As filed with the Securities and Exchange Commission on March 16,
2010.


UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





x   ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
fiscal year ended December 31,
2009                                Commission
file number: 000-26455




OR




 ̈  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For the
transition period from _____________ to _____________.




iSecureTrac
Corp.


(Exact
name of registrant as specified in its charter)





DELAWARE
              87-0347787(State
      or other jurisdiction
              (I.R.S.
      Employerof
      incorporation or organization)
              Identification
      No.)





5078
South 111th
Street


Omaha,
Nebraska 68137


(Address
of principal executive offices)(Zip Code)


Registrant’s
telephone number: (402) 537-0022





Securities
registered under Section 12(b) of the Exchange Act:  None


Securities
registered under Section 12(g) of the Exchange Act:  Common Stock, par
value $0.001 per share





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





Indicated
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.   Yes  ̈  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 Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x  No
 ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes   ̈     No   ̈
Indicate by check mark if  disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein and  will not be
contained, to the best of 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.   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated file, or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act)


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





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





The
aggregate market value of the common stock of the registrant held by
non-affiliates, all of which is voting, was approximately $5,950,000, based on
the closing sale price reported on June 30, 2009.





As of
March 12, 2010, there were 10,821,392 shares of the registrant’s common stock
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the definitive Proxy Statement for the Registrant’s 2010 Annual Meeting of
Stockholders to be filed within 120 days of the fiscal year ended December 31,
2009, are incorporated by reference in Items  10, 11, 12, 13 and 14 of
Part III of this Annual Report on Form 10-K










iSecureTrac Corp.





Table
of Contents





Item
                            
                            PagePART
      I1
                            Business
                            
                            011A.
                            Risk
      Factors
                            
                            081B.
                            Unresolved
      Staff Comments2.
                            Properties
                            
                            133.
                            Legal
      Proceedings
                            
                            144.
                            Reserved
                            
                            14PART
      II5.
                            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                            
                            146.
                            Selected
      Financial Data ( Not Required for SRC)
                            
                            157.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            
                            157A.
                            Quantitative
      and Qualitative Disclosures about Market Risk ( Not Required for
      SRC)
                            
                            238.
                            Financial
      Statements and Supplementary Data
                            
                            249.
                            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                            
                            479A.(T)
                            Controls
      and Procedures
                            
                            479B.
                            Other
      Information
                            
                            48PART
      III10.
                            Directors,
      Executive, Officers and Corporate Governance
                            
                            4911.
                            Executive
      Compensation
                            
                            4912.
                            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                            
                            4913.
                            Certain
      Relationships and Related Transactions, and Director
      Independence
                            
                            4914.
                            Principal
      Accounting Fees and Services
                            
                            49PART
      IV15.
                            Exhibits
      and Financial Statement Schedules
                            
                            50Signatures
                            
                            53









PART
I




Regarding
Forward-Looking Statements




This Form
10-K contains forward-looking statements including statements about the future
of iSECUREtrac Corp.’s products and the industry, statements about future
business plans and strategies, and most other statements that are not historical
in nature.  In this Form 10-K, forward-looking statements are
generally identified by the words “believes,” “intends,” “expects,” “may,”
“will,” “should,” “plan,” “projected,” “contemplates,” “anticipates,”
“estimates,” “predicts,” “potential,” “continue,” or similar
terminology.  Readers of this Form 10-K should understand that a
number of factors could cause the Company’s actual results to differ materially
from those expressed in the forward-looking statements contained
herein.  Many of these factors are described in Item 7 Managements’
Discussion and Analysis of Financial Condition and Results of Operations and
under the heading “Risk Factors”.  Other factors discussed elsewhere
in this report, in filings with the Securities and Exchange Commission or in
materials incorporated herein or therein by reference may also affect the
Company’s future financial condition and results of operations.




Item
1.  Business




General




As used
in this report the terms “we”, “us”, “our”, “iSECUREtrac”, or the “Company”
refer to iSECUREtrac Corp., a Delaware corporation that is the successor in
interest to a Colorado corporation initially incorporated in 1983.




iSECUREtrac
develops, markets, leases and services products that assist in “monitoring
compliance and modifying behavior” of individuals who are under the supervision
of the criminal justice system and social service agencies, primarily in the
United States.




The
Company’s principal sources of revenue are daily leasing of electronic
monitoring equipment including access to the corresponding web-based monitoring
software, and providing administrative, field and support services, generally
charged on a per offender/per day basis.




Background




For more
than a decade, the Company has been engaged in its current business of providing
electronic monitoring products and services including its proprietary Global
Positioning System (“GPS”) tracking systems and non-proprietary visual breath
alcohol testing for individuals under community supervision with the objective
of “monitoring compliance and modifying behavior.”




In
1997, the Company introduced its first GPS tracking system -1600 series,
followed by the 2000 Series (System 2150 and System 2250) in 2003, and the
latest generation system – the System 5000 in the fourth quarter of
2007.




In
addition, the Company offers products and services through third-party
providers.  Automated-Voice-Notification was added in 2006;
complementary, non-proprietary, GPS tracking systems were added in 2008; and
biometric voice verification was added in 2009.




Market
Overview




According
to the Pew Public Safety Performance Project, the incarcerated population in the
United States has reached 2.3 million and more than one in every 100 adults is
now confined in an American jail or prison.  This growing number of
incarcerated offenders is burdening states’ budgets with soaring
costs.  Agencies are seeing increases in facilities, health care,
geriatrics and overtime costs while at the same time seeing a lag in victim
restitution, child support and tax payments as incarcerated persons lose their
jobs and become a tax burden.




As
significant as the incarcerated population may be it is the growth in those
being monitored outside of prison by probation and parole departments that has
skyrocketed.  Today more than 5 million adults – or one in every 45
adults - are subject to community corrections supervision.




1




The
growth in both populations (incarcerated and community supervised) and the
related growth in related costs is unsustainable.   The existing
facilities simply can’t house the growing population and agencies at all levels
are struggling to find funding as budgets are being cut.  Electronic
monitoring systems offered by the Company (e.g. GPS, House Arrest, Voice
Verification and Visual Breath Alcohol) are very logical and economical
alternatives.




Electronic
monitoring systems enable an agency to monitor, at a greater level of
supervision, the activities of a growing number of probationers and parolees
without having to allocate additional labor resources to such monitoring
efforts.  Community supervision programs give corrections and law
enforcement agencies more flexibility in solving budget-related
problems.  Since public safety is maintained or improved by linking
alternative sentencing programs with electronic monitoring, programs like work
release become viable, cost-effective tools for today’s correctional
system.




In
summary, the use of products and services offered by iSECUREtrac offer four
distinct advantages over incarceration:




(1)
            the
      cost of managing an offender in the community with electronic monitoring
      is almost 85% less expensive than the cost of
  incarceration




(2)
            electronic
      monitoring  reduces the public's tax burden by allowing the
      offender to work thereby providing the offender the opportunity to meet
      their financial obligations,




(3)
            electronic
      monitoring  reduces prison and jail
  overcrowding




(4)
            electronic
      monitoring helps to reduce the rate of recidivism (re-offense) when
      combined with regular rehabilitation/reintegration
    counseling.




Industry/Technology
Advancements




The
electronic monitoring market remains an emerging, early stage
industry.   Accordingly, new technology is being developed and
introduced at a rapid pace.  In general, the technological advancements of
the new products are able to demand a higher price point.  However, the
industry has historically demonstrated that in most instances, there remains a
steady and consistent demand for the existing technology and
products.




Our
Products and Services




iSECUREtrac
has a full suite of electronic monitoring products and services consisting
of:




·
            GPS
      Tracking Systems, including Automated Voice
  Notification




·
            House
      Arrest




·
            Visual
      Breath Alcohol Testing




·
            Bio-metric
      Voice Verification




·
            Supplemental
      Monitoring Center Services




The
Company sees a continued demand for its existing product offerings and remains
committed to continuing to provide and support all product lines.




2




GPS
Tracking Systems




GPS
tracking systems enable law enforcement agencies to continuously monitor an
individual’s location, and thereby compliance, with pre-determined
terms.




Operated
by the United States Department of Defense and provided free of charge, the
Global Positioning System consists of at least 24 operational satellites that
orbit the Earth every 12 hours.  Eight to twelve GPS satellites are
visible from any point on Earth at any given moment in time.  A
position fix can be acquired when a GPS receiver receives signals from at least
three of these satellites.




Our GPS
tracking products use this state-of-the-art positioning technology to monitor
the movements of individuals under community supervision to a degree not
previously possible or cost efficient.




The
Company’s Series 2000 (System 2150 and System 2250) and System 5000 GPS systems
are manufactured in the United States and consist of:




·
            Personal
      Tracking Unit (PTU) that is carried by the offender when not in the
      charging base.  The PTU may include cellular communication
      capabilities.  The reception of the radio frequency (RF) signal
      from the ankle cuff indicates the cuff and PTU are in proximity. The
      absence of that RF signal indicates a possible
  violation.




·
            An
      ankle cuff that is worn continuously by the offender. The cuff emits an RF
      signal to the PTU.




·
            A
      charging base that re-charges the PTU battery and in some systems contains
      traditional land line communication
capability.




Our GPS
unit tracks an individual by collecting data points regarding their location and
time, at intervals as short as every 10 seconds.   All data
processing and compliance assessments take place in the PTU, a capability we
call on-board intelligence.  When operating in an “active” mode, this
feature provides officers with near real-time compliance reporting and
potentially quicker response to violations by high risk offenders.




Our GPS
systems offer:




·
            Tracking
      units equipped with on-board intelligence allowing them to compute GPS
      locations and discern violation status without the assistance of a
      monitoring center or other secondary
sources




·
            Advanced
      circumvention sub-systems to identify, report and log attempts by the
      offender to tamper with the equipment or render it
    inoperable




·
            The
      latest generation GPS chip sets for greater accuracy and sensitivity in
      areas that typically have weak GPS signals (e.g., urban canyons, terrain
      under dense foliage)




·
            Secure,
      web-based management reporting through any Internet-ready device, anywhere
      in the world




·
            Geo-fencing
      to control entrance and/or egress from geographically defined locations
      (e.g., home, work, spouse’s residence, elementary schools,
      etc.)




·
            Automated
      voice notification with escalation to an unlimited number of parties
      including but not limited to supervising officers, law enforcement
      officials, judicial personnel and potential
  victims




·
            Equipment
      designed and manufactured specifically for the corrections market that is
      hypoallergenic (ankle bracelet or cuff), tamper and shock resistant and
      water resistant or water proof (ankle bracelet or
  cuff)




3




·
            Crime
      scene analysis (Crime Scene Inquiry) to assist agencies in identifying or
      eliminating potential suspects based upon their proximity to a specific
      crime location within a specified time
period.




All of
the Company’s GPS products collect data points regarding the individual’s time
and location and provide the individual immediate feedback regarding compliance
violations.  Depending on the specifications of the law enforcement or
social services agency, the agency or monitoring center is notified of
compliance violations based on the modes of operations outlined
below:




·
            Active GPS - uses
      on-board intelligence and a cellular communications network to report
      locations and violation status in near real time (Series 2000 and System
      5000).  In addition, the Company’s System 5000 also offers the
      capability of reporting locations and violation status via a traditional
      land-line when the PTU is returned to the charging base.  This
      service is particularly useful in areas where cellular coverage is
      weak.




·
            Passive GPS - uses the
      same on-board intelligence as the Active GPS unit, but reports the
      locations and violation status via a traditional land-line telephone only
      when the PTU is returned to the charging base (Series 2000
      only)




House
Arrest




House
Arrest is a system that enables law enforcement agencies to verify an offender’s
presence at a particular location (house, residence, work release facility,
etc.).  Equipment and features of the iSECUREtrac House Arrest System
include:




·
            The
      ability to move from House Arrest to Active or Passive GPS remotely with
      the flip of a switch




·
            A
      hypoallergenic and water proof ankle bracelet or cuff worn continuously by
      the offender which is equipped with tamper-detecting sub-systems and a
      radio frequency (RF) transmitter




·
            A
      shock resistant monitoring base with enhanced signal reception to ensure
      superior signal monitoring at a range of
  distances




·
            Reporting
      through a single, secure, web-based platform utilizing common management
      software for monitoring offenders on House Arrest, Active or Passive
      GPS




The
agency can set a schedule for each offender corresponding to the rules of
release.  For example, the offender must be at home between 6:00 p.m.
and 7:00 a.m. every day.  Offender deviation from the schedule results
in a violation notification sent to the agency.If the offender takes
off the ankle bracelet or tampers with it, it sends out a unique signal alerting
the monitoring base of the violation.  The base then communicates with
the monitoring center which, in turn, automatically alerts the appropriate
authorities.




Visual
Breath Alcohol Testing




Our
breath alcohol monitoring system enables an offender’s breath alcohol levels to
be tested remotely and at the offender’s residence.  The system calls
the offender on a scheduled, random, or on-demand basis, giving him clear
instructions.  The offender blows into a drinking straw inserted in
the HomeStation while a camera on the unit photographs the
offender.  Breath Alcohol Test data and photographs are sent
electronically to our data center.  Our personnel confirm the
offender’s identity by comparing the event verification photo with original
reference picture provided by the agency.  Deviation from program
parameters, as defined by the agency, results in monitoring center staff
contacting appropriate agency personnel.




Advantages
of the iSECUREtrac Alcohol Testing System include:




·
            In-home
      testing of individuals who may not have convenient access to a central
      testing facility




·
            A
      proven alcohol testing methodology that yields court admissible
      evidence




4




·
            The
      ability to customize a testing schedule (fixed, random or on-demand) to
      fit an individual’s supervision/corrections
plan




·
            The
      use of a time-tested reliable system designed to meet agency program
      parameters and budget




Many
agency programs use a combination of iSECUREtrac systems to better monitor
compliance and shape more socially responsible behavior.  For example,
it is not unusual for individuals accused or convicted of domestic violence to
be supervised with both active GPS and remote alcohol monitoring.




BioMetric
Voice Verification




In
2009, the Company became an independent distributor of the voice biometrics
speaker verification technology of ShadowTrack Technologies, Inc. ® ShadowTrack
Technologies, Inc offers an interactive voice response system coupled with
biometric authentication technology which is integrated into iSECUREtrac’s
proprietary web-based platform tracNET24.




Supplemental
Monitoring Center Services




To effect
a more seamless integration with agency protocols and programs, iSECUREtrac
provides supplemental services.  These optional services
include:




·
            Direct Monitoring Center
      Intervention in which iSECUREtrac will attempt to resolve common
      compliance issues through direct contact with the monitored
      individual.  If iSECUREtrac cannot resolve the issue, the
      situation is escalated in accordance with agency
  protocols.




·
            Equipment Install and
      Removal frees agents from the task of fitting their clients and
      retrieving the equipment at the end of the
  program.




·
            Automated Voice
      Notificationprovides voice
      alerts to officers in addition to text, pager and email notifications when
      those individuals under community supervision violate the terms of their
      release. These automated voice alerts can be customized by offender,
      violation and content. Voice messages can be automatically and
      simultaneously sent to a virtually unlimited number of recipients
      including potential victims.




·
            On-Site Inventory
      Management provides precise control and safeguarding of
      equipment.  An on-site iSECUREtrac administrator maintains
      accurate inventory records including data pertaining to equipment receipt,
      the movement of equipment within and between locations and inventory
      assignments that match equipment serial numbers with client case
      numbers.




·
            Extended Trainingincludes follow-up
      training and refresher courses to ensure agents, officers and supervisors
      are comfortable with the operation of the equipment and proficient in
      reading and interpreting electronic monitoring
  reports.




·
            Program Development and
      Consulting can help fine tune protocols and procedures to reduce
      program “noise”, annoyance alerts and unnecessary
  data.




·
            Financial Services and
      Administrationprovides agencies
      several options in the financial administration of community supervision
      programs.  For example, iSECUREtrac provides client billing
      services in which the offender/client is directly invoiced by iSECUREtrac
      for the cost of their electronic
supervision.




·
            Day Reporting
      Servicesincludes the
      provision by iSECUREtrac of a reporting center and staff to effectively
      supervise release compliance by those individuals under community
      supervision.




Web-Based
Software/System Interface (tracNET24)




Our
web-based software/system interface, known as tracNET24, is provided to end-user
agencies through the Internet.  Probation or corrections officers with
a secure log-in can access the system and know where his or her clients have
been over any given time period.  With GPS monitoring, the officer can
create or modify a schedule of locations where the offender must be at certain
times of the day, week or month (e.g., a place of work, medical appointments,
counseling appointments, meetings with the probation officer,
etc.).  He/she merely enters a drop down menu for the schedule and
either enters an address or points to a spot on the map and specifies a
radius.  He/she thereby creates “inclusion zones” for the
offender.  Similarly, the officer can create “exclusion zones” (e.g.,
schools, home of an ex-spouse, etc.).  Once the parameters are
entered, the officer clicks “synchronize with Personal Tracking Unit” which
causes the scheduling and zone information to be downloaded to the tracking
unit.




5




Features
of iSECUREtrac’s proprietary reporting and management software include but are
not limited to:




·
            The
      ability to establish boundaries or geo-fences via “inclusion” and
      “exclusion” zones, either for individual clients or entire caseload
      populations




·
            The
      flexibility to change the content, delivery method and timing of alert
      notifications to best fit agency
needs




·
            Access
      to all reports and key events pertaining to monitored individuals through
      a secure, web-based program




·
            Utilization
      of Microsoft’s Virtual Earth® as a mapping system overlay as well as
      recognizable and easy-to-read names of countries, states, counties,
      cities, municipalities, landmarks, points of interest, and street
      names




·
            The
      ability to present mapping and monitoring information for all enrolled
      clients in the vicinity of a crime at the time the crime was committed,
      enabling the officer to research multiple clients
      simultaneously




Customers




Our
principal customers are federal, state, county, and municipal law enforcement
and corrections agencies and not-for-profit agencies in the United
States.  Our customers also include social service agencies dealing
with curbing juvenile delinquency and domestic violence/abuse.




Sales
and Distribution Channels




The
Company's markets its products and services through two methods: through direct
contracts with state, local and county correction agencies and not-for-profit
agencies or through resellers who have direct relationships with those same
agencies and other end users of our products who integrate iSECUREtrac’s systems
with their own localized install and removal services or case management
services.





Direct contracts with the
      state, county or local agencies - These contracts are generally won
      through the competitive bid processes as required by the particular state,
      county or local procurement laws.   The length of contracts
      vary and range from one year to five years, including renewal options and
      typically include cancellation clauses with 30 to 60 days
      notice.  In general, contracts do not specify a minimum or
      maximum number of units.





Resellers - These
      contracts are won through direct solicitation to the
      reseller.  They generally have no stated expiration or
      automatically renew on a month to month basis with cancellation clauses of
      30 to 60 days notice.




Competition




The
Company competes for GPS-based offender monitoring with a number of different
companies, including:




·
            G4S
      a subsidiary of Group 4 Securicor


·
            Omnilink
      Systems


·
            ProTech
      Monitoring, Inc.


·
            BI
      Incorporated


·
            Satellite
      Tracking of People, LLC


·
            SecureAlert




6




Neither
the Company nor any of these competitors has attained a dominant market
position, however, several of the Company’s principal competitors have access to
financial, technical, marketing, distribution and procurement resources that are
greater than those of the Company.




In
addition, there are several other companies that use GPS, electronic mapping and
Internet technologies to provide tracking and monitoring products and
services.  The markets served by these companies include vehicle and rail
car tracking, vehicle fleet management, container tracking as well as cell
phones and 911 emergency response services.  While the companies serving
these markets do not currently sell products or services to the corrections and
social services markets, these companies or others may enter this market in the
future.




Seasonality




The
Company has observed that contract awards and the rollout of new programs is
noticeably slower in the three months ended June 30th  -
which negatively impacts the revenue growth opportunities for the three months
ended September 30th.   We
believe this slowdown in the award and roll-out of new programs is the result
of  uncertainty surrounding agency budgets in the months leading up to
the new fiscal year which begins July 1.  In recent years, many
agencies have been unable to finalize budgets until well into the new fiscal
year.




In
addition, the lack of availability of program decision makers, judges who
sentence offenders, program managers during the traditional United States
vacation months of May, June and July and August also impact our customers’
usage of the Company’s equipment and as such also impacts revenue for the three
months ended September 30th.




Principal
Suppliers




The
Company’s products are manufactured in the United States by Altron Inc. of
Anoka, Minnesota, an ISO-9002 qualified electronics manufacturer in accordance
with manufacturing specifications set by the Company.




Principal
Customers




For the
year ended December 31, 2009, the Company had one customer, the Office of the
Commissioner of Probation of the Commonwealth of Massachusetts, which accounted
for 18.79% of its total revenues for the year.  The receivable balance
for this customer at December 31, 2009 was $178,792.




Intellectual
Property Rights




We have
been issued four patents to date by the United States Patent Office: (i) No.
6,072,396 for an "Apparatus and Method for Continuous Electronic Monitoring and
Tracking of Individuals" was issued on June 6, 2000 and will expire on December
30, 2014; (ii) No. 6,100,806, also for an "Apparatus and Method for Continuous
Electronic Monitoring and Tracking of Individuals" was issued on August 8, 2000
and will expire on December 30, 2014; (iii) No. 6,337,665 was issued on January
8, 2002 for an "Antenna Orientation Maintaining System in a System for Tracking
Individuals and Method of Use" and will expire on April 24, 2017; and (iv) No.
6,646,617 was issued on November 11, 2003, for an "Antenna Orientation
Maintaining System in a System for Tracking Individuals and Method of Use" and
will expire on April 24, 2017.




We have
been issued patent rights in Australia, patent No. 2000235013, issued November
17, 2005 relating to an “Apparatus and Method for Continuous Electronic
Monitoring and Tracking of Individuals” and will expire on February 24,
2020.




We have
been granted a non-exclusive software license from SiRF Technology Incorporated
(“SiRF”) allowing us to embed SiRF’s patented GPS technology into our
products.




We assert
common law copyright and statutory trade secret protection to our proprietary
software. Our logo, the words “tracNET24”, Reg No. 3114715, “iSECUREtrac”, Reg
No. 3159632, “IntelliCuff”, Reg No. 3313220  and the word
"iSecureTrack”, Reg. No. 2520981 are registered trademarks.




7




In
addition, we have applied for several additional patents and
trademarks.




Regulation




The
manufacture, sale and use of devices that utilize any part of the radio
frequency radiation spectrum are subject to regulation. The Federal
Communications Commission (the "FCC") is the principal agency responsible for
regulations relating to the manufacture, sale and use of devices that transmit
radio frequency radiation.  All of our equipment utilizing radio
frequency has each received full FCC compliance certification.




Similarly,
insofar as GPS remains funded and controlled by the U.S. government, devices
utilizing GPS must conform to government specifications.




Research
and Development




The
electronic monitoring market remains an emerging, early stage
industry.  Accordingly, new technology is being developed and
introduced at a rapid pace.  In order to maintain our competitive
position, we must constantly improve our products and services.  Our
research and development staff designs and develops products incorporating GPS
technology, wireless communications, web-based reporting and data storage and
transmission.  Our research and development activities are primarily
related to our GPS products and the systems by which the equipment and services
are delivered.  During 2009, these activities were mainly related to
improving the speed and reliability of the core systems (tracNET24) and the
development of new service delivery platforms.  During 2009 and 2008,
our research and development expenses totaled $1,263,000 and $1,240,000,
respectively.




Employees




As of
December 31, 2009, the Company had 73 full-time employees and one temporary
employee on staff.  Of the 73 full-time employees, five are executives,
four are administrative personnel, five are in sales, 12 are in customer
support, 17 operate the monitoring center, two are in technology services, 16
are in operations and 12 are in engineering and development. The temporary
employee is assisting in software development.




General
Information




The
Company’s principal office is located at 5078 South 111th Street, Omaha,
Nebraska, 68137 (telephone: 402-537-0022) and its internet address is
www.isecuretrac.com.  The Company’s annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports are available free of charge through its website as soon as
reasonably practicable after these documents are filed with the Securities and
Exchange Commission.  The information contained in the Company’s
website is not part of this Report on Form 10-K.




Item
1A.  Risk Factors




The
Company’s business and financial condition are subject to a number of risks and
uncertainties, many of which are beyond the control of the
Company.  These risks and uncertainties include the
following:




The
current economic downturn could adversely impact our future
revenue.




Our
revenues are primarily derived from contracts with state, local and county
government agencies in the United States.  The budgets of many of
these government agencies have been, or are expected to be, negatively impacted
by the current economic downturn.  As a result, the amount spent by
the Company’s current clients on equipment and services supplied by the Company
may be reduced or grow at rates slower than anticipated and it may be more
difficult to attract additional government clients for the Company’s equipment
and services.  As a result, our ability to maintain or increase our
revenues may be negatively affected.




We
have incurred significant losses and expect losses to continue.




Our
revenues have not been sufficient to cover our cost of operations and other
expenses, and we have yet to establish profitable operations.  We
incurred net losses of $1,923,000 and $4,601,000 for the years ended December
31, 2009 and 2008 respectively.   As a result, on
December 31, 2009, the Company is reporting an accumulated deficit of
$78,839,000.  There is no assurance that we will be able to increase
our revenues or manage our operating expenses so that our revenues will be
sufficient to cover our operating expenses or that we will achieve profitability
in the future.




8




We
have incurred a substantial amount of secured debt and may not have enough cash
to repay it at maturity.




We have
borrowed a total of $11,877,000 under a Credit and Security Agreement with
Crestpark LP, Inc., an affiliate of our controlling shareholder.  The
entire principal of this loan, plus an estimated $2,964,000 of accrued interest,
will be due and payable on January 1, 2012.  Additional borrowings
from Crestpark LP, Inc. include $280,000 under a separate equipment term loan
agreement and $350,000 under a separate revolving credit agreement both of which
are due and payable January 1, 2012.   The borrowings under these
credit facilities , excluding the revolving credit agreement, are secured by a
first priority security interest in all of the assets of the Company except that
Lender’s security interest in certain monitoring equipment is subordinate to the
interest of AHK Leasing LLC.    The borrowings under the
revolving credit agreement are unsecured.  To the extent that the
Company is not able to retain sufficient cash flow from operations to repay
principal and interest on these loans,   we will need to
refinance the loans through additional debt or equity
financings.  There is no assurance that the Company will be able to
generate sufficient cash flow from operations to service these loans and there
is no assurance that we will be able to refinance them or otherwise raise
capital in order to repay all amounts that will be due and payable on the
loans.  If we cannot repay all principal and interest on the loans as
due, we will be subject to all of the remedies available to the lender upon
default, including foreclosure of virtually all of our assets.  It is
unlikely that the holders of our common stock would recover any of their
investment if that were to occur.




Markets
for our products and services may develop slowly.




The
long-term financial viability of our company depends on our ability to attract
additional customers for our GPS tracking system in order to increase
revenues.  There are many factors that affect the demand for our
products and services that we cannot control.  In particular, we sell
our products to governmental agencies, such as state corrections
departments.  Accordingly, the acquisition and continued use of our
products by these types of customers is generally subject to legislative
appropriation of funds which is subject to budgetary and political
considerations that change over time.  Adoption of our GPS tracking
system may represent a significant expenditure by these types of customers which
often face restrictive budgetary constraints.  In addition, contracts
with governmental agencies are generally subject to a competitive bid process
which is often time consuming and does not assure that we will be successful in
selling our products and services or that we will be able to do so at prices
that are economically beneficial for us.  In addition, our industry is
relatively new and many of our target customers are only now becoming aware of
our products and services and the possible advantages they may
provide.  As a result, there is often a long sales cycle involved with
sales of our products and services.  Due to these market factors, the
demand for GPS tracking systems is difficult to forecast and may develop slowly
or sporadically.  Accordingly, we may not be able to commercialize our
products on the scale necessary to achieve profitability.




We
face significant competition and this may make it difficult to achieve
profitability.




We
compete with a number of other companies that offer GPS solutions for offender
tracking.  In addition, many companies use GPS, electronic mapping and
Internet technologies to provide tracking and monitoring products and services
in other markets such as vehicle and rail car tracking, vehicle fleet
management, container tracking and emergency response
services.  Companies serving these other markets may enter the
offender tracking market in the future.  Some of the companies with
which we currently compete, or may compete against in the future, may have
access to greater financial, technical, marketing, distribution and procurement
resources than we have.  There can be no assurance that we will be
able to continue to successfully compete in our market.  Accordingly,
we may not be able to commercialize our products on the scale necessary to
achieve profitability.




9




Our
technology may become obsolete which could materially adversely affect our
ability to sell our products and services.




If our
technology, products and services become obsolete, our business operations would
be materially adversely affected.  The market in which we compete is
characterized by technological change, evolving industry standards,
introductions of new products, and changes in customer demands that can render
existing products obsolete and unmarketable.  We must continuously
improve our product as the market demands smaller, lighter and more versatile
PTUs.  Faster and more accurate mapping software may make the mapping
software currently used in our tracNET24 application obsolete.  Future
releases of Windows may also compel us to upgrade our application
software.  Our current application servers will require continuous
upgrading with newer and faster models or our technology will become
obsolete.  Our future success will depend upon our ability to address
the increasingly sophisticated needs of our customers by supporting existing and
emerging hardware, software, database, and networking platforms and by
developing and introducing enhancements to our existing products and new
products on a timely basis that keep pace with technological developments,
evolving industry standards, and changing customer
requirements.  Accordingly, we have and expect to continue to incur
significant research and development expenses in the future.




We
rely on third party vendors to manufacture our products and if these vendors are
unable to timely supply us with required components our business will be
materially adversely affected.




While we
acquire the components used in our products from various vendors, we currently
rely on a single electronics manufacturer, Altron, Inc. to manufacture most of
our PTUs.  In addition we have only one provider of ankle cuffs for
each of the GPS tracking systems we offer.  We have not qualified or
contracted with other manufacturers for our PTUs or ankle
cuffs.  Accordingly, if our vendors encounter difficulties with
meeting our demand, alternative components may not be available quickly enough
to avoid delaying production and shipment of customer orders.  Any
such delays may hamper our ability to service existing customers or market our
products and services to new customers.  Also, if the agreements with
our current providers are terminated or expire, our search for additional or
replacement providers could result in significant delays, added expense and our
inability to maintain or expand our customer base.




We
face the risk of systems interruptions and capacity constraints, possibly
resulting in adverse publicity, revenue loss and erosion of customer
trust.




The
satisfactory performance, reliability and availability of our network
infrastructure are critical to our reputation and our ability to attract and
retain customers and to maintain adequate customer service levels.  We
may experience temporary service interruptions for a variety of reasons,
including telecommunications or power failures, fire, water damage, vandalism,
computer bugs or viruses or hardware failures.  We may not be able to
correct a problem in a timely manner.  Any service interruption that
results in the unavailability of our system or reduces its capacity could result
in real or perceived public safety issues that may affect customer confidence in
our services and result in negative publicity that could cause us to lose
customer accounts or fail to obtain new accounts.  Any inability to
scale our systems may cause unanticipated system disruptions, slower response
times, degradation in levels of customer service, or impaired quality and speed
of transaction processing.  We are not certain that we will be able to
project the rate or timing of increases, if any, in the use of our services to
permit us to upgrade and expand our systems effectively or to integrate smoothly
any newly developed or purchased modules with our existing systems.




If
we were denied access to GPS technology, our business will be materially
adversely affected.




Our
services rely on signals from GPS satellites built and maintained by the U.S.
Department of Defense.  GPS satellites and their ground support
systems are subject to electronic and mechanical failures and
sabotage.  If one or more satellites malfunction, there could be a
substantial delay before they are repaired or replaced, if at all, and our
services may cease and customer satisfaction would suffer.  In
addition, the U.S. government could decide not to continue to operate and
maintain Global Positioning System satellites over a long period of time or to
charge for the use of the Global Positioning System.  Furthermore,
because of increasing commercial applications of the Global Positioning System,
other U.S. government agencies may become involved in the administration or the
regulation of the use of Global Positioning System signals in the
future.  If the foregoing factors affect the availability and pricing
of Global Positioning System technology, our business will
suffer.  Global Positioning System technology is also dependent on the
use of radio frequency spectrum.  An international organization known
as the International Telecommunications Union controls the assignment of
spectrum.  If the International Telecommunications Union reallocates
radio frequency spectrum, our services may become less useful or less
reliable.  This would, in turn, harm our business.  In
addition, emissions from mobile satellites and other equipment using other
frequency bands may adversely affect the utility and reliability of our
services.




10




If
we are not able to protect our intellectual property rights, our business may be
materially adversely affected.




In order
to protect the technology and other intellectual property underlying our
products and services, we rely on a combination of patents, license agreements,
copyrights, trade secrets, and trademarks.  We also rely on
confidentiality procedures and contractual provisions to protect our
intellectual property rights.  There can be no assurance that any of
the measures we take to protect our intellectual property rights will be
adequate.  There is a risk that any patents issued to us may be
invalidated, circumvented, or challenged; that the rights granted thereunder
will not provide competitive advantages to us; or that none of our future patent
applications will be issued with the scope of protection sought by us, if at
all.  Furthermore, there is a risk that others may develop
technologies that are similar or superior to our technology or design around any
patents issued to us.  Despite our efforts to protect our intellectual
property rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as
proprietary.




The
protection of our intellectual property in foreign countries is
uncertain.




We have
not registered our patents with most foreign countries and may have no legal
recourse to proceed against entities in such countries that choose to copy our
hardware and/or software.  In addition, the laws of some foreign
countries do not protect proprietary information rights as fully as do the laws
of the United States.




We
depend on licensed technologies and may need to obtain additional licenses in
the future to remain competitive.




We have
been granted a nonexclusive software license from a technology company that has
designed GPS chip sets and software solutions that allow us to embed GPS
technology into our products.  This license has an indefinite term;
however, it may be terminated if the licensor loses any of its rights to the
software products encompassed therein or by either party upon thirty (30) days
written notice in the event of a material breach of the license by the other
party.  Termination of this license could have a material adverse
effect on our business.  In addition, we may need to obtain licenses
to additional technologies in the future in order to keep our products
competitive.  If we fail to license or otherwise acquire necessary
technologies, we may not be able to develop new products or services needed to
remain competitive.




Our
products could infringe on the intellectual property rights of
others.




There are
other U.S. patents and patent applications submitted for technologies in, or
related to, our principal area of business, and it is possible that foreign
patents are also in existence or have been applied for by others.  As
a result, any application or exploitation of our technology could infringe on
patents or proprietary rights of others and any licenses required as a result of
such infringement might not be available on commercially reasonable terms, if at
all.  This may lead others to assert patent infringement or other
intellectual property claims against us.




We
may not be able to effectively manage the growth of our company.




If our
business grows in the manner that we currently project, we must continue to
implement and improve our operational, financial and management information
systems and expand, train and manage our employees.  We may not have
made adequate allowances for the costs and risks associated with this expansion,
and our systems, procedures or controls may not be adequate to support the
growth of our operations.  Our failure to manage growth effectively
could cause us to incur substantial additional costs, lose opportunities to
generate sales or impair our ability to maintain our customers.




11




Risks
Relating to the Ownership of Our Common Stock




The
price for our common stock is volatile and may drop.




The
trading price for our common stock has fluctuated significantly over recent
years.  The volatility in the price of our stock is attributable to a
number of factors, not all of which relate to our operating results and
financial position.  Nevertheless, continued volatility in the market
price for our stock should be expected and we cannot assure you that the price
of our stock will increase in the future.  Fluctuations or further
declines in the price of our stock may affect our ability to sell shares of our
stock and to raise capital through future equity financing.




We
may issue a large number of shares to holders of preferred stock and warrants
and the issuance and sale of these shares may depress the market price of our
common stock.




We
currently have warrants outstanding which entitle the holders thereof to acquire
2,227,087 shares of common stock.   An additional 6,287,045
shares of our common stock are issuable upon exercise of warrants to be issued
upon exchange of our Series C 8% Exchangeable Preferred Stock (“Series C
Preferred Stock”).  In addition, the holder of our Series C
Preferred Stock may convert this Series C Preferred Stock into 4,782,609 shares
of common stock. In addition 2,188,700 shares of our common stock are issuable
at December 31, 2009 in connection with stock options granted to employees. The
issuance and sale of these shares is likely to result in substantial dilution to
the proportionate equity interest and voting power of holders of our common
stock.  The sale of these shares also has potential to cause
significant downward pressure on the price of our common stock.  This
is particularly the case if the shares being placed into the market exceed the
market's ability to absorb the increased stock.  Such an event could
place further downward pressure on the price of our common
stock.  This presents an opportunity for short sellers to contribute
to the further decline of our stock price.  If there are significant
short sales of our stock, the price decline that would result from this activity
will cause the share price to decline more so, which, in turn, may cause long
holders of the stock to sell their shares thereby contributing to sales of stock
in the market.




In
2005, we issued a significant number of shares of Series C Preferred Stock as
part of a refinancing transaction and the holder of these shares has the ability
to acquire a majority position in our common stock and appoint a majority of our
Board.




On June
27, 2005, we issued 1,000,000 shares of our Series C Preferred Stock plus
warrants to acquire 3,234,248 shares of the Company’s common stock, of which
2,227,087 are currently outstanding, at exercise prices ranging from $2.30 to
$16.50 per share.  The Series C Preferred Stock is exchangeable for
4,782,609 shares of Common Stock and warrants to acquire 6,287,045 shares of
Common Stock at an exercise price of $2.30 per share.  Upon conversion
of the Series C Preferred Stock into common stock, and exercise of its warrants,
the holder of the Series C Preferred Stock will control a majority of the shares
of our common stock.  Prior to that time, the holder of the Series C
Preferred Stock has the right to appoint a majority of our Board of
Directors.  In addition, each share of Series C Preferred Stock will
have 11 votes on all other matters submitted to the vote of the Company’s
stockholders.  Accordingly, the holder of our Series C Preferred Stock
holds a majority of the voting power held by all stockholders of the
Company.  If the holder of the Series C Preferred Stock exchanges its
Series C Preferred Stock for shares of the Company’s common stock and exercises
all of its warrants, it would own approximately 55% of the issued and
outstanding shares of the Company’s common stock.




Our
common stock is deemed to be "penny stock," which may make it more difficult for
investors to sell their shares due to suitability requirements.




The
Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain
exceptions.  For any transaction involving a penny stock, unless
exempt, Rule 15g-9 requires:




·
            that
      a broker or dealer approve a person's account for transactions in penny
      stocks; and




·
            that
      the broker or dealer receives from the investor a written agreement to the
      transaction, setting forth the identity and quantity of the penny stock to
      be purchased.




12




In order
to approve a person's account for transactions in penny stocks, the broker or
dealer must:




·
            obtain
      financial information and investment experience objectives of the person;
      and




·
            make
      a reasonable determination that the transactions in penny stocks are
      suitable for that person and the person has sufficient knowledge and
      experience in financial matters to be capable of evaluating the risks of
      transactions in penny stocks.




Among
other requirements, the broker or dealer must also deliver, prior to any
transaction in a penny stock, a written statement, which:




·
            sets
      forth the basis on which the broker or dealer made the suitability
      determination;




·
            states,
      in a highlighted format, that it is unlawful for the broker or dealer to
      effect a transaction in a penny stock unless the broker or dealer has
      received a signed, written agreement from the investor prior to the
      transaction; and




·
            states,
      in a highlighted format immediately preceding the customer signature line,
      that the broker or dealer is required to provide the person with the
      written statement and that the investor should not sign and return the
      written statement to the broker or dealer if it does not accurately
      reflect the person’s financial situation, investment experience, and
      investment objectives.




Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules.  This may make it more difficult for investors to
dispose of our common stock and cause a decline in the market value of our
stock.




Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions.  Finally, monthly statements have
to be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.




Item
2.  Properties




The
Company leases approximately 11,477 square feet of office space located at 5078
South 111th Street, Omaha, Nebraska where most of the Company’s administrative,
service, and other business operations are conducted.  The lease was
amended on December 14, 2009 to extend the term of the lease to December 31,
2014.  The base rent for this property was $7,265 per month for
2009.  In addition to base rent, the Company pays a pro rata share of
the operating expenses of the building.  The Company’s pro rata share
of operating expenses on the leased premises is $2,986 per month.




The
Company also leases approximately 1,800 square feet of office space located at
11132 Q Street, Omaha, Nebraska where its monitoring center is
located.  The lease term commenced on January 1, 2007, and ended on
December 31, 2009.  For the year ended December 31, 2009, the base
rent for this property was $1,125 per month.  In addition to base
rent, the Company pays a pro rata share of the operating expenses of the
building.  The Company’s pro rata share of operating expenses on the
leased premises is $391 per month.  The lease on 11132 Q Street was
not extended and the Company is in the process of relocating its monitoring
center to 5078 South 111th Street.
During this relocation, the Company is renting the facility on a month to month
basis.  In the opinion of management, the 5078 South 111th Street
facility is adequate for the Company’s current and reasonably foreseeable
needs.    The Company does not own any real
property.




13




Item
3.  Legal Proceedings





The
Company is not currently involved in any material pending legal proceedings but
may, from time to time, be involved in ordinary routine litigation incidental to
the business.




Item
4.  Reserved




PART
II




Item
5.  Market for Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities




Market
Information.iSECUREtrac’s common stock is listed on the OTC
Bulletin Board under the trading symbol “ISEC”.  The following table
sets forth the high and low sale prices for the Company’s common stock during
each calendar quarter of 2008 and 2009:




Year
                                    
                                    Quarter
                                    
                                    High
                                    
                                    
                                    Low1st
                                    
                                    $
                                    0.72
                                    
                                    
                                    $
                                    0.452008
                                    
                                    2nd
                                    
                                    $
                                    0.71
                                    
                                    
                                    $
                                    0.333rd
                                    
                                    $
                                    0.65
                                    
                                    
                                    $
                                    0.334th
                                    
                                    $
                                    0.55
                                    
                                    
                                    $
                                    0.191st
                                    
                                    $
                                    0.45
                                    
                                    
                                    $
                                    0.202009
                                    
                                    2nd
                                    
                                    $
                                    0.70
                                    
                                    
                                    $
                                    0.343rd
                                    
                                    $
                                    0.80
                                    
                                    
                                    $
                                    0.404th
                                    
                                    $
                                    0.54
                                    
                                    
                                    $
                                    0.33




The
source of the foregoing information is Bloomberg, LP Quotations and reflects
inter-dealer prices, without retail markup, markdown or commission and may not
represent actual transactions.




Holders.As of
December 31, 2009 there were approximately 367 stockholders of record for the
Company’s common stock.




Dividends.The
Company has not declared any dividends on shares of Common Stock and has no
plans to do so in the foreseeable future.




Recent Sales of Unregistered
Securities.  The Company issued 17,010, 19,410 and 6,226 shares
of common stock without registration under the Securities Act of 1933 during
2009, 2008 and 2007, respectively, to non-management directors as payment of
director fees.  The number of shares of common stock issued in each
case was based on the fair market value of the Company’s common stock as of the
date of the meetings to which such fees related.  All previously
unreported, unregistered issuances of common stock during 2009 are as
follows:




Date
                        
                        
                        
                        Amount of
                        
                        
                        
                        
                        
                        Cash toIssued
                        
                        Title
                        
                        Securities Sold
                        
                        Security Holder
                        
                        Description of Transaction
                        
                        Company03/02/09
                        
                        Common Stock
                        
                        
                        5,714
                        
                        Various Directors
                        
                        Shares issued for directors' fees
                        
                        
                        N/A05/04/09
                        
                        Common
      Stock
                        
                        
                        2,898
                        
                        Various
      Directors
                        
                        Shares
      issued for directors' fees
                        
                        
                        N/A08/03/09
                        
                        Common
      Stock
                        
                        
                        3,636
                        
                        Various
      Directors
                        
                        Shares
      issued for directors' fees
                        
                        
                        N/A10/28/09
                        
                        Common
      Stock
                        
                        
                        4,762
                        
                        Various
      Directors
                        
                        Shares
      issued for directors' fees
                        
                        
                        N/A




All of
the foregoing transactions of common stock were exempt from registration under
the Securities Act of 1933 pursuant to Section 4(2) of such Act.  All
such shares are subject to restrictions on resale.




14




Company Purchases of its Equity
Securities.No purchases of the Company’s common stock were
made by the Company or any “affiliated purchaser” (as defined in Rule 10b-18
under the Securities Exchange Act of 1934) during 2009.




Item
6.  Selected Financial Data




Not
Required for Smaller Reporting Company




Item
7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations




Highlights
of 2009 Operations





Increased
Revenue and Reduced Operating Loss


As
highlighted in its quarterly reports, the Company has continued to report
significant increases in year over year revenue as well as similarly significant
decreases in operating losses.  For the year ended December 31, 2009,
in comparison to the year ended December 31, 2008, the Company reported a
$2,637,000 increase in revenue and a decrease in operating loss of
$2,812,000.





Positive
Cash Flow from Operations


For the
first time in the Company's history, the Company's annual cash flow from
operations was positive. For the
year ended December 31, 2009 the Net Cash Provided
by Operating Activities was $2,240,000, an improvement of $4,876,000 over
the Net Cash Used
in Operating Activities for the year ended December 31, 2008 of
$2,636,000.  The improvement in Net Cash Provided by Operating
Activities from 2008 to 2009 was the result of increasing revenues as well as
the cost reductions and cost control plans implemented in 2008 and
2009.





In
addition, the Company’s operations generated $537,000 in excess of required
principal payments on long-term debt related to capital
leases.   It is important to note that, based on borrowings
outstanding at December 31, 2009, the cash required to cover the principal
payments on these borrowings for 2010 is slightly less than 2009, but will
decrease approximately $600,000 in 2011.





System
Infrastructure and Service Delivery Systems


During
2009, the Company has continued to invest in the Company’s core infrastructure –
tracNet24.  The improvements in 2009 significantly improved the speed
and capacity of the tracNet24 system which positions us well for growth in terms
of additional equipment under lease but also the expansion of
services.   In addition, during the latter half of 2009 the
Company invested in the development of a Salesforce.com (“SFDC”) platform which,
when completed, will enhance the Company’s service delivery
capabilities.  The development of the SFDC platform is expected to
continue through 2010 and into 2011.





Outlook
for 2010


The
decline in equipment leasing revenue in the fourth quarter of 2009 has created
some short-term challenges in terms of cash flow which will impact
2010.  Management has already taken steps to mitigate the impact of
the decrease in revenue and related cash flow.





Despite
recent signs of economic recovery, we expect that the ongoing difficult economic
situation in the United States will continue to make it difficult for many
state, county and local governments to accurately budget their tax revenues and
costs.  As a result, we expect that many of the corrections agencies
and other target customers for our offender tracking equipment and services will
continue to evaluate expenditures carefully.  However, we believe that
the value proposition that the Company provides to these target customers along
with a recovering economy will result in the number of contracts being awarded
beginning to increase slowly in the early part of 2010 and then accelerate in
the later part of the year.




15




Summary
of Financial Information


The
following table provides a comparison of selected financial highlights for the
years ended December 31, 2009 and 2008:





CONDENSED CONSOLIDATED FINANCIAL HIGHLIGHTS


Twelve Months Ended December 31,  2009 and 2008


(Rounded to nearest thousand)





2009
                                      
                                      
                                      2008
                                      
                                      
                                      ChangeRevenues:Equipment
      revenue
                                      
                                      $
                                      11,124,000
                                      
                                      
                                      $
                                      8,876,000
                                      
                                      
                                      $
                                      2,248,000Services
      revenue
                                      
                                      
                                      461,000
                                      
                                      
                                      
                                      334,000
                                      
                                      
                                      
                                      127,000Royalty
      revenue
                                      
                                      
                                      754,000
                                      
                                      
                                      
                                      492,000
                                      
                                      
                                      
                                      262,000Total
      revenues
                                      
                                      
                                      12,339,000
                                      
                                      
                                      
                                      9,702,000
                                      
                                      
                                      
                                      2,637,000Costs
      of revenue
                                      
                                      
                                      4,525,000
                                      
                                      
                                      
                                      3,868,000
                                      
                                      
                                      
                                      657,000Gross
      profit margin
                                      
                                      
                                      7,814,000
                                      
                                      
                                      
                                      5,834,000
                                      
                                      
                                      
                                      1,980,000Gross
      profit margin %
                                      
                                      
                                      63.3
                                      %
                                      
                                      
                                      60.1
                                      %Research
      and development expenses (R&D)
                                      
                                      
                                      1,263,000
                                      
                                      
                                      
                                      1,240,000
                                      
                                      
                                      
                                      23,000Sales,
      general and administrative expenses (SG&A)
                                      
                                      
                                      7,262,000
                                      
                                      
                                      
                                      8,117,000
                                      
                                      
                                      
                                      (855,000
                                      )Total
      R&D and SG&A
                                      
                                      
                                      8,525,000
                                      
                                      
                                      
                                      9,357,000
                                      
                                      
                                      
                                      (832,000
                                      )Operating
      loss
                                      
                                      
                                      (711,000
                                      )
                                      
                                      
                                      (3,523,000
                                      )
                                      
                                      
                                      2,812,000Interest
      expense, net
                                      
                                      
                                      (1,212,000
                                      )
                                      
                                      
                                      (1,078,000
                                      )
                                      
                                      
                                      (134,000
                                      )Net
      loss
                                      
                                      $
                                      (1,923,000
                                      )
                                      
                                      $
                                      (4,601,000
                                      )
                                      
                                      $
                                      2,678,000Preferred
      stock dividends and accretion
                                      
                                      
                                      (1,347,000
                                      )
                                      
                                      
                                      (1,224,000
                                      )
                                      
                                      
                                      (123,000
                                      )Net
      loss available to common stockholders
                                      
                                      $
                                      (3,270,000
                                      )
                                      
                                      $
                                      (5,825,000
                                      )
                                      
                                      $
                                      2,555,000




16




Quarterly
Highlights


In
addition to the annual statements of operation presented above, the following
tables of selected quarterly financial and non-financial data is important in
understanding the Company’s results of operation for the years ended December
31, 2008 and 2009 and the operating trends going into 2010.





CONDENSED
CONSOLIDATED QUARTERLY  FINANCIAL HIGHLIGHTS


8
Quarter Trend


(Rounded
to nearest thousand)


Three Months EndedMarch 31
                                  
                                  
                                  June 30
                                  
                                  
                                  Sept 30
                                  
                                  
                                  Dec 31
                                  
                                  
                                  March 31
                                  
                                  
                                  June 30
                                  
                                  
                                  Sept 30
                                  
                                  
                                  Dec 312008
                                  
                                  
                                  2008
                                  
                                  
                                  2008
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2009
                                  
                                  
                                  2009
                                  
                                  
                                  2009Revenue:Equipment
      leasing
                                  
                                  $
                                  2,202,000
                                  
                                  
                                  $
                                  2,263,000
                                  
                                  
                                  $
                                  2,099,000
                                  
                                  
                                  $
                                  2,312,000
                                  
                                  
                                  $
                                  2,625,000
                                  
                                  
                                  $
                                  2,974,000
                                  
                                  
                                  $
                                  2,924,000
                                  
                                  
                                  $
                                  2,601,000Service
      Revenue
                                  
                                  
                                  74,000
                                  
                                  
                                  
                                  87,000
                                  
                                  
                                  
                                  71,000
                                  
                                  
                                  
                                  102,000
                                  
                                  
                                  
                                  132,000
                                  
                                  
                                  
                                  116,000
                                  
                                  
                                  
                                  107,000
                                  
                                  
                                  
                                  106,000Royalty
      Revenue
                                  
                                  
                                  226,000
                                  
                                  
                                  
                                  6,000
                                  
                                  
                                  
                                  8,000
                                  
                                  
                                  
                                  252,000
                                  
                                  
                                  
                                  347,000
                                  
                                  
                                  
                                  102,000
                                  
                                  
                                  
                                  180,000
                                  
                                  
                                  
                                  125,000Total
      Revenue
                                  
                                  
                                  2,502,000
                                  
                                  
                                  
                                  2,356,000
                                  
                                  
                                  
                                  2,178,000
                                  
                                  
                                  
                                  2,666,000
                                  
                                  
                                  
                                  3,104,000
                                  
                                  
                                  
                                  3,192,000
                                  
                                  
                                  
                                  3,211,000
                                  
                                  
                                  
                                  2,832,000Costs
      of Revenue
                                  
                                  
                                  1,087,000
                                  
                                  
                                  
                                  948,000
                                  
                                  
                                  
                                  844,000
                                  
                                  
                                  
                                  989,000
                                  
                                  
                                  
                                  1,166,000
                                  
                                  
                                  
                                  1,173,000
                                  
                                  
                                  
                                  1,172,000
                                  
                                  
                                  
                                  1,014,000Gross
      profit margin
                                  
                                  
                                  1,415,000
                                  
                                  
                                  
                                  1,408,000
                                  
                                  
                                  
                                  1,334,000
                                  
                                  
                                  
                                  1,677,000
                                  
                                  
                                  
                                  1,938,000
                                  
                                  
                                  
                                  2,019,000
                                  
                                  
                                  
                                  2,039,000
                                  
                                  
                                  
                                  1,818,000Gross
      profit margin percentage*
                                  
                                  
                                  56.6
                                  %
                                  
                                  
                                  59.8
                                  %
                                  
                                  
                                  61.2
                                  %
                                  
                                  
                                  62.9
                                  %
                                  
                                  
                                  62.4
                                  %
                                  
                                  
                                  63.3
                                  %
                                  
                                  
                                  63.5
                                  %
                                  
                                  
                                  64.2
                                  %Research
      & Development (R&D)
                                  
                                  
                                  340,000
                                  
                                  
                                  
                                  329,000
                                  
                                  
                                  
                                  275,000
                                  
                                  
                                  
                                  296,000
                                  
                                  
                                  
                                  319,000
                                  
                                  
                                  
                                  251,000
                                  
                                  
                                  
                                  316,000
                                  
                                  
                                  
                                  377,000Selling
      General & Administrative (SG&A)
                                  
                                  
                                  2,252,000
                                  
                                  
                                  
                                  2,047,000
                                  
                                  
                                  
                                  1,817,000
                                  
                                  
                                  
                                  2,001,000
                                  
                                  
                                  
                                  1,916,000
                                  
                                  
                                  
                                  1,862,000
                                  
                                  
                                  
                                  1,796,000
                                  
                                  
                                  
                                  1,688,000Subtotal
      R&D and SG&A
                                  
                                  
                                  2,592,000
                                  
                                  
                                  
                                  2,376,000
                                  
                                  
                                  
                                  2,092,000
                                  
                                  
                                  
                                  2,297,000
                                  
                                  
                                  
                                  2,235,000
                                  
                                  
                                  
                                  2,113,000
                                  
                                  
                                  
                                  2,112,000
                                  
                                  
                                  
                                  2,065,000Operating
      Loss
                                  
                                  $
                                  (1,177,000
                                  )
                                  
                                  $
                                  (968,000
                                  )
                                  
                                  $
                                  (758,000
                                  )
                                  
                                  $
                                  (620,000
                                  )
                                  
                                  $
                                  (297,000
                                  )
                                  
                                  $
                                  (94,000
                                  )
                                  
                                  $
                                  (73,000
                                  )
                                  
                                  $
                                  (247,000
                                  )Total
      Full-Time Employees
                                  
                                  
                                  91
                                  
                                  
                                  
                                  89
                                  
                                  
                                  
                                  80
                                  
                                  
                                  
                                  74
                                  
                                  
                                  
                                  73
                                  
                                  
                                  
                                  74
                                  
                                  
                                  
                                  73
                                  
                                  
                                  
                                  73


* Gross
proft margin percentage = Gross Profit Margin / Total Revenue




17




CONDENSED
CONSOLIDATED QUARTERLY  FINANCIAL HIGHLIGHTS


Three
Months Ended March 31, 2009, June 30, 2009, September 30, 2009 , December 31,
2009


and
year  ended December 31, 2009


(Rounded
to nearest thousand)


Three Months EndedMarch 31,
                                                        2009
                                                      
                                                      
                                                      June 30,
                                                        2009
                                                      
                                                      
                                                      September 30,
                                                        2009
                                                      
                                                      
                                                      December 31,
                                                        2009
                                                      
                                                      
                                                      Year Ended
                                                        December 31,
                                                        2009Cash
      Flows From Operating ActivitiesNet
      loss
                                                      
                                                      $
                                                      (585,000
                                                      )
                                                      
                                                      $
                                                      (400,000
                                                      )
                                                      
                                                      $
                                                      (378,000
                                                      )
                                                      
                                                      $
                                                      (560,000
                                                      )
                                                      
                                                      $
                                                      (1,923,000
                                                      )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization
                                                      
                                                      
                                                      504,000
                                                      
                                                      
                                                      
                                                      593,000
                                                      
                                                      
                                                      
                                                      556,000
                                                      
                                                      
                                                      
                                                      470,000
                                                      
                                                      
                                                      $
                                                      2,123,000Stock
      based compensation
                                                      
                                                      
                                                      105,000
                                                      
                                                      
                                                      
                                                      103,000
                                                      
                                                      
                                                      
                                                      81,000
                                                      
                                                      
                                                      
                                                      50,000
                                                      
                                                      
                                                      $
                                                      339,000Provision
      for Doubtful Accounts
                                                      
                                                      
                                                      91,000
                                                      
                                                      
                                                      
                                                      70,000
                                                      
                                                      
                                                      
                                                      33,000
                                                      
                                                      
                                                      
                                                      10,000
                                                      
                                                      
                                                      $
                                                      204,000Changes
      in operating assets and liabilities:Accounts
      receivable
                                                      
                                                      
                                                      (42,000
                                                      )
                                                      
                                                      
                                                      298,000
                                                      
                                                      
                                                      
                                                      71,000
                                                      
                                                      
                                                      
                                                      37,000
                                                      
                                                      
                                                      $
                                                      364,000Inventories
                                                      
                                                      
                                                      45,000
                                                      
                                                      
                                                      
                                                      (108,000
                                                      )
                                                      
                                                      
                                                      (31,000
                                                      )
                                                      
                                                      
                                                      3,000
                                                      
                                                      
                                                      $
                                                      (91,000
                                                      )Prepaid
      expenses
                                                      
                                                      
                                                      (14,000
                                                      )
                                                      
                                                      
                                                      (33,000
                                                      )
                                                      
                                                      
                                                      13,000
                                                      
                                                      
                                                      
                                                      3,000
                                                      
                                                      
                                                      $
                                                      (31,000
                                                      )Accounts
      payable
                                                      
                                                      
                                                      148,000
                                                      
                                                      
                                                      
                                                      (295,000
                                                      )
                                                      
                                                      
                                                      190,000
                                                      
                                                      
                                                      
                                                      108,000
                                                      
                                                      
                                                      $
                                                      151,000Accrued
      expenses
                                                      
                                                      
                                                      340,000
                                                      
                                                      
                                                      
                                                      274,000
                                                      
                                                      
                                                      
                                                      47,000
                                                      
                                                      
                                                      
                                                      (8,000
                                                      )
                                                      
                                                      $
                                                      653,000Deferred
      revenue
                                                      
                                                      
                                                      (126,000
                                                      )
                                                      
                                                      
                                                      (31,000
                                                      )
                                                      
                                                      
                                                      (11,000
                                                      )
                                                      
                                                      
                                                      (35,000
                                                      )
                                                      
                                                      $
                                                      (203,000
                                                      )Accrued
      interest payable
                                                      
                                                      
                                                      153,000
                                                      
                                                      
                                                      
                                                      158,000
                                                      
                                                      
                                                      
                                                      161,000
                                                      
                                                      
                                                      
                                                      181,000
                                                      
                                                      
                                                      $
                                                      653,000-Net
      cash provided by  operating activities
                                                      
                                                      
                                                      619,000
                                                      
                                                      
                                                      
                                                      629,000
                                                      
                                                      
                                                      
                                                      732,000
                                                      
                                                      
                                                      
                                                      259,000
                                                      
                                                      
                                                      
                                                      2,239,000Principal
      payments on long-term debt
                                                      
                                                      
                                                      (491,000
                                                      )
                                                      
                                                      
                                                      (459,000
                                                      )
                                                      
                                                      
                                                      (344,000
                                                      )
                                                      
                                                      
                                                      (408,000
                                                      )
                                                      
                                                      
                                                      (1,702,000
                                                      )Net
      cash provided by  operating activities
      less  principal  payments on long-term
      debt
                                                      
                                                      $
                                                      128,000
                                                      
                                                      
                                                      $
                                                      170,000
                                                      
                                                      
                                                      $
                                                      388,000
                                                      
                                                      
                                                      $
                                                      (149,000
                                                      )
                                                      
                                                      $
                                                      537,000





For
the year ended December 31, 2009 compared to the year ended December 31,
2008




Total
Revenues


For the
year ended December 31, 2009, the Company had total revenue of $12,339,000, an
increase of 27.2% over the total revenue of $9,702,000 recorded for the year
ended December 31, 2008.





Equipment
Revenue and Service Revenue


The
Company’s principal sources of revenue (daily leasing of electronic monitoring
equipment and administrative, field and support services) grew 25.8% over 2008.
The increase in revenue over the prior year is the result of a net increase in
the number of units under lease (equipment leasing) and the  number of
units utilizing the Company’s monitoring center services (administrative field
& support service revenues) net of several downward price adjustments as
described below.





On a
quarterly basis, the Company reported increasing levels of revenue from
equipment leasing for the three months ended March 31, 2009 and June 20, 2009 as
a result of increasing amounts of equipment under lease.





For the
three months ended September 30, 2009 the Company experienced a slight decrease
in equipment leasing revenue of which approximately $25,000 is attributable to a
reduction in units deployed by existing customers, as opposed to the loss of
customers.  The remaining decrease is attributable to a reduction of
the overall daily price of a contract which occurred due to the customer
exercising the renewal options extending the contract to June of
2010.




18




For the
three months ended December 31, 2009, equipment leasing revenue decreased
approximately $323,000.  Of that approximately $200,000 was attributed
to a reduction in the overall daily price of a contract which occurred due to
the customer exercising renewal options extending the contract to January
2012.  The remaining decrease in revenue was attributable to a
reduction in units deployed by existing customers, as opposed to the loss of a
customer.





Royalty
Revenue


The
Company earns royalty revenues under a Patent License Agreement with Satellite
Tracking of People, L.L.C. (STOP) which grants STOP a license to utilize
specific technology that is patented by the Company.  The Company
earns a royalty equal to 2.5% of STOP’s revenue utilizing this
technology.  Royalty revenue increased $262,000 from $492,000 in 2008
to $754,000 for the year ended December 31, 2009.  Revenue recognized
under the STOP Patent License Agreement is based on estimates of STOP’s revenue
and fluctuates accordingly.  The maximum amount of royalties that the
Company can earn under the STOP Patent License Agreement is
$1,500,000.  Through December 31, 2009 the Company had earned
$1,250,000, leaving $250,000 which is expected to be recognized in the first six
months of 2010.





Cost
of Revenues


Cost of
Revenues represents all direct costs related to delivery of monitoring equipment
including amortization of the acquisition costs, repairs and maintenance of the
monitoring equipment, transportation costs, communication costs associated with
the equipment, as well as costs to upgrade existing units for advancements in
technology.  Cost of revenues for the year ended December 31, 2009
were $4,525,000, an increase of $657,000 from $3,868,000 reported in
2008.   The increase in cost of revenues is outlined
below


·
            $229,000
      related to communication costs of the Company's GPS
      equipment.  The increase is due to both an increase in the
      number of units deployed as well as an increase in the daily charge from
      the Company's cellular provider.


·
            $171,000
      related to royalty expenses outlined further
  below.


·
            $125,000
      related to the costs of sub-contracted services and equipment which are
      revenue producing to the Company.


·
            $132,000
      related to increases in amortization, repairs and supplies related to
      increased units deployed.





On
November 27, 2007, the Company and Pro Tech Monitoring, Inc. (“Pro Tech”)
entered into a Confidential Settlement Agreement (“Settlement Agreement”),
pursuant to which the Company agreed to make a modification to its GPS tracking
equipment to eliminate or disable a component that allegedly infringed on a U.S.
patent held by Pro Tech.  On January 27, 2008, the Company became
subject to royalty payments, which escalated over time, on unmodified equipment
generating revenue.





In
December 2009 the Company and Pro Tech reached substantial agreement over a
Confidential Patent License Agreement ("Patent License Agreement") under which
the Company was granted a limited license to provide the applicable technology
to specific customers.  In addition, the Patent License Agreement
fixed the amount of all royalties due Pro Tech for the limited license under the
Patent License Agreement and all royalties due under the Settlement Agreement at
$650,000, of which, approximately $142,000 was paid prior to December 31, 2009
with the balance being reflected in Accrued Expenses on the balance sheet of the
Company at December 31, 2009.  The Patent License Agreement was
entered into effective  March 1, 2010 on substantially the same terms
as agreed upon in December, 2009 with the final payment being made to Pro Tech
on March 4, 2010.





Royalty
expense for 2009 and 2008 was   $411,000 and $239,000,
respectively.   As a result of entering into this agreement, the
Company will have no future royalty expenses in connection with this alleged
infringement.




19


Gross
Profit Margin


The net
effect of the $2,637,000 increase in revenues offset by the $657,000 increase in
cost of revenues is an increase in the Company’s gross profit margin of
$1,980,000.  Gross profit margin, as a percentage of total revenue,
improved to 63.3% in 2009 from 60.1% in 2008.





Research
and Development Expenses


Research
and Development (R&D) expenses represent the on-going direct costs
associated with the development of the Company’s proprietary hardware and
software including  staffing expenses for the Company’s own engineers
and software developers, the cost of outside contracted engineering and design,
and the actual costs of components, prototypes, and testing equipment and
services used in the product development functions.





Research
and Development expenses for 2009 were $1,263,000, an increase of $23,000 over
the $1,240,000 expensed in 2008.





The
Company is currently in the process of redesigning several major software
systems and, in accordance with Statement of Position (SOP) 98-1, has
capitalized certain payroll and related costs associated with the
development of the applications.  For the year ended December 31, 2009, the
capitalized expenses which would have otherwise been reported as R&D
expenses totaled approximately $146,000.  $114,000 associated with
this redesign was capitalized during the year ended December 31,
2008.





In
addition, $75,000 was capitalized during the year ended December 31, 2009
related to improvements in the System 5000 equipment. No amounts were
capitalized related to the System 5000 during the year ended December 31,
2008.





R&D
expenses fluctuate as a result of open positions and subsequent staffing as well
the amount of capitalization of certain payroll costs in connection with the
software redesign noted above.





Sales,
General and Administrative Expenses


Sales,
General and Administrative (SG&A) expenses are all the expenses associated
with the operations of the Company, other than the expenses described
above.  These expenses include payroll, taxes and benefits and related
travel for executive, sales, administrative, customer support and accounting
staff.  In addition these costs include rent on property, corporate
communications, office leases and supplies, marketing, advertising, trade shows,
recruiting and training expenses, professional fees and bad debt
expense.





For the
year ended December 31, 2009, SG&A expenses decreased $855,000 to $7,262,000
from $8,117,000 incurred in 2008.  Significant components of the
decrease in SG&A expense from 2008 to 2009 are highlighted
below:


·
            $560,000
      reduction in personnel related expenses including salaries, benefits,
      recruiting, and travel  due to the decrease in staffing levels
      related to sales, administrative,  customer support and the
      monitoring center.




·
            $120,000
      reduction in bad debt expense




·
            $75,000
      reduction in stock option expense




·
            $59,000
      reduction in office and computer supplies due to implemented cost control
      measures and the reduction in the Company's overall
    headcount




·
            $41,000
      reduction in corporate insurance
expense




Looking
forward, management expects Operating Expenses which include SG&A and
R&D to continue at, or slightly below the levels as incurred in the second
half of 2009.


20




Interest
Expense, Net


Net
interest expense represents the total interest expense incurred by the
Company  in connection with its borrowings from Crestpark, LP Inc.
(“Crestpark”) and AHK Leasing LLC (“AHK”) reduced by the interest income earned
by the Company during the year.  The net interest expense increased
$134,000 from $1,078,000 in 2008 to $1,212,000 in 2009.  The increase
is attributable to the increase in equipment purchased under capital leases, as
well as the additional borrowings under the credit facilities with
Crestpark.





Until
such time as the Company is able to finance equipment purchases from cash flow
generated by operations, we expect to see net interest expense continue at or
above the current levels.





Net
Loss


The
Company’s net loss for 2009 was $1,923,000 a decrease of $2,678,000 from the
$4,601,000, reported in 2008 for the reasons described herein.





Preferred
Stock Dividends and Accretion


For the
year ended December 31, 2009, preferred stock dividends and accretion totaled
$1,347,000 as compared to $1,224,000 for 2008.  This increase was due
to compounding interest on accrued but unpaid dividends on our Series C
Preferred Stock.  The Series C Exchangeable Preferred Stock accrues
interest at a cumulative compounded rate of 8.0% per annum.





Liquidity
and Capital Resources




For the
year ended December 31, 2009, the Company generated $2,240,000 of cash in
operating activities, used $2,322,000 in investing activities, and generated
$378,000 in cash from financing activities.  The total of all cash flow
activities resulted in an increase of $296,000 in the balance of cash for the
year ended December 31, 2009.




For the
year ended December 31, 2008, the Company used $2,636,000 of cash in operating
activities, used $2,433,000 in investing activities and generated $2,049,000 in
cash from financing activities.  The total of all cash flow activities in
2008 resulted in a decrease in the balance of cash of $3,019,000.





In
addition to cash generated by operations, the Company has access to credit
facilities under lending agreements with AHK to finance the acquisition of
tracking equipment and Crestpark to meet its other working capital needs as
follows:





AHK:





AHK, a
company controlled by three stockholders, one of which is a current director has
indicated that they expect to continue to provide lease financing for our
monitoring equipment purchases during 2010.  Through sale-leaseback
arrangements, the Company sells the inventory to AHK and then leases the
equipment back.  All capital leases are treated as financing
transactions with interest rates ranging from 10.00% to 12.50% per
annum.  Maturity dates on these capital leases run from September 2010
to December 2012.  As of December 31, 2009, the aggregate balance on
the capital leases totaled $2,923,532, of which $1,674,221 is current and the
balance of $1,249,311 is classified as long-term debt. The Company made
principal payments on capital leases with AHK totaling $1,702,000 and $1,151,000
during 2009 and 2008, respectively.





To the
extent that AHK is unable to provide lease financing, the Company intends to
utilize the Equipment Term Loan under the November 2008 loan agreement with
Crestpark.


21





Crestpark:





Revolving
Line of Credit - The Company has a $750,000 Revolving Line Credit with
Crestpark for its working capital needs.  The Revolving Line of Credit
has a term ending on January 1, 2012, is unsecured and bears interest at a fixed
noncompounded rate of 12% per annum.  The Company is also required to
pay Crestpark a fee of 0.25% per annum on the average daily unused amount of the
Revolving Line of Credit. The Company had a net decrease in borrowings on the
Revolving Line of Credit of $150,000 in 2009 in comparison to a net increase in
borrowings on the same line in 2008.  As of December 31, 2009, the
Company had $350,000 outstanding under the Revolving Line of Credit and $400,000
available.





Equipment
Term Loan - The Company has a $1,750,000 Equipment Term Loan with
Crestpark which it has used to purchase GPS-based offender tracking and
monitoring equipment.  At Crestpark’s discretion, any borrowings under
the Equipment Term Loan that remain outstanding more than 30 days can be
converted into separate 36 Month Notes, which are notes payable over 36 month
terms.  The Equipment Term Loan has a term ending January 1, 2012,
bears interest at a fixed rate of 12% per annum and is secured by the monitoring
equipment purchased with the proceeds of the Equipment Term Loan.  The
Company is also required to pay Crestpark a fee of 0.25% per annum on the
average daily unused amount of the Equipment Term Loan.  The Company
had a net increase in borrowings on the Equipment Term Loan of $230,000 and
$50,000 for the years ended December 31, 2009 and 2008, respectively. The amount
available to be drawn under the Equipment Term Loan at December 31, 2009 is
$1,338,000, of which approximately $508,000 was drawn on February 24, 2010,
leaving $830,000 available to be drawn.





By the
end of 2009, the Company was incurring approximately $350,000 in recurring
monthly costs of revenues and $630,000 in recurring monthly operating expenses,
excluding non-cash expenses such as the provision for doubtful accounts,
depreciation and amortization of stock options.  The majority of the
recurring monthly operating expenses consisted of salaries, wages, payroll
taxes, health insurance and other employee benefits.  In addition to these
recurring monthly operating expenses, the Company’s other principal uses of cash
are the payment of other recurring monthly operating expenses, the acquisition
of monitoring equipment and the changes in working capital.  In
general, the Company meets its liquidity needs from its current revenues,
existing cash and cash equivalents (including the proceeds of the additional
borrowings from Crestpark, as described above), and through capital leasing
arrangements.  As of December 31, 2009, the Company had $720,000 in
cash and cash equivalents.





The
Company believes that its current working capital combined with the expected
amounts available for additional working capital via the Revolving Line of
Credit with Crestpark and through lease financing for its monitoring equipment
through AHK and/or Crestpark are sufficient to meet its liquidity needs through
2010.




Critical
Accounting Policies




The
Company prepares its consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America (“U.S.
GAAP”).  This requires management to make estimates and judgments that
affect reported amounts and related disclosures.  Actual amounts will
differ from those estimates.  The significant accounting policies are
described in Note 1 to the audited Consolidated Financial
Statements.  Of those policies, the following have been identified as
the most critical because they are the most important to the portrayal of the
Company’s results of operations and financial condition and they require
subjective or complex management judgments:




Revenue
recognition and deferred revenue


The
Company derives revenue from equipment leasing and services and patent
royalties.


22


Equipment leasing and
services – the Company charges a daily rate for equipment leasing and
service revenue (e.g. per day/per individual being monitored) and recognizes
revenue as equipment leasing and services are provided. The majority of the
Company’s contracts are billed on a monthly basis in arrears. However, in some
instances customers are billed in advance, in which case, those billings are
reflected as deferred revenue and recognized as equipment leasing and services
are provided.




Royalty revenue – the Company
earns royalty revenues on a patent license agreement under which it licenses its
patented technology to a competitor. Prior to and during the quarter ended
September 30, 2008, the Company accounted for these royalty revenues on a cash
basis. Beginning in the quarter ended December 31, 2008, the Company accounted
for these royalty revenues on an accrual basis as the amounts were then
estimable and probable of collection.





Stock–based
compensation




The
Company accounts for its stock-based compensation in accordance with Accounting
Standards Codification (“ASC)” 718, “Compensation-Stock Compensation”, which
requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options, be recognized in the
financial statements based on the fair value of the equity or liability
instruments issued. ASC 718 covers a wide range of share-based compensation
arrangements including stock options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. Under ASC
718, the Company is required to measure the cost of its employee services
received in exchange for stock options based on the grant-date fair value of the
award, and to recognize the cost over the period the employee is required to
provide services for the award.





Research
and Development Expenses


The
Company expenses research and development expenses as incurred.  For the
year ended December 31, 2009, the Company incurred $1,263,000 in research and
development expenses, net of $146,000 capitalized in connection with the
redesign of major software systems and $75,000 capitalized in connection with
System 5000 improvements.





Impairment
of Long-Lived Assets


The
Company evaluates goodwill for impairment on an annual basis.  The
Company assesses the recoverability of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.  These computations utilize judgments and assumptions
inherent in management’s estimate of future undiscounted and discounted cash
flows to determine recoverability of these assets.  If management’s
assumptions about these assets were to change as a result of events or
circumstances, the Company may be required to record an impairment
loss.  The Company recorded no impairment charges for the years ended
December 31, 2009 and December 31, 2008.





Off-Balance
Sheet Arrangements




The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or future material effect on its financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources




Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk




Not
Required for Smaller Reporting Company


23




Item
8.  Financial Statements.


iSECUREtrac
Corp. and Subsidiaries


Consolidated
Financial Report





Table of
Contents





Report
      of Independent Registered Public Accounting Firm
                  
                  
                  25Consolidated
      Financial Statements:Consolidated
      Balance Sheets
                  
                  
                  26Consolidated
      Statements of Operations
                  
                  
                  27Consolidated
      Statements of Stockholders' Deficit
                  
                  
                  28Consolidated
      Statements of Cash Flows
                  
                  
                  29Notes
      to Consolidated Financial Statements
                  
                  
                  30


24


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors


iSECUREtrac
Corp.


Omaha,
Nebraska





We have
audited the accompanying consolidated balance sheets of iSECUREtrac Corp. and
Subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ deficit, and cash flows for the years
then ended.  These financial statements are the responsibility of the
Company’s management. 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.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of iSECUREtrac Corp. and
Subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years ended December 31, 2009 and 2008,
in conformity with U.S. generally accepted accounting principles.





We were
not engaged to examine management’s assessment of the effectiveness of
iSECUREtrac Corp. and Subsidiaries' internal control over financial
reporting as of December 31, 2009 included in the Annual Report on Form 10-K
and, accordingly, we do not express an opinion thereon.





/s/
McGladrey & Pullen LLP


Kansas
City, Missouri


March 16,
2010


25





iSECUREtrac
Corp. and SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


December
31, 2009 and 2008





2009
                                    
                                    
                                    2008ASSETSCurrent
      AssetsCash
      and cash equivalents (Note 11)
                                    
                                    $
                                    719,662
                                    
                                    
                                    $
                                    423,361Accounts
      receivable, net of allowance for doubtful accounts of $666,630 in 2009 and
      $462,553 in 2008 (Note 11)
                                    
                                    
                                    1,877,330
                                    
                                    
                                    
                                    2,445,505Inventories
                                    
                                    
                                    284,838
                                    
                                    
                                    
                                    193,820Prepaid
      expenses and other
                                    
                                    
                                    115,004
                                    
                                    
                                    
                                    84,224Total
      current assets
                                    
                                    
                                    2,996,834
                                    
                                    
                                    
                                    3,146,910Leasehold
      improvements and equipment, net of accumulated depreciation of $11,228,684
      in 2009 and $9,125,376 in 2008 (Notes 2, 5, & 6)
                                    
                                    
                                    4,461,466
                                    
                                    
                                    
                                    4,229,319Intangibles,
      net of accumulated amortization of $911,522 in 2009 and $892,128 in 2008
      (Note 3)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    19,394Goodwill
      (Note 3)
                                    
                                    
                                    2,302,179
                                    
                                    
                                    
                                    2,302,179Other
      assets
                                    
                                    
                                    69,889
                                    
                                    
                                    
                                    83,386Total
      assets
                                    
                                    $
                                    9,830,368
                                    
                                    
                                    $
                                    9,781,188LIABILITIES
      AND STOCKHOLDERS' (DEFICIT)Current
      LiabilitiesAccounts
      payable
                                    
                                    $
                                    554,592
                                    
                                    
                                    $
                                    403,399Accrued
      expenses
                                    
                                    
                                    1,177,666
                                    
                                    
                                    
                                    524,339Revolving
      Line of Credit
                                    
                                    
                                    350,000
                                    
                                    
                                    
                                    500,000Equipment
      Term Loan
                                    
                                    
                                    280,000
                                    
                                    
                                    
                                    50,000Current
      maturities of long-term debt  (Notes 5, 6, &
    10)
                                    
                                    
                                    1,674,221
                                    
                                    
                                    
                                    1,222,508Deferred
      revenues & gain on sale-leaseback transactions (Notes 6 &
      10)
                                    
                                    
                                    96,937
                                    
                                    
                                    
                                    299,548Accrued
      interest payable (Note 5)
                                    
                                    
                                    1,428,778
                                    
                                    
                                    
                                    776,011Total
      current liabilities
                                    
                                    
                                    5,562,194
                                    
                                    
                                    
                                    3,775,805Long-term
      debt, less current maturities (Notes 5, 6, & 10)
                                    
                                    
                                    13,126,786
                                    
                                    
                                    
                                    13,280,368Total
      liabilities
                                    
                                    $
                                    18,688,980
                                    
                                    
                                    $
                                    17,056,173Redeemable
      convertible Series C preferred stock (Note 8)
                                    
                                    
                                    14,453,227
                                    
                                    
                                    
                                    13,106,407Commitments
      and contingency (Notes 6 & 12)Stockholders'  (deficit)Common
      stock
                                    
                                    
                                    10,816
                                    
                                    
                                    
                                    10,799Additional
      paid-in capital
                                    
                                    
                                    55,516,568
                                    
                                    
                                    
                                    55,369,880Accumulated
      deficit
                                    
                                    
                                    (78,839,223
                                    )
                                    
                                    
                                    (75,762,071
                                    )Total
      stockholders' (deficit)
                                    
                                    
                                    (23,311,839
                                    )
                                    
                                    
                                    (20,381,392
                                    )Total
      liabilities and stockholders' (deficit)
                                    
                                    $
                                    9,830,368
                                    
                                    
                                    $
                                    9,781,188





See Notes
to Consolidated Financial Statements.


26





iSECUREtrac
Corp. and SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


Years
Ended December 31, 2009 and 2008





2009
                        
                        
                        2008Revenues:Equipment
      leasing & hosting (Note 11)
                        
                        $
                        10,958,294
                        
                        
                        $
                        8,771,198Administrative,
      field & support service revenues
                        
                        
                        460,670
                        
                        
                        
                        334,579Equipment
      sales
                        
                        
                        165,618
                        
                        
                        
                        104,014Other
      revenues
                        
                        
                        754,405
                        
                        
                        
                        492,624Total
      revenues
                        
                        
                        12,338,987
                        
                        
                        
                        9,702,415Operating
      expenses:Cost
      of revenues
                        
                        
                        4,524,864
                        
                        
                        
                        3,867,895Research
      and development
                        
                        
                        1,263,148
                        
                        
                        
                        1,240,382Sales,
      general and administrative
                        
                        
                        7,262,031
                        
                        
                        
                        8,116,974Total
      operating expenses
                        
                        
                        13,050,043
                        
                        
                        
                        13,225,251Operating
      loss
                        
                        
                        (711,056
                        )
                        
                        
                        (3,522,836
                        )Other
      income (expense):Interest
      income
                        
                        
                        652
                        
                        
                        
                        27,130Interest
      expense (Note 5 & 10)
                        
                        
                        (1,212,559
                        )
                        
                        
                        (1,105,530
                        )Total
      other income (expense)
                        
                        
                        (1,211,907
                        )
                        
                        
                        (1,078,400
                        )Loss
      before provision for income taxes
                        
                        
                        (1,922,963
                        )
                        
                        
                        (4,601,236
                        )Provision
      for income taxes (Note 9)
                        
                        
                        -
                        
                        
                        
                        -Net
      loss
                        
                        $
                        (1,922,963
                        )
                        
                        $
                        (4,601,236
                        )Preferred
      stock dividends and accretion (Note 8)
                        
                        
                        (1,346,822
                        )
                        
                        
                        (1,223,862
                        )Net
      loss available to common stockholders
                        
                        $
                        (3,269,785
                        )
                        
                        $
                        (5,825,098
                        )Basic
      and diluted loss per common share
                        
                        $
                        (0.30
                        )
                        
                        $
                        (0.54
                        )Weighted
      average shares of common stock outstanding
                        
                        
                        10,807,963
                        
                        
                        
                        10,788,089





See Notes
to Consolidated Financial Statements.


27


iSECUREtrac
Corp. AND SUBSIDIARY


STATEMENT
OF STOCKHOLDERS' DEFICIT


Years
Ended December 31, 2009 and 2008





AdditionalCommon Stock
                          
                          
                          Paid
      -in
                          
                          
                          AccumulatedShares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Deficit
                          
                          
                          TotalBalance,
      December 31, 2007
                          
                          
                          10,779,680
                          
                          
                          $
                          10,779
                          
                          
                          $
                          55,109,333
                          
                          
                          $
                          (70,089,430
                          )
                          
                          $
                          (14,969,318
                          )Shares
      issued for director's fees
                          
                          
                          19,410
                          
                          
                          
                          20
                          
                          
                          
                          6,980
                          
                          
                          
                          -
                          
                          
                          
                          7,000Stock
      based compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          406,024
                          
                          
                          
                          -
                          
                          
                          
                          406,024Series
      C preferred stock dividends
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,071,405
                          )
                          
                          
                          (1,071,405
                          )Accretion
      to redemption value of preferred stock
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (152,457
                          )
                          
                          
                          -
                          
                          
                          
                          (152,457
                          )Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (4,601,236
                          )
                          
                          
                          (4,601,236
                          )Balance,
      December 31, 2008
                          
                          
                          10,799,090
                          
                          
                          $
                          10,799
                          
                          
                          $
                          55,369,880
                          
                          
                          $
                          (75,762,071
                          )
                          
                          $
                          (20,381,392
                          )Shares
      issued for director's fees
                          
                          
                          17,010
                          
                          
                          
                          17
                          
                          
                          
                          7,983
                          
                          
                          
                          -
                          
                          
                          
                          8,000Stock
      issued upon exercise of options
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          162
                          
                          
                          
                          -
                          
                          
                          
                          162Stock
      based compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          331,175
                          
                          
                          
                          -
                          
                          
                          
                          331,175Series
      C preferred stock dividends
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,154,189
                          )
                          
                          
                          (1,154,189
                          )Accretion
      to redemption value of preferred stock
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (192,632
                          )
                          
                          
                          -
                          
                          
                          
                          (192,632
                          )Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,922,963
                          )
                          
                          
                          (1,922,963
                          )Balance,
      December 31, 2009
                          
                          
                          10,816,100
                          
                          
                          $
                          10,816
                          
                          
                          $
                          55,516,568
                          
                          
                          $
                          (78,839,223
                          )
                          
                          $
                          (23,311,839
                          )





See Notes
to Consolidated Financial Statements.


28


iSECUREtrac
CORP. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Twelve
Months Ended December 31, 2009 and 2008





2009
                                        
                                        
                                        2008Cash
      Flows From Operating ActivitiesNet
      loss
                                        
                                        $
                                        (1,922,963
                                        )
                                        
                                        $
                                        (4,601,236
                                        )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                        
                                        
                                        2,122,701
                                        
                                        
                                        
                                        2,126,066Stock
      based compensation
                                        
                                        
                                        339,175
                                        
                                        
                                        
                                        413,024Provision
      for Doubtful Accounts
                                        
                                        
                                        204,077
                                        
                                        
                                        
                                        343,761Changes
      in operating assets and liabilities:Accounts
      receivable
                                        
                                        
                                        364,098
                                        
                                        
                                        
                                        (847,364
                                        )Inventories
                                        
                                        
                                        (91,018
                                        )
                                        
                                        
                                        (58,444
                                        )Prepaid
      expenses
                                        
                                        
                                        (30,780
                                        )
                                        
                                        
                                        8,526Accounts
      payable
                                        
                                        
                                        151,193
                                        
                                        
                                        
                                        (666,178
                                        )Accrued
      expenses
                                        
                                        
                                        653,327
                                        
                                        
                                        
                                        (84,744
                                        )Deferred
      revenues and gain on sale - leaseback transactions
                                        
                                        
                                        (202,611
                                        )
                                        
                                        
                                        (14,542
                                        )Accrued
      interest payable
                                        
                                        
                                        652,767
                                        
                                        
                                        
                                        745,498Net
      cash provided by (used in) operating activities
                                        
                                        
                                        2,239,966
                                        
                                        
                                        
                                        (2,635,633
                                        )Cash
      Flows From Investing ActivitiesPurchases
      of leasehold improvements and equipment
                                        
                                        
                                        (2,189,280
                                        )
                                        
                                        
                                        (2,323,894
                                        )Capitalization
      of software development costs
                                        
                                        
                                        (146,175
                                        )
                                        
                                        
                                        (113,802
                                        )Decrease
      in other assets
                                        
                                        
                                        13,497
                                        
                                        
                                        
                                        5,039Net
      cash (used in) investing activities
                                        
                                        
                                        (2,321,958
                                        )
                                        
                                        
                                        (2,432,657
                                        )Cash
      Flows From Financing ActivitiesPrincipal
      proceeds from long-term debt
                                        
                                        
                                        2,000,000
                                        
                                        
                                        
                                        2,650,000Net
      proceeds/(payments) on revolving line of credit
                                        
                                        
                                        (150,000
                                        )
                                        
                                        
                                        500,000Net
      proceeds from equipment term loan
                                        
                                        
                                        230,000
                                        
                                        
                                        
                                        50,000Principal
      payments on long-term debt
                                        
                                        
                                        (1,701,869
                                        )
                                        
                                        
                                        (1,151,061
                                        )Proceeds
      from the exercise of options and warrants
                                        
                                        
                                        162
                                        
                                        
                                        
                                        -Net
      cash provided by financing activities
                                        
                                        
                                        378,293
                                        
                                        
                                        
                                        2,048,939Increase
      (Decrease) in cash
                                        
                                        
                                        296,301
                                        
                                        
                                        
                                        (3,019,351
                                        )Cash
      at beginning of period
                                        
                                        
                                        423,361
                                        
                                        
                                        
                                        3,442,712Cash
      at end of period
                                        
                                        $
                                        719,662
                                        
                                        
                                        $
                                        423,361Supplemental
      Disclosure of Cash Payments forInterest
                                        
                                        
                                        559,792
                                        
                                        
                                        
                                        360,033





See Notes
to Consolidated Financial Statements.


29


iSECUREtrac
CORP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Note 1.  Nature
of Business and Significant Accounting Policies





Nature
of Business





iSECUREtrac
develops, markets, leases and services products that assist in “monitoring
compliance and modifying behavior” of individuals who are under the supervision
of the criminal justice system and social service agencies, primarily in
the United States.  The Company’s suite of services  (e.g. Global
Positioning System (“GPS”)  tracking systems, house arrest, visual
breath alcohol monitoring and supplemental monitoring services) are designed to
offer an alternative to incarceration thereby reducing  the overall cost
associated with individuals under correctional or community
supervision.





The
Company deploys equipment and services through two methods: through direct
contracts with state, local and county agencies or through resellers who have
contracts with state, local and county agencies. The actual number of units
deployed by the Company's customers will vary from month to month and the
Company's revenue will vary accordingly. Therefore, in the absence of new
contracts won, the Company's revenue may increase and in the absence of
contracts lost, the Company's revenue may decrease.





Direct contracts with the
      state, county or local agencies - These contracts are generally won
      through the competitive bid processes as required by the particular state,
      county or local procurement laws.   The length of contracts
      vary and range from one year to five years, including renewal options and
      typically include cancellation clauses with 30 to 60 days
      notice.  In general, contracts do not specify a minimum or
      maximum number of units.





Resellers - These
      contracts are won through direct solicitation to the
      reseller.  They generally have no stated expiration or
      automatically renew on a month to month basis with cancellation clauses of
      30 to 60 days notice.





Significant
Accounting Policies





Principles of
consolidation:  The consolidated financial statements include
the accounts of iSECUREtrac and its wholly-owned subsidiaries, iSt Services,
Inc., formed September 25, 2002, and Tracking Systems Corporation (“TSC”),
acquired on August 28, 2003.  All material intercompany balances and
transactions have been eliminated in consolidation.




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




Cash and cash
equivalents:For financial statement purposes, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.  The carrying value of
these investments approximates fair value due to the nature of the maturity
period.




Trade accounts
receivable:Trade 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.  Management determines
the allowance for doubtful receivables by regularly evaluating individual
customer receivables and considering a customer’s financial condition, credit
history and current economic conditions.  Trade accounts receivable
are written off when deemed uncollectible.  Recoveries of trade
accounts receivable previously written off are recorded when
received.  The Company offers credit terms to select customers of up
to 45 days.  Additionally, the Company reserves the right to assess
finance charges on delinquent accounts where such charges are
permitted.  Accounts are considered delinquent after 45
days.  There was $223,856 of bad debt expenses for 2009 and $343,761
for 2008.


30




Inventories:Inventories
consist of repair parts or components that will be used in the production of new
revenue producing equipment.  Inventories are reviewed for
obsolescence on a quarterly basis.




Leasehold improvement and
equipment:  Leasehold improvements and equipment are recorded
at cost.  Equipment, including monitoring equipment, is depreciated on
the straight-line method over the estimated useful lives of the related assets
ranging from 3 to 10 years.  The cost of leasehold improvements is
amortized over the lesser of the estimated lives of the assets or the lease
term.  Amortization of assets acquired under capital leases is
included with depreciation expense on the owned assets.




The
Company assesses the recoverability of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.  These computations utilize judgments and assumptions
inherent in management’s estimate of future undiscounted and discounted cash
flows to determine recoverability of these assets.  If management’s
assumptions about these assets were to change as a result of events or
circumstances, the Company may be required to record an impairment
loss.  With respect to the Company’s long lived assets, the Company
recorded no impairment charges for the years ended December 31, 2009 and
2008.




Product
development:  The Company capitalizes software and hardware
development costs when a product's technological feasibility has been
established and ends when the product is available for general release to
customers.  All software and hardware development costs are amortized
on a straight-line basis over 36 months.   As of December 31,
2009, the Company had capitalized development costs of $315,937 related to the
System 5000 and $259,977 related to the improvements in the functionality of our
web-based software and customer-facing interfaces.  Of these amounts,
$259,662 and $0, respectively, had been amortized through December 31,
2009.  The net value of these capitalized software and hardware
development costs are included in the Leasehold improvements and equipment line
of the Consolidated Balance Sheets.




Research and development
expenses:Research and development cost of $1,263,148 and
$1,240,382 were charged to operations for the years ended December 31, 2009 and
2008, respectively.




Goodwill:  Goodwill
represents the excess of purchase price paid over the net identifiable assets of
the acquired business.  It is subject to annual tests for
impairment.  The Company has recorded no impairment charges related to
goodwill for the years ended December 31, 2009 and 2008.




Intangibles, subject to
amortization:  Amortizable intangibles represent the value
assigned to the future net income stream attributable to customer monitoring
contracts assumed by the Company in a prior acquisition based on their capacity
to generate such income.  The intangible asset was amortized over
seven years, the estimated life of the monitoring contracts to which they
relate.  Amortization was based on the ratio of projected annual
revenue streams to total projected revenue per existing customer monitoring
contracts.  All intangibles were fully amortized as of December 31,
2009.




Earnings (loss) per
share:  Basic Earnings (Loss) Per Common Share is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding during the period.  Diluted
Earnings (Loss) Per Common Share shall be computed by including contingently
issuable shares with the weighted average shares outstanding during the
period.  When inclusion of the contingently issuable shares would have
an antidilutive effect upon earnings per share, no diluted earnings (loss) per
share shall be presented.  The following potentially dilutive shares
were not included in diluted earnings (loss) per common share as they would have
an antidilutive effect upon earnings (loss) per share:


31




December 31, 2009
                                      
                                      
                                      December 31, 2008Shares
      issuable upon conversion of Series C Exchangeable Preferred
      Stock
                                      
                                      
                                      4,782,609
                                      
                                      
                                      
                                      4,782,609Warrants
      issuable upon conversion of Series C Exchangeable Preferred
      Stock
                                      
                                      
                                      6,287,045
                                      
                                      
                                      
                                      6,287,045Common
      stock options outstanding
                                      
                                      
                                      3,054,320
                                      
                                      
                                      
                                      2,734,276Common
      stock warrants outstanding
                                      
                                      
                                      2,227,074
                                      
                                      
                                      
                                      3,544,535




Revenue recognition and deferred
revenue:   The Company derives revenue from equipment
leasing and services and patent royalties.





Equipment leasing and
services – the Company charges a daily rate for equipment leasing and
service revenue (e.g. per day/per individual being monitored) and recognizes
revenue as equipment leasing and services are provided. The majority of the
Company’s contracts are billed on a monthly basis in arrears. However, in some
instances customers are billed in advance, in which case, those billings are
reflected as deferred revenue and recognized as equipment leasing and services
are provided.





Royalty revenue – the Company
entered into a Patent License Agreement in 2005 with Satellite Tracking of
People, L.L.C. (STOP) which grants STOP a license to utilize specific technology
that is patented by the Company. In exchange for that license the Company is
entitled to receive a royalty payment from STOP equal to 2.5% of the revenue
utilizing such technology, due annually by March 31 of each year. Prior to and
during the quarter ended September 30, 2008, the Company accounted for royalty
revenue on a cash basis. During the three months ended December 31, 2008, the
Company began accounting for these revenues on an accrual basis as the amounts
were then estimable and probable of collection. The maximum that can be earned
under this agreement is $1,500,000. Through December 31, 2009 the Company has
earned $1,250,000, leaving $250,000 which is expected to be recognized in the
first six months of 2010.




Income taxes: Deferred taxes
are provided for by the liability method wherein deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.




Stock–based compensation:The
Company accounts for its stock-based compensation in accordance with Accounting
Standards Codification (“ASC”) 718, “Compensation-Stock Compensation”, which
requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options, be recognized in the
financial statements based on the fair value of the equity or liability
instruments issued. ASC 718 covers a wide range of share-based compensation
arrangements including stock options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. Under ASC
718, the Company is required to measure the cost of its employee services
received in exchange for stock options based on the grant-date fair value of the
award, and to recognize the cost over the period the employee is required to
provide services for the award.




The
Company adopted the requirements of ASC 718 using the modified prospective
transition method for valuing stock options. Under this method, stock based
compensation expense is recognized using the fair-value based accounting method
for all employee awards granted, modified, or settled during a
period.


32




The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:  The significant assumptions used in the Black Scholes
model to estimate compensation expense are as follows:




2009
                                      
                                      
                                      2008Risk
      free interest rate
                                      
                                      
                                      3.60
                                      %
                                      
                                      
                                      3.79
                                      %Expected
      volatility factor
                                      
                                      
                                      81.50
                                      %
                                      
                                      
                                      82.84
                                      %Expected
      option term in years
                                      
                                      3.5
      to 6.5
                                      
                                      
                                      3.5
      to 6.5Dividends
                                      
                                      $
                                      0.00
                                      
                                      
                                      $
                                      0.00Forfeitures
      for senior executives
                                      
                                      
                                      35
                                      %
                                      
                                      
                                      23
                                      %Forfeitures
      for non-senior
                                      
                                      
                                      24
                                      %
                                      
                                      
                                      24
                                      %




The
risk-free interest rate is determined on the date the grant is issued. This rate
is equal to the rates based on yields from U.S. Treasury zero-coupon issues with
maturity of 3.5 years to 6.5 years. Expected volatilities are based upon looking
back at historical stock prices since the date of adoption of the
plan.




The
Company is required to estimate forfeitures. The forfeiture rate is the rate at
which options are expected to be forfeited prior to full vesting. The forfeiture
rate is determined based on actual forfeiture rate experience as follows: For
each historical year of option issuance, the total options issued for the year
is compared to the options forfeited prior to having vested. For option years in
which the two year vesting period has not passed, past experience is used to
project future forfeitures. The total of pro forma forfeitures is then compared
to total options awarded and the resultant percentage is used as the forfeiture
rate. This forfeiture rate is recalculated on an annual basis.




The
annual rate of quarterly dividends is 0% since iSECUREtrac has historically not
paid dividends on its common stock and does not anticipate paying dividends on
its common stock in the future.




The
Company recorded pre-tax compensation expense for stock options issued to its
employees of $331,175 and $406,024 for the years ended December 31, 2009 and
2008, respectively. The Company has recorded a full valuation allowance on
deferred tax assets and, therefore, no tax benefit is recognized.




The fair value of stock
warrants issued to non-employees is also accounted for using ASC 718.
Related compensation expense is charged to income when incurred.





Advertising costs:
Advertising costs are expensed as incurred. Advertising expense for the years
ended December 31, 2009 and 2008, was $13,355 and $35,310,
respectively.





Uncertain Tax Positions. The
Company accounts for all income taxes in accordance with ASC 740 – Income Taxes
which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. It requires that we recognize in our
consolidated financial statements, only those tax positions that are
“more-likely-than-not” of being sustained as of the adoption date, based on the
technical merits of the position. There are no unrecognized tax benefits in the
Company’s financial statements as of December 31, 2009 and
2008.


33





The
Company recognizes interest and penalties related to uncertain tax positions in
general and administrative expense. As of December 31, 2009, the Company has not
recorded any provisions for accrued interest and penalties related to uncertain
tax positions.





Recent Accounting
Pronouncements:




In June
2009, the Financial Accounting Standards Board, (“FASB”) issued Accounting
Standards Codification (“ASC”) 105, Generally Accepted Accounting
Principles (“ASC 105”). ASC 105 establishes the FASB Accounting Standards
Codification (“Codification”) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernment entities in the
preparation of financial statements in conformity with GAAP. Rules and
interpretive releases of the SEC under authority of federal securities law are
also sources of authoritative GAAP for SEC registrants. The Company adopted ASC
105 in three months ended September 30, 2009. References to FASB guidance
throughout this document have been updated for the Codification.




The
Company adopted an update toASC 820 – “Fair Value Measurement and Derivatives” (“ASC 820”) (formerly
SFAS No. 157, “Fair Value Measurements”) on January 1, 2009. ASC 820 defines
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurement. ASC 820 also emphasizes that fair
value is a market-based measurement, not an entity-specific measurement, and
sets out a fair value hierarchy with the highest priority being quoted prices in
active markets. Under ASC 820, fair value measurements are disclosed by level
within that hierarchy. The Company adopted ASC 820 for the fiscal year beginning
January 1, 2008, except for nonfinancial assets and nonfinancial liabilities
that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis for which delayed application is permitted until fiscal years
beginning after November 15, 2008. Under the elected deferral, the following are
assets and liabilities recognized or disclosed at fair value for which the
Company has not yet applied the provisions of ASC 820; (non financial assets and
liabilities in business combinations, reporting units measured at fair value in
goodwill testing, indefinite lived intangibles measured at fair value for
impairment testing, long lived assets measured at fair value for impairment,
asset retirement obligations and liabilities for exit or disposal
activities.) The Company adopted the remaining provisions of ASC 820 on
January 1, 2009. The adoption of the remaining provisions of ASC 820 and the
update had no material impact on the Company’s financial position, results of
operations or cash flows.




The
Company adopted an update to ASC 810 – “Consolidation” (“ASC 810”) (formerly
SFAS No. 160 “Noncontrolling Interest in Consolidated Financial Statements”) on
January 1, 2009, " This statement requires that noncontrolling or minority
interests in subsidiaries be presented in the consolidated statement of
financial position within equity, but separate from the parents' equity, and
that the amount of the consolidated net income attributable to the parent and to
the noncontrolling interest be clearly identified and presented on the face of
the consolidated statement of income. ASC 810 is effective for the fiscal years
beginning on or after December 15, 2008. The update had no material impact on
the Company’s financial position, results of operations or cash
flows.




The
Company adopted an update to ASC 805 – Business Combinations (“ASC 805”)
(formerly SFAS No. 141 (Revised) “Business Combinations” on January 1, 2009. ASC
805 establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. This update had no material
impact on the Company’s financial position, results of operations or cash flows
but will have an impact on any future acquisitions.




34




The
Company adopted an update to ASC 825 – “Financial Instruments” (“ASC 825”)
(formerly Financial Staff Position 107-1, “Interim Disclosures about Fair Value
of Financial Instruments” on April 1, 2009. ASC 825 requires disclosures about
the fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements and also
requires those disclosures in summarized financial information at interim
reporting periods A publicly traded company includes any company whose
securities trade in a public market on either a stock exchange or in the
over-the-counter market, or any company that is a conduit bond obligor.
Additionally, when a company makes a filing with a regulatory agency in
preparation for sale of its securities in a public market it is considered a
publicly traded company for this purpose. The update had no material impact on
the financial statements. Additional disclosures have been provided where
applicable.





The
Company adopted an update to ASC 855 – “Subsequent Events” (“ASC 855”) (formerly
SFAS No. 165, “Subsequent Events”) on April 1, 2009. ASC 855 provides guidance
on when a subsequent event should be recognized in the financial statements.
Subsequent events that provide additional evidence about conditions that existed
at the date of the balance sheet should be recognized at the balance sheet date.
Subsequent events that provide evidence about conditions that arose after the
balance sheet date but before financial statements are issued, or are available
to be issued, are not required to be recognized. The date through which
subsequent events have been evaluated must be disclosed as well as whether it is
the date the financial statements were issued or the date the financial
statements were available to be issued. For nonrecognized subsequent events
which should be disclosed to keep the financial statements from being
misleading, the nature of the event and an estimate of its financial effect, or
a statement that such an estimate cannot be made, should be disclosed. The
standard is effective for interim or annual periods ending after June 15, 2009.
See Note 9 for Management’s evaluation of subsequent events.





In June
2009, the FASB issued updates to ASC 405 – “Liabilities” and ASC 860 –
“Transfers and Servicing” (“updates”) (formerly SFAS No. 166, “Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140”). These
updates improve the relevance, representational faithfulness, and comparability
of the information that a reporting entity provides in its financial statements
about a transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement, if any, in transferred financial assets. The updates shall be
effective as of the 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. Our adoption of these updates to ASC 405 and ASC 860 will not have a
material effect on our consolidated financial statements.





In June
2009, the FASB issued revised authoritative guidance related to variable
interest entities, which requires entities to perform a qualitative analysis to
determine whether a variable interest gives the entity a controlling financial
interest in a variable interest entity. The guidance also requires an ongoing
reassessment of variable interests and eliminates the quantitative approach
previously required for determining whether an entity is the primary
beneficiary. This guidance, which will be incorporated into ASC Topic 810,
“Consolidation,” will be effective as of the beginning of an entity’s first
annual reporting period that begins after November 15, 2009 (January 1, 2010 for
the Company). Our adoption of the update will not have a material effect on our
consolidated financial statements.





In
October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC 605): Multiple-Deliverable Revenue
Arrangements (a
consensus of the FASB Emerging Issues Task Force); effective for years
beginning after June 15, 2010. Vendors often provide multiple products and/or
services to their customers as part of a single arrangement. These deliverables
may be provided at different points in time or over different time periods. The
existing guidance regarding how and whether to separate these deliverables and
how to allocate the overall arrangement consideration to each was originally
captured in EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, which is now codified at ASC 605-25, Revenue Recognition -
Multiple-Element Arrangements. The issuance of ASU 2009-13 amends ASC
605-25 and represents a significant shift from the existing guidance that was
considered abuse-preventative and heavily geared toward ensuring that revenue
recognition was not accelerated. The application of this new guidance is
expected to result in accounting for multiple-deliverable revenue arrangements
that better reflects their economics as more arrangements will be separated into
individual units of accounting. The Company is in the process of evaluating the
impact of adopting ASU No. 2009-13.


35




In
October 2009, the FASB issued ASU No. 2009-14, Software (ASC 985): Certain Revenue
Arrangements That Include Software Elements (a consensus of the FASB Emerging
Issues Task Force);effective for years beginning after June 15,
2010.  ASU 2009-14 modifies the existing scope guidance in ASC
985-605, Software Revenue
Recognition, for revenue arrangements with tangible products that include
software elements.  This modification was made primarily due to the changes
in ASC 605-25 noted previously, which further differentiated the separation and
allocation guidance applicable to non-software arrangements as compared to
software arrangements.  Prior to the modification of ASC 605-25, the
separation and allocation guidance for software and non-software arrangements
was more similar.  Under ASC 985-605, which was originally issued as AICPA
Statement of Position 97-2, Software Revenue Recognition,
an arrangement to sell a tangible product along with software was considered to
be in its scope if the software was more than incidental to the product as a
whole.  The Company is in the process of evaluating the impact of
adopting ASU No. 2009-14.





Note 2.  Leasehold
Improvements and Equipment




The cost
and accumulated depreciation of our leasehold improvements and equipment for the
years ended December 31, 2009 and 2008 are as follows:




2009
                                            
                                            
                                            2008Cost
                                            
                                            
                                            Accumulated
                                              Depreciation
                                            
                                            
                                            Net Book
                                              Value
                                            
                                            
                                            Cost
                                            
                                            
                                            Accumulated
                                              Depreciation
                                            
                                            
                                            Net Book
                                              ValueEquipment
                                            
                                            $
                                            1,055,794
                                            
                                            
                                            $
                                            719,639
                                            
                                            
                                            $
                                            336,155
                                            
                                            
                                            $
                                            969,624
                                            
                                            
                                            $
                                            592,072
                                            
                                            
                                            $
                                            377,552Leasehold
      improvements
                                            
                                            
                                            249,081
                                            
                                            
                                            
                                            176,522
                                            
                                            
                                            
                                            72,559
                                            
                                            
                                            
                                            239,341
                                            
                                            
                                            
                                            113,924
                                            
                                            
                                            
                                            125,417Components
      held for future monitoring equipment builds
                                            
                                            
                                            210,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            210,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Capitalization
      of Software Development Costs
                                            
                                            
                                            259,977
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            259,977
                                            
                                            
                                            
                                            113,802
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            113,802Monitoring
      equipment
                                            
                                            
                                            13,915,298
                                            
                                            
                                            
                                            10,332,523
                                            
                                            
                                            
                                            3,582,775
                                            
                                            
                                            
                                            12,031,928
                                            
                                            
                                            
                                            8,419,380
                                            
                                            
                                            
                                            3,612,548Total
      leasehold improvements and equipment
                                            
                                            $
                                            15,690,150
                                            
                                            
                                            $
                                            11,228,684
                                            
                                            
                                            $
                                            4,461,466
                                            
                                            
                                            $
                                            13,354,695
                                            
                                            
                                            $
                                            9,125,376
                                            
                                            
                                            $
                                            4,229,319




The
Company incurred depreciation expense of $2,103,307 and $2,084,104 for the years
ended December 31, 2009 and 2008, respectively.




Note
3.  Goodwill and Intangibles, Subject to Amortization




Goodwill
is the excess of the cash paid over the net fair value of assets acquired and
liabilities assumed in an acquisition, less the amount of identifiable
intangible assets.  Goodwill is not amortized, but is tested for impairment
on an annual basis at the end of each calendar year.  The Company has
determined that there is no impairment of goodwill as of December 31, 2009 and
2008.




The
Company also separately records other intangible assets that can be identified
and assigned a value.  At December 31, 2009, such intangible assets
consisted solely of customer monitoring contracts assumed in a prior
acquisition.  The Company amortizes the initial carrying value
attributable to these monitoring contracts based on the projected revenue stream
of the monitoring contracts.  This amortization expense is included in
sales, general and administrative expenses in the consolidated statements of
operations and was $19,394 in 2009 and $41,961 in 2008.  These
intangible assets were previously tested for impairment on an annual
basis.   As of December 31, 2009, the intangibles were fully
amortized.


36




The
composition of goodwill and intangible assets at December 31, 2009 and 2008, is
as follows:




2009
                                      
                                      
                                      2008Intangibles,
      subject
                                      
                                      
                                      
                                      
                                      
                                      Intangibles,
      subjectGoodwill
                                      
                                      
                                      to
      Amortization
                                      
                                      
                                      Goodwill
                                      
                                      
                                      to
      AmortizationGross
      Carrying Amount
                                      
                                      $
                                      2,302,179
                                      
                                      
                                      $
                                      911,522
                                      
                                      
                                      $
                                      2,302,179
                                      
                                      
                                      $
                                      911,522Accumulated
      Amortization
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (911,522
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (892,128
                                      )Balance
                                      
                                      $
                                      2,302,179
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      2,302,179
                                      
                                      
                                      $
                                      19,394




Note
4. Credit Agreements




On
November 10, 2008, the Company entered into a loan agreement (the “Loan
Agreement”) with Crestpark LP, Inc. (“Crestpark”) and in connection with the
Loan Agreement executed two separate promissory notes.  The first note
is for $750,000 for working capital via a Revolving Credit Commitment and the
second note is for $1,750,000 for equipment financing via an Equipment Term
Loan.  The Loan Agreement, when executed in 2008 had a maturity date
of July 1, 2010.  On November 4, 2009, the parties executed an
amendment to the Loan Agreement extending the maturity date to January 1,
2012.  All other terms remain unchanged.




Revolving
Credit Commitment - The proceeds of the Revolving Credit Commitment of
$750,000 are to be used for working capital needs and are anticipated to be
repaid from cash flow generated by the operations of the Company.  The
Revolving Credit Commitment has a term ending on January 1, 2012, is unsecured
and bears interest at a fixed noncompounded rate of 12% per
annum.  The Company is also required to pay Crestpark an unused fee of
0.25% per annum on the average daily unused amount of the Revolving Credit
Commitment.  Interest expense to Crestpark in 2009 and 2008 was
$70,468 and $2,682, respectively.  As of December 31, 2009, the
Company had $350,000 outstanding under the Revolving Credit Commitment and
$400,000 available, compared with $500,000 outstanding and $250,000 available as
of December 31, 2008.  Amounts borrowed and repaid remain available
under the Revolving Credit Commitment.




Equipment
Term Loan - The proceeds of the $1,750,000 Equipment Term Loan are to be
used to purchase GPS-based offender tracking and monitoring equipment that is
leased or sold by the Company to its clients.  It is anticipated that
borrowings under the Equipment Term Loan will be repaid from permanent equipment
financing secured by the Company from time to time.  At Crestpark’s
discretion, any borrowings under the Equipment Term Loan that remain outstanding
more than 30 days can be converted into separate 36 Month Notes, which are notes
payable over 36 month terms.  The Equipment Term Loan has a term
ending January 1, 2012, bears interest at a fixed rate of 12% per annum and is
secured by the monitoring equipment purchased with the proceeds of the Equipment
Term Loan.  The Company is also required to pay Crestpark an unused
fee of 0.25% per annum on the average daily unused amount of the Equipment Term
Loan.  Interest expense to Crestpark in 2009 and 2008 was $13,033 and
$784 respectively.  As of December 31, 2009, the Company had $280,000
outstanding under the Equipment Term Loan and $1,337,593 available, compared
with $50,000 outstanding and $1,700,000 available as of December 31,
2008.  Amounts borrowed and repaid are no longer available under the
Equipment Term Loan.


37




Crestpark
is an affiliate of Mykonos 6420 LP (“Mykonos”).  As the sole holder of
the Company’s Series C Preferred Stock, Mykonos has the right to elect a
majority of the Company’s Board of Directors.  The terms of the loan
were approved by a Special Committee of the Board of Directors consisting solely
of disinterested directors.




Note 5.  Long
Term Debt




The
Company had the following long-term debt at December 31, 2009 and
2008:




2009
                      
                      
                      2008Long
      Term DebtCrestpark
      LP, IncOne
      secured note payable in the amount of $11,877,475 maturing on January 1,
      2012Fixed
      Tranche ~ with an interest rate of 9% effective November 4, 2009 and 7%
      prior to that date
                      
                      $
                      6,455,250
                      
                      
                      $
                      6,455,250Floating
      Tranche ~ with an interest rate of 2% over prime
                      
                      
                      5,422,225
                      
                      
                      
                      5,422,225Crestpark
      LP, Inc Total
                      
                      $
                      11,877,475
                      
                      
                      $
                      11,877,475AHK
      Leasing, LLCTwelve
      separate capital leases with related parties that are carrying interest
      rates at 10.00% to 12.50% and maturing September 2010 to December
      2012
                      
                      
                      2,923,532
                      
                      
                      
                      2,625,401Total
      long term debt
                      
                      $
                      14,801,007
                      
                      
                      $
                      14,502,876Less
      current maturities
                      
                      
                      (1,674,221
                      )
                      
                      
                      (1,222,508
                      )Total
      long term debt less current maturities
                      
                      $
                      13,126,786
                      
                      
                      $
                      13,280,368





Crestpark
LP, Inc.


The
Company has outstanding a Note Payable (“Note”) with Crestpark LP, Inc
(“Crestpark”),   for $11,877,475 under a Credit and Security
Agreement originally dated December 18, 2007.  Outstanding borrowings
are due and payable on the earlier of (i) January 1, 2012 or (ii) the first
date on which the Company either issues equity securities or arranges for
additional indebtedness (other than trade indebtedness incurred in the ordinary
course of its business) in a transaction or series of transactions which
generates aggregate net proceeds to the Company of not less than the then
current principal amount outstanding under this Note, plus all accrued but
unpaid interest.  The Company may prepay the Note at any time without
premium or penalty.  The Note provides, among other things, that
$6,455,250 (the “Fixed Tranche”) of the borrowings thereunder shall bear
interest at 9.0% per annum and that such interest will be due and payable at
maturity of the Note.  The remaining $5,422,225 of borrowings (the
“Floating Tranche”) under the Note will bear interest at a floating rate equal
to 2% over the prime rate (the “Base Rate”).  The portion of the
interest on the Floating Tranche determined by the Base Rate will be payable at
maturity, but the remaining portion of the interest representing the 2% premium
over the Base Rate will be payable monthly.





The
Credit and Security Agreement, when originally executed had a maturity date of
July 1, 2010.  On November 4, 2009, the parties executed an amendment
to the Credit and Security Agreement extending the maturity date to January 1,
2012.  All other terms of the Credit and Security Agreement remain
unchanged except the interest rate on the Fixed Tranche which was increased from
7% to 9%.





Accrued
interest on the secured note payable at December 31, 2009 equaled
$1,428,778.





The
borrowings under the Note are secured by a first priority security interest in
all of the assets of the Company except that Crestpark’s security interest in
certain monitoring equipment is subordinate to the interest of AHK Leasing LLC
under its sale leaseback arrangements.


38





Crestpark
is an affiliate of Mykonos 6420 LP (“Mykonos”).  As the sole holder of
the Company’s Series C 8% Cumulative Compounding Exchangeable Preferred Stock,
Mykonos has the right to elect a majority of the Company's Board of
Directors.  The terms of the Loan were approved by a Special Committee
of the Board of Directors consisting solely of disinterested
directors.




Capital
Leases - AHK Leasing, LLC.


AHK
Leasing, LLC (“AHK”) is a company controlled by three stockholders, one of which
is a current director, which lent the Company money during 2009 and
2008.  These loans were in the form of capital leases with 36 month
terms and bearing interest at a rate of 10.00% to 12.50% per annum and mature
between September 2010 and December 2012.   There was no accrued
interest payable to AHK at December 31, 2009.




Total
interest expense, including unused commitment fees, for the years ended December
31, 2009 and 2008 is as follows:




2009
                    
                    
                    2008AHK
      interest on long term debt
                    
                    
                    341,392
                    
                    
                    
                    226,978Crestpark
      LP interest on long term debt
                    
                    
                    765,870
                    
                    
                    
                    851,983Crestpark
      LP revolving credit agreements
                    
                    
                    83,501
                    
                    
                    
                    3,466Other
                    
                    
                    21,797
                    
                    
                    
                    23,103Total
      interest expense
                    
                    
                    1,212,559
                    
                    
                    
                    1,105,530




The
carrying value of the secured note payable to Crestpark and the capital leases
with AHK  approximates their fair value in each case due to the
short-term nature of the borrowings and, in the case of the capital leases, a
guarantee from a stockholder.




The
following is a schedule of aggregate debt maturities, including lease related
obligations, due in future years as of December 31, 2009:




2010
                                  
                                  $
                                  1,674,2212011
                                  
                                  
                                  1,074,3092012
                                  
                                  
                                  12,052,477Total
                                  
                                  $
                                  14,801,007




Note 6.  Lease
Obligations




In 2009
and 2008, the Company financed the acquisition of approximately $2,000,000 and
$2,650,000 of monitoring equipment, respectively, through sale-leaseback
agreements with a related party. Under these sale-leaseback arrangements, the
Company purchases the monitoring equipment from the manufacturer, sells it to
the leasing company  at cost and then leases the equipment
back.  The Company’s capital leases in conjunction with these
transactions expire from September 2010 to December 2012.  The assets
and the related liabilities under the leases have been recorded at the present
value of the future minimum lease payments using discount rates of 10.00% to
12.50%.


39


The
Company also has a noncancelable operating lease for its facility in Omaha,
Nebraska and an operating lease for office equipment.  Future minimum
lease payments, by year and in aggregate, under the capital leases and
noncancelable operating leases, with initial terms of one year or more, are due
as follows:
  Capital Leases
                                    
                                    
                                    OperatingRelated Party
                                    
                                    
                                    Lease2010
                                    
                                    $
                                    1,911,424
                                    
                                    
                                    $
                                    78,5652011
                                    
                                    
                                    1,147,881
                                    
                                    
                                    
                                    81,3602012
                                    
                                    
                                    181,133
                                    
                                    
                                    
                                    82,9882013
                                    
                                    
                                    -
                                    
                                    
                                    
                                    84,6472014
                                    
                                    
                                    -
                                    
                                    
                                    
                                    86,340Total
      approximate minimum lease payments
                                    
                                    $
                                    3,240,438
                                    
                                    
                                    $
                                    413,901Less
      the amount representing interest
                                    
                                    
                                    (316,906
                                    )
                                    
                                    
                                    -Approximate
      present value of minimum lease payments
                                    
                                    $
                                    2,923,532
                                    
                                    
                                    $
                                    413,901
  The cost
and accumulated depreciation of assets acquired under capital leases is as
follows:
  2009
                            
                            
                            2008Equipment
                            
                            $
                            5,451,873
                            
                            
                            $
                            5,029,183Less
      accumulated depreciation
                            
                            
                            (2,280,734
                            )
                            
                            
                            (2,267,556
                            )Total
                            
                            $
                            3,171,139
                            
                            
                            $
                            2,761,627
  The total
rent expense under the operating leases was $106,225 and $104,195 for the years
ended December 31, 2009 and 2008, respectively.
  Note 7.  Common
Stock, Stock Options, Warrants and Benefit Plan
  Common
Stock
  In 2009
and 2008, the Company issued 17,010 and 19,410 shares of common stock,
respectively, to non-management directors in lieu of director
fees.  The number of shares of common stock issued in each case was
based on the fair value of the Company’s common stock as of the date of the
meetings to which such fees related.  Expense related to these
director’s fees totaled $8,000 for each of the years ended December 31, 2009,
and 2008.
  Stock
Options
  The
Company has issued options to acquire shares of its common stock under two
equity incentive plans and pursuant to certain employment agreements with
current and former executive officers.  The terms of these equity
incentive plans and non-plan option grants are described below.
  40
  2001
Omnibus Equity Incentive Plan
  In June
2001, the stockholders of iSECUREtrac approved the 2001 Omnibus Equity Incentive
Plan (the “2001 Plan”).  As of May 31, 2006, the Company’s 2001 Plan
expired.  The 2001 Plan provided for the granting of stock options and
other equity incentives for up to 100,000 shares of the Company’s Common Stock
to the Company’s officers, directors, and consultants who provided services to
the Company and key employees at an exercise price 85% of the average daily
closing price of the Company’s common stock for the week prior to when the
options were granted.  The options are to vest on a monthly basis over
a one month to a 36-month period of time from the date of grant.  As
of January 1 of each year, commencing with the year 2002, the aggregate number
of options that were awarded under the 2001 Plan was automatically increased by
a number equal to the lesser of 1% of the total number of Common Shares then
outstanding or 20,000.
  2006
Omnibus Equity Incentive Plan
  On May 4,
2006, at the Company’s annual meeting of stockholders, the stockholders approved
the adoption of the Company’s newly created 2006 Omnibus Equity Incentive Plan
(the “2006 Plan”).  The 2006 Plan became effective on May 31,
2006.  The 2006 Plan provides for the granting of stock options and
other equity incentives to the Company’s officers, employees, directors and
consultants who provide services to the Company.  The 2006 Plan has a
term of ten years unless terminated by the board of directors.  Stock
options are granted with an exercise price not less than fair market value of
the common stock on the date of the grant.  Vesting schedules and
expiration dates for the grants issued under this plan are specified at the time
of grant.
  Non-Plan
Stock Options
  The
Company has granted options to purchase common stock outside of the 2001 Plan
and 2006 Plan to various executive officers pursuant to the terms of their
employment agreements.  These options have exercise prices ranging
from $2.01 to $4.90 per share and have terms expiring through April 30,
2014.  These options vest on a monthly basis over two year periods
from their grant date.
  The
options granted, exercised, forfeited and outstanding under the various Plans
for the years ended December 31, 2009 and 2008 are detailed as
follows:
  2001OmnibusPlan
                    
                    
                    2006OmnibusPlan
                    
                    
                    Non-StockOptionPlan
                    
                    
                    TotalStockOption2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Options
      outstanding at beginning of year
                    
                    
                    72,525
                    
                    
                    
                    100,775
                    
                    
                    
                    1,760,583
                    
                    
                    
                    759,745
                    
                    
                    
                    901,268
                    
                    
                    
                    957,060
                    
                    
                    
                    2,734,376
                    
                    
                    
                    1,817,580Granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    651,250
                    
                    
                    
                    1,126,050
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    651,250
                    
                    
                    
                    1,126,050Excercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (292
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (292
                    )
                    
                    
                    -Forfeited
                    
                    
                    (25,525
                    )
                    
                    
                    (28,250
                    )
                    
                    
                    (124,239
                    )
                    
                    
                    (125,212
                    )
                    
                    
                    (181,250
                    )
                    
                    
                    (55,792
                    )
                    
                    
                    (331,014
                    )
                    
                    
                    (209,254
                    )Options
      outstanding at end of year
                    
                    
                    47,000
                    
                    
                    
                    72,525
                    
                    
                    
                    2,287,302
                    
                    
                    
                    1,760,583
                    
                    
                    
                    720,018
                    
                    
                    
                    901,268
                    
                    
                    
                    3,054,320
                    
                    
                    
                    2,734,376
  41
  A summary
of employee stock option activity during the years ended December 31, 2009, and
2008, is as follows:
  For the Year Ended December 31,2009
                                                      
                                                      
                                                      For the Year Ended December 31,2008Weighted Average
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Weighted AverageOptions
                                                      
                                                      Shares
                                                      
                                                      
                                                      Exercise Price
                                                      
                                                      
                                                      Shares
                                                      
                                                      
                                                      Exercise PriceOutstanding
      at beginning of year
                                                      
                                                      
                                                      2,734,376
                                                      
                                                      
                                                      $
                                                      1.59
                                                      
                                                      
                                                      
                                                      1,817,580
                                                      
                                                      
                                                      $
                                                      2.30Granted
                                                      
                                                      
                                                      651,250
                                                      
                                                      
                                                      
                                                      0.45
                                                      
                                                      
                                                      
                                                      1,126,050
                                                      
                                                      
                                                      
                                                      0.45Exercised
                                                      
                                                      
                                                      (292
                                                      )
                                                      
                                                      
                                                      0.56
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Forfeited
                                                      
                                                      
                                                      (331,014
                                                      )
                                                      
                                                      
                                                      1.78
                                                      
                                                      
                                                      
                                                      (209,254
                                                      )
                                                      
                                                      
                                                      1.72Outstanding
      at end of year
                                                      
                                                      
                                                      3,054,320
                                                      
                                                      
                                                      $
                                                      1.32
                                                      
                                                      
                                                      
                                                      2,734,376
                                                      
                                                      
                                                      $
                                                      1.59Exercisable
      at end of year
                                                      
                                                      
                                                      2,188,700
                                                      
                                                      
                                                      $
                                                      1.69
                                                      
                                                      
                                                      
                                                      1,772,246
                                                      
                                                      
                                                      $
                                                      2.11Weighted-average
      fair value for options granted during the year
                                                      
                                                      
                                                      651,250
                                                      
                                                      
                                                      $
                                                      0.30
                                                      
                                                      
                                                      
                                                      1,126,050
                                                      
                                                      
                                                      $
                                                      0.30
  Additional
information regarding options outstanding at December 31, 2009, is as
follows:
  Options Outstanding
                                  
                                  
                                  Options ExercisableNumber
                                  
                                  Weighted Average
                                  
                                  Weighted Average
                                  
                                  
                                  Number
                                  
                                  
                                  Weighted AverageRange of Exercise Prices
                                  
                                  Outstanding
                                  
                                  Remaining Life
                                  
                                  Exercise Price
                                  
                                  
                                  Exercisable
                                  
                                  
                                  Exercise Price$0.20
      to 1.00
                                  
                                  
                                  1,644,696
                                  
                                  8.9
      years
                                  
                                  $
                                  0.45
                                  
                                  
                                  
                                  779,077
                                  
                                  
                                  $
                                  0.50$1.01
      to 2.00
                                  
                                  
                                  185,975
                                  
                                  5.7
      years
                                  
                                  $
                                  1.22
                                  
                                  
                                  
                                  185,975
                                  
                                  
                                  $
                                  1.22$2.01
      to 3.00
                                  
                                  
                                  1,098,231
                                  
                                  4.1
      years
                                  
                                  
                                  2.44
                                  
                                  
                                  
                                  1,098,231
                                  
                                  
                                  
                                  2.44$3.01
      to 4.00
                                  
                                  
                                  125,418
                                  
                                  1.4 years
                                  
                                  
                                  3.09
                                  
                                  
                                  
                                  125,417
                                  
                                  
                                  
                                  3.09Totals
                                  
                                  
                                  3,054,320
                                  
                                  6.7 years
                                  
                                  $
                                  1.32
                                  
                                  
                                  
                                  2,188,700
                                  
                                  
                                  $
                                  1.69
  292 stock
options were exercised during 2009, which resulted in gross proceeds to the
Company of $162.
  As of
December 31, 2009, there was approximately $236,026 of total unrecognized
compensation costs related to non-vested share based compensation agreements
granted to the Company’s executives and employees.   The weighted
average period in which the unrecognized compensation costs will be recognized
into income is 1.58 years.
  Common
Stock Warrants
  Warrants
to purchase shares of common stock were granted, exercised, forfeited and
outstanding at December 31, 2009 and 2008 as follows:
  42
 Warrants (b)
                    
                    Non-Related
                      Party
                    
                    
                    Related
                      Party(a)
                    
                    
                    Total
                    
                    
                    Weighted
                      Average
                      ExercisePriceOutstanding  and
      excercisable at December 31, 2007
                    
                    
                    1,294,656
                    
                    
                    
                    2,628,269
                    
                    
                    
                    3,922,925
                    
                    
                    $
                    3.65Granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Excercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    (82,500
                    )
                    
                    
                    (295,890
                    )
                    
                    
                    (378,390
                    )
                    
                    $
                    3.70Outstanding  and
      excercisable at December 31, 2008
                    
                    
                    1,212,156
                    
                    
                    
                    2,332,379
                    
                    
                    
                    3,544,535
                    
                    
                    $
                    3.65Granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Excercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    (1,212,156
                    )
                    
                    
                    (105,292
                    )
                    
                    
                    (1,317,448
                    )
                    
                    $
                    4.10Outstanding  and
      excercisable at December 31, 2009
                    
                    
                    -
                    
                    
                    
                    2,227,087
                    
                    
                    
                    2,227,087
                    
                    
                    $
                    3.38
 
 (a)
Held by Mykonos 6420 LP
 (b)
Does not include warrants issued to Mykonos 6420 LP in connection with the
Convertible Preferred Stock.  See Footnote 8.
  A further
summary about warrants outstanding at December 31, 2009, is as
follows:
  Number Outstanding
                              
                              Weighted Average
                              
                              Weighted AverageRange of Exercise Prices
                              
                              and Exercisable
                              
                              Remaining Life
                              
                              Exercise Price$1.00
      to 2.50
                              
                              
                              701,588
                              
                              1.66
      years
                              
                              $
                              2.30$2.51
      to 5.00
                              
                              
                              1,522,999
                              
                              0.40
      years
                              
                              
                              3.86$5.01
      to 7.50
                              
                              
                              2,500
                              
                              0.16 years
                              
                              
                              6.40Total
                              
                              
                              2,227,087
                              
                              .80 years
                              
                              $
                              3.38
 
 Benefit
Plan
 
 The
“iSECUREtrac Corporation Retirement Plan” offers all regular full-time
employees, 21 years of age and older, to participate in a 401k savings
plan.  The plan offers either a pre-tax contribution option or the Roth,
after-tax contribution option.   iSECUREtrac provides a match of 25%
up to 10% of the employee’s contribution, with a maximum match of $2,500. 
The employer contribution vests over a 4-year graded schedule.  The
total expense related to the plan was $39,192 and $38,589 for the years ended
December 31, 2009 and 2008, respectively.
  Note 8.  Convertible
Preferred Stock
 
 The
Company is authorized to issue up to 5,000,000 shares of preferred stock from
time to time with such rights and privileges as the Board of Directors may
determine.  The Company has issued the following shares of preferred
stock:
  43
  Series C Exchangeable Preferred
Stock
 
 On June
27, 2005, the Company issued 1,000,000 shares of its $0.01 par value Series C 8%
Cumulative Compounding Exchangeable Preferred Stock (the “Series C Preferred
Stock”). The Series C Preferred Stock is exchangeable for 4,782,609 shares of
Common Stock and warrants to acquire 6,287,045 shares of Common Stock at an
exercise price of $2.30 per share.
  If, after
June 27, 2010, the closing price of the common stock exceeds $20.00 per share
for at least 120 consecutive trading days, the Company can require the
conversion of the Series C Preferred Stock into Common Stock in accordance with
the above exchange provisions.
  The
Series C Preferred Stock is redeemable on the tenth anniversary of the original
issue date.  The redemption price per share of the Series C Preferred
Stock will equal the per share original issue price ($11.00 per share) plus an
amount equal to all accrued but unpaid dividends thereon (and any interest
payable thereon).  The interest method will be utilized to accrete the
carrying amount of the Series C Preferred Stock over the ten year period to the
earliest redemption date so that the carrying amount will equal the redemption
amount at the earliest possible redemption date.  Due to the
accumulated deficit position of the Company, the periodic accretion is charged
to Additional Paid-In Capital.
 
 As of
December 31, 2009, the Company had accrued Series C Preferred Stock dividends
totaling $4,581,555 and accretion to redemption value of the Series C Preferred
Stock totaling $852,592.  Of these amounts, $1,154,189 and $192,632,
respectively, were the amounts accrued and accreted in 2009.
 
 Upon any
liquidation of the Company, no distribution shall be made to the holders of
shares of Common Stock or other stock ranking junior to the Series C Preferred
Stock unless, prior thereto, the holders of shares of Series C Preferred Stock
shall have received an amount per share equal to the per share Original Issue
Price plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, multiplied by a
factor of 105%.
  Except as
otherwise required by law, the holders of shares of Series C Preferred Stock
vote together with the holders of shares of the Common Stock of the Company on
all matters submitted to the stockholders of the Company and not as a separate
class, and each share of Series C Preferred Stock entitles the holder thereof to
11 votes or the equivalent amount of voting power thereof as determined by the
Board of Directors.  In addition, until such time that less than
500,000 shares of Series C Preferred Stock are outstanding, the Series C
Preferred Stock holders have the ability to appoint a majority of the Company’s
directors.
  Note 9.  Income
Taxes
  Net
deferred tax asset includes the following components as of December 31, 2009 and
2008:
  44
 
 2009
                    
                    
                    2008Deferred
      tax assets (liabilities):Net
      operating loss carryforward
                    
                    $
                    27,157,000
                    
                    
                    $
                    26,571,000Allowance
      for doubtful accounts
                    
                    
                    267,000
                    
                    
                    
                    185,000Stock
      option expense
                    
                    
                    592,000
                    
                    
                    
                    460,000Accrued
      expenses
                    
                    
                    141,000
                    
                    
                    
                    110,000Deferred
      revenue
                    
                    
                    39,000
                    
                    
                    
                    120,000Subtotal
                    
                    
                    28,196,000
                    
                    
                    
                    27,446,000Valuation
      Allowance
                    
                    
                    (28,196,000
                    )
                    
                    
                    (27,446,000
                    )$
                    -
                    
                    
                    $
                    -
  The
income tax provision differs from the amount of income tax determined by
applying the statutory federal income tax rate to pretax loss for the years
ended December 31, 2009, and 2008 due to the following:
  2009
                    
                    
                    2008Computed
      Federal "expected" tax benefit
                    
                    $
                    (655,000
                    )
                    
                    $
                    (1,564,000
                    )Increase
      (decrease) in income taxes resulting from:Benefit
      from state taxes
                    
                    
                    (115,000
                    )
                    
                    
                    (276,000
                    )Nondeductible
      expenses
                    
                    
                    20,000
                    
                    
                    
                    67,000Expiration
      of net operating loss carryforwards
                    
                    
                    -
                    
                    
                    
                    1,980,000Other
      timing differences
                    
                    
                    -
                    
                    
                    
                    (113,000
                    )Increase
      (decrease) in valuation allowance
                    
                    
                    750,000
                    
                    
                    
                    (94,000
                    )$
                    -
                    
                    
                    $
                    -
  As of
December 31, 2009, the Company had available federal net operating loss
carryforwards of approximately $67,500,000 for future tax purposes that expire
from 2010 to 2027.  The Company believes that Section 382 of the
Internal Revenue Code and the associated U.S. Treasury regulations will
significantly limit the amount of net operating loss carryforward that the
Company will be able to utilize in any tax year.  All losses incurred
prior to the Company’s change of ownership event on June 27, 2005 totaled
approximately $48,000,000.  The utilization of these losses is limited
(by Internal Revenue Code Section 382) to approximately $950,000 per year
through 2025.
  A
valuation allowance was established due to the uncertainty relating to the
future utilization of net operating loss carryforwards.  The amount of
the deferred tax assets considered realizable could be adjusted in the future
based upon changes in circumstances that result in a change in our assessment of
our ability to realize those deferred tax assets through the generation of
taxable income or other tax events.
  The
Company accounts for all income taxes in accordance ASC 740 – Income Taxes which
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return.  It requires that we recognize in our
consolidated financial statements, only those tax positions that are
“more-likely-than-not” of being sustained as of the adoption date, based on the
technical merits of the position.  There are no unrecognized tax
benefits in the Company’s financial statements as of December 31, 2009 and
2008.
  The
Company files income tax returns in the U.S. federal jurisdiction and various
state and local jurisdictions. As the Company has a federal Net Operating Loss
carryforward from the year ended December 31, 1995 forward, all tax years
from 1995 forward are subject to examination. As states have varying
carryforward periods, and the Company has recently entered into additional
states, the states are generally subject to examination for the previous 15
years or less.
  45
  The
Company recognizes interest accrued, net of tax and penalties, related to
unrecognized tax benefits as components of income tax provision as applicable.
As of December 31, 2009, the Company did not have any accrued interest or
penalties.
  Note
10.  Related Party Transactions
 
 The
Company has incurred debt with related parties through several lending
arrangements as further described in Note 4 Credit Agreements and Note 5 Long
Term Debt.
 
 Note
11.  Concentrations
 
 The
Company maintains cash in excess of the Federal Deposit Insurance Corporation
limit of $250,000.  The Company has not experienced and does not
anticipate such losses in these accounts.
 
 For the
year ended December 31, 2009, the Company had one customer which accounted for
18.79% of its total revenues for the year.  The receivable balance for
this customer at December 31, 2009 was $178,792.  The Company had no
customers which accounted for more than 10% of total revenues for the year ended
December 31, 2008.
 
 Note
12.  Legal Proceedings
 
 The
Company was not involved in any legal proceedings other than those involved in
the ordinary course of business.
 
 Note
13. Subsequent Events
 
 The
Company and Pro Tech Monitoring Inc. (“Pro Tech”) entered into a Confidential
Patent License Agreement ("Patent License Agreement"), effective March 1, 2010,
under which the Company was granted a limited license to provide certain
technology to specific customers as agreed with Pro Tech. In addition, the
Patent License Agreement  fixed the amount of  all royalties
due Pro Tech for the limited license under the Patent License Agreement and all
royalties due  under the November 27, 2007
Confidential  Settlement Agreement  at
$650,000.
 
 On
February 24, 2010, the Company drew down $507,790 on the Equipment Term Loan
with Crestpark LP, Inc.  After this draw, the outstanding balance on
the Equipment Term Loan is $787,790 and the amount available to be drawn is
$829,803.
 
 The
Company evaluates all subsequent events and transactions for potential
recognition or disclosure in our financial statements.  Besides those
noted above, there are no additional matters which require
disclosure.
  Note
14.  Fair Value of Financial Instruments
 
 The
following methods and assumptions were used to estimate fair value of each class
of financial instruments for which it is practicable to estimate that
value:
 
 Accounts
receivable:  The carrying amount approximates fair value.
 
 Long-term
debt:  Based on the borrowing rates available to the Company for bank
loans with similar terms and maturities, the carrying value approximates fair
value due to the short maturity dates.
  46
  Accounts
payable and accrued expenses:  The carrying amount approximates fair
value.
 
 Redeemable
Exchangeable Series C Preferred Stock:  The Company estimates the fair
value of this instrument to be approximately $17,700,000 at December 31, 2009
using a discount rate of 5%.
  Item
9.  Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
  None.
  Item
9A(T).  Controls and Procedures.
  The
Company maintains disclosure controls and procedures designed to ensure that the
information the Company must disclose in its filings with the Securities and
Exchange Commission is recorded, processed, summarized and reported on a timely
basis.  The Company's chief executive officer and chief financial
officer have reviewed and evaluated the Company's disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the
period covered by this report (the "Evaluation Date").  Based upon
that evaluation, the chief executive officer and the chief financial officer
concluded that, as of the Evaluation Date, the Company's disclosure, controls
and procedures are effective, providing them with information relating to the
Company as required to be disclosed in the reports the Company files or submits
under the Exchange Act on a timely basis.
 
 Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting.  Internal control over financial
reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act as a process designed by, or under the supervision of, the Company’s
principal executive and principal financial officers and effected by the
Company’s Board, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with Accounting
Principles Generally Accepted in the U.S. and includes those policies and
procedures that:
 
 ·
                pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;
 ·
                provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with GAAP, and that
      receipts and expenditures of the Company are being made only in accordance
      with authorizations of management and Directors of the
      Company; and
 ·
                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.  Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
 The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009.  In
making this assessment, the Company’s management used criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.  Based on its assessment, the Company’s management
believes that, as of December 31, 2009, the Company’s internal control over
financial reporting was effective based on that criteria.
 47
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
 There
have not been any changes in the Company's internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
 
 Item
9B.  Other Information.
  None
  48
  PART
III
  Item
10.  Directors, Executive Officers and Corporate
Governance
  The
discussion under the headings “Election of Directors”, “Certain Relationships
and Related Transactions”, “The Board of Directors and its Committees”, “Named
Executive Officers” and “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Proxy Statement relating to the Company’s 2010 Annual Meeting
of Stockholders (the ”Proxy Statement”) are incorporated herein by
reference.
  Item
11.  Executive Compensation.
  The
discussion under the headings “Executive Compensation” and “Director
Compensation” in the Proxy Statement are incorporated herein by
reference.
  Item
12.  Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
  The
discussion under the heading “Security Ownership of Certain Beneficial Owners
and Management” in the Proxy Statement is incorporated herein by
reference.
  Equity Compensation Plan
Information.Information regarding shares of the Company’s
common stock under equity compensation plans and executive employment agreements
maintained by the Company as of December 31, 2009 is set forth in the
following table:
  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
                            under equity compensation
                            plans *(a)
                          
                          
                          (b)
                          
                          
                          (c)Equity
      compensation plans  approved by security holders
                          
                          
                          2,334,302
                          
                          
                          $
                          0.93
                          
                          
                          
                          712,698Equity
      compensation plans not approved by security holders
                          
                          
                          720,018
                          
                          
                          $
                          2.60
                          
                          
                          
                          0Total
                          
                          
                          3,054,320
                          
                          
                          $
                          1.32
                          
                          
                          
                          712,698
  *Excludes
securities reflected in column (a).
  Equity
compensation plans approved by security holders consist of our 2006 Omnibus
Equity Incentive Plan and 2001 Omnibus Equity Incentive Plan.  The
exercise prices for options issued under these plans range from $0.20 to $2.75
per share.  Equity compensation plans not approved by security holders
consist of options issued to employees per their employment agreements or
performance bonuses.  Exercise prices for these options range from
$2.01 to $4.70 per share.
  Item
13.  Certain Relationships, and Related Transactions and Director
Independence.
  The
discussion under the heading “Certain Relationships and Related Transactions”
and “The Board of Directors and its Committees” in the Proxy Statement is
incorporated herein by reference.
  Item
14.  Principal Accounting Fees and Services
  The
discussion under the heading “Principal Accounting Fees and Services” in the
Proxy Statement is incorporated herein by reference.
  49
  PART
IV
  Item
15.  Exhibits and Financial Statement Schedules
  (a)
              The
      following documents are filed as part of this
  report:
  1.
              Financial
      Statements of the Company.
  2.
              Exhibits.
  3.01
              Amended
      and Restated Certificate of Incorporation of the Company, as amended
      (13)
  3.02
              Restated
      Bylaws of the Company (1)
  3.03
              Certificate
      of Designations, Preferences and Rights of Series A Convertible Preferred
      Stock of the Company (3)
  3.04
              Certificate
      of Designations, Preferences and Rights of Series B Convertible Preferred
      Stock of the Company (9)
  3.05
              Certificate
      of Designations, Preferences and Rights of Series C Exchangeable Preferred
      Stock of the Company (12)
  4.01
              Form
      of Common Stock Certificate (1)
  10.01
              License
      Agreement with SiRF Technology, Inc.
(1)
  10.02
              ADT
      Distribution Agreement (3)
  10.03
              ADT
      Hosting Agreement (3)
  10.04
              Preferred
      Distributor Agreement with Premier Geografix LTD.
  (7)
  10.05
              Employment
      Agreement between the Company and David G. Vana
  (5)
  10.06
              Employment
      Agreement between the Company and Edward J. Sempek
  (5)
  10.07
              Employment
      Agreement between the Company and David G. Sempek
  (5)
  10.08
              Employment
      Agreement between the Company and Peter A. Michel
  (17)
  10.09
              Agreement
      Among Noteholders (10)
  10.10
              Debt
      Conversion between the Company and Roger Kanne
  (11)
  10.11
              Debt
      Conversion between the Company and Martin Halbur
  (11)
  10.12
              Debt
      Conversion between the Company and Kenneth Macke
  (11)
  10.13
              Debt
      Conversion between the Company and Buckshot Capital, LLC
    (11)
  10.14
              Business
      Office Lease (11)
  10.15
              Business
      Office Lease Amendment (20)
  10.16
              Securities
      Purchase Agreement (14)
  10.17
              Registration
      Rights Agreement (15)
  10.18
                Warrant
      Agreement (16)
  10.19
              2001
      Omnibus Equity Incentive Plan (4)
  10.20
              2006
      Omnibus Equity Incentive Plan (18)
  10.21
              Indemnification
      Agreement in favor of AHK Leasing, LLC
(19)
  50
  10.22
              Credit
      and Security Agreement in favor of Crestpark LP, Inc.
  (21)
  10.23
              First
      Amendment to Credit and Security Agreement in favor of Crestpark LP, Inc.
      (22)
  10.24
              Amended
      and Restated Promissory Note in favor of Crestpark LP, Inc.
      (22)
  10.25
              Employment
      Agreement between the Company and Lincoln Zehr
  (24)
  10.26
              Employment
      Agreement between the Company and Robert Bierman
  (24)
  10.27
              Confidential
      Settlement Agreement (24)
  21.01
              Subsidiaries
      of the Company
  23
              Consent
      of McGladrey & Pullen, LLP, Independent Registered Public Accounting
      Firm
  24
              Powers
      of Attorney
  31.1
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.
  31.2
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.
  32
              Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.
  (1)
              Incorporated
      by reference from the registrant’s registration statement under Form
      10-SB, filed on June 22, 1999 (Commission File No.
    0-26455).
  (2)
              Not
      Used
  (3)
              Incorporated
      by reference from the registrant’s registration statement under Form SB-2
      filed on November 30, 2001 (Commission File No.
  333-74762).
  (4)
              Incorporated
      by reference from the Notice of Annual Meeting of Stockholders and Proxy
      Statement contained in Registrant’s Definitive Proxy Statement under
      Schedule 14A, filed with the SEC on May 14, 2001 (Commission File No.
      0-26455).
  (5)
              Incorporated
      by reference from the registrant’s registration statement under Form S-8
      filed on May 22, 2002 (Commission File No.
  333-88798).
  (6)
              Incorporated
      by reference from the registrant’s registration statement under Form S-8
      filed on April 16, 2004 (Commission File No.
  333-114513).
  (7)
              Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      March 18, 2003 (Commission File No.
0-26455).
  (8)
              Not
      Used
  (9)
              Incorporated
      by reference from the registrant’s registration statement under Form SB-2
      filed on August 11, 2004 (Commission File No.
  333-118135).
  (10)
              Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      February 10, 2005 (Commission File No.
0-26455)
  (11)
              Incorporated
      by reference from the registrant’s annual report under Form 10-KSB filed
      on March 31, 2005 (Commission File No.
0-26455).
  (12)
              Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      June 23, 2005. (Commission File No.
0-26455).
  (13)
              Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      December 14, 2006. (Commission File No.
  0-26455).
  (14)
              Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      June 23, 2005. (Commission File No.
0-26455).
  51
 (15)
              Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      June 29, 2005. (Commission File No.
0-26455).
  (16)
              Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      June 29, 2005. (Commission File No.
0-26455).
  (17)
              Incorporated
      by reference from the registrant’s current report under Form 8-K filed
      August 8, 2006 (Commission File No.
0-26455).
  (18)
              Incorporated
      by reference from the registrant’s quarterly report under Form 10-QSB
      filed on August 11, 2006. (Commission File No.
  0-26455).
  (19)
              Incorporated
      by reference from the registrant’s current report under Form 8-K filed
      February 22, 2007 (Commission File No.
0-26455).
  (20)
              Incorporated
      by reference from the registrant’s annual report under Form 10-KSB filed
      on March 12, 2006 (Commission File No.
0-26455).
  (21)
              Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      November 2, 2007 (Commission File No.
0-26455).
  (22)
              Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      December 20, 2007 (Commission File No.
0-26455).
  (23)
              Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      November 12, 2008 (Commission File No.
0-26455).
  (24)
              Incorporated
      by reference from the registrant’s annual report under Form 10-KSB filed
      on March 19, 2008 (Commission File No.
0-26455).
  52
  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.
 
 iSecureTrac
      Corp.By:
                              /s/ Peter A. MichelPeter
      A. MichelChief
      Executive OfficerDated:
      March 16, 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/
      Roger J. Kanne *
                
                Chairman
      of the Board of Directors,
                
                March
      16, 2010Roger
      J. Kanne
                
                Director/s/
      Peter A. Michel
                
                President,
      Chief Executive Officer, Director
                
                March
      16, 2010Peter
      A. Michel
                
                (Principal
      Executive Officer)/s/
      Lincoln Zehr
                
                Chief
      Financial Officer
                
                March
      16, 2010Lincoln
      Zehr
                
                (Principal
      Financial and Accounting Officer)/s/
      Joseph A. Ethridge *
                
                Director
                
                March
      16, 2010Joseph
      A. Ethridge/s/
      Robert W. Korba *
                
                Director
                
                March
      16, 2010Robert
      W. Korba/s/
      Ravi Nath *
                
                Director
                
                March
      16, 2010Ravi
      Nath
 
 * Peter
A. Michel, by signing his name hereto, signs this annual report on behalf of
each person indicated. A Power-of-Attorney authorizing Peter A. Michel to sign
this annual report on Form 10-K on behalf of each of the indicated Directors of
iSECUREtrac Corp. has been filed herein as Exhibit 24.
 
 By:/s/ Peter A. MichelPeter
      A. MichelAttorney-In-Fact
  53