UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549-1004





Form
10-Q





(Mark
One)


x  Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange


Act
of 1934





FOR
THE QUARTERLY PERIOD ENDED September 30, 2010





or





o  Transition
report pursuant to Section 13 or 15(d) of the Securities


Exchange
Act of 1934





For
the transition period from _______________ to _______________





Commission
File Number 000-26455





ISECURETRAC
CORP.


(Exact
name of registrant as specified in its charter)




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




5078
S. 111th
Street


OMAHA,
NEBRASKA 68137


(Address
of principal executive offices, Zip Code)





(402)
537-0022


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes  x  No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes  o  No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company in Rule 12b-2 of the Exchange
Act.    (Check one)




Large
accelerated filer o       Accelerated
filer o


Non-accelerated
filer o (Do
not check if a smaller reporting
company)        Smaller reporting
company x





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





The
number of shares of issuer’s common stock outstanding as of October 22, 2010 was
10,917,713.










iSecureTrac
Corp.


Table
of Contents




Item
              
              
              PagePART
      I1
              Financial
      Statements
              
              012.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              123.
              Quantitative
      and Qualitative Disclosures About Market Risk
              
              214.
              Controls
      and Procedures
              
              22PART
      II1.
              Legal
      Proceedings
              
              221A.
              Risk
      Factors (Not Required for SRC)
              
              222.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              223.
              Defaults
      Upon Senior Securities
              
              224.
              Reserved
              
              225.
              Other
      Information
              
              226.
              Exhibits
              
              23










PART
I.  FINANCIAL INFORMATION





Item 1.  Financial
Statements




iSECUREtrac
Corp. and SUBSIDIARY
 CONSOLIDATED
BALANCE SHEETS
  (Unaudited)September
      30,
                2010
              
              
              December
      31,
                2009ASSETSCurrent
      AssetsCash
      and cash equivalents
              
              $
              574,945
              
              
              $
              719,662Accounts
      receivable, net of allowance for doubtful accounts of $473,396 in 2010 and
      $666,630 in 2009
              
              
              2,034,674
              
              
              
              1,877,330Inventories
              
              
              238,895
              
              
              
              284,838Prepaid
      expenses and other
              
              
              176,337
              
              
              
              115,004Total
      current assets
              
              
              3,024,851
              
              
              
              2,996,834Leasehold
      improvements and equipment, net of accumulated depreciation of $12,169,618
      in 2010 and $11,228,684 in 2009
              
              
              3,860,353
              
              
              
              4,461,466Goodwill
              
              
              2,302,179
              
              
              
              2,302,179Other
      assets
              
              
              68,059
              
              
              
              69,889Total
      assets
              
              $
              9,255,442
              
              
              $
              9,830,368LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesAccounts
      payable
              
              $
              714,499
              
              
              $
              554,592Accrued
      expenses
              
              
              457,380
              
              
              
              1,177,666Revolving
      Line of Credit
              
              
              750,000
              
              
              
              350,000Equipment
      Term Loan
              
              
              898,805
              
              
              
              280,000Current
      maturities of long-term debt
              
              
              1,396,983
              
              
              
              1,674,221Deferred
      revenues
              
              
              72,468
              
              
              
              96,937Accrued
      interest payable
              
              
              47,427
              
              
              
              -Total
      current liabilities
              
              
              4,337,562
              
              
              
              4,133,416Long-term
      debt, less current maturities, including accrued interest on long-term
      debt
              
              
              14,477,013
              
              
              
              14,555,564Total
      liabilities
              
              
              18,814,575
              
              
              
              18,688,980Redeemable
      convertible Series C preferred stock
              
              
              15,520,558
              
              
              
              14,453,227Commitments
      and contingencyStockholders'
      deficitCommon
      stock
              
              
              10,908
              
              
              
              10,816Additional
      paid-in capital
              
              
              55,519,774
              
              
              
              55,516,568Accumulated
      deficit
              
              
              (80,610,373
              )
              
              
              (78,839,223
              )Total
      stockholders' deficit
              
              
              (25,079,691
              )
              
              
              (23,311,839
              )Total
      liabilities and stockholders' deficit
              
              $
              9,255,442
              
              
              $
              9,830,368


See Notes
to Consolidated Financial Statements (unaudited).
  Page
1


iSECUREtrac
Corp. and SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)


Three
      Months Ended
                September
      30
              
              
              Nine
      Months Ended
                September
      302010
              
              
              2009
              
              
              2010
              
              
              2009Revenues:Equipment
      leasing
              
              $
              2,437,485
              
              
              $
              2,872,888
              
              
              $
              7,313,861
              
              
              $
              8,391,294Administrative,
      field & support service revenues
              
              
              123,280
              
              
              
              106,786
              
              
              
              365,057
              
              
              
              354,652Equipment
      sales
              
              
              64,823
              
              
              
              51,664
              
              
              
              119,113
              
              
              
              131,582Royalty
      revenue
              
              
              -
              
              
              
              179,852
              
              
              
              282,815
              
              
              
              628,933Total
      revenues
              
              
              2,625,588
              
              
              
              3,211,190
              
              
              
              8,080,846
              
              
              
              9,506,461Operating
      expenses:Cost
      of revenues
              
              
              828,916
              
              
              
              1,172,145
              
              
              
              2,585,999
              
              
              
              3,510,893Research
      and development
              
              
              286,521
              
              
              
              315,801
              
              
              
              895,840
              
              
              
              885,239Sales,
      general and administrative
              
              
              1,413,507
              
              
              
              1,796,365
              
              
              
              4,470,560
              
              
              
              5,574,317Total
      operating expenses
              
              
              2,528,944
              
              
              
              3,284,311
              
              
              
              7,952,399
              
              
              
              9,970,449Operating
      income (loss)
              
              
              96,644
              
              
              
              (73,121
              )
              
              
              128,447
              
              
              
              (463,988
              )Interest
      income (expense):Interest
      income
              
              
              2
              
              
              
              36
              
              
              
              7
              
              
              
              636Interest
      expense
              
              
              (326,866
              )
              
              
              (304,987
              )
              
              
              (979,253
              )
              
              
              (899,343
              )Total
      interest income (expense)
              
              
              (326,864
              )
              
              
              (304,951
              )
              
              
              (979,246
              )
              
              
              (898,707
              )Loss
      before provision for income taxes
              
              
              (230,220
              )
              
              
              (378,072
              )
              
              
              (850,799
              )
              
              
              (1,362,695
              )Provision
      for income taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              $
              (230,220
              )
              
              $
              (378,072
              )
              
              $
              (850,799
              )
              
              $
              (1,362,695
              )Preferred
      stock dividends and accretion
              
              
              (375,409
              )
              
              
              (350,289
              )
              
              
              (1,067,332
              )
              
              
              (996,295
              )Net
      loss available to common stockholders
              
              $
              (605,629
              )
              
              $
              (728,361
              )
              
              $
              (1,918,131
              )
              
              $
              (2,358,990
              )Basic
      and diluted loss per common share
              
              $
              (0.06
              )
              
              $
              (0.07
              )
              
              $
              (0.18
              )
              
              $
              (0.22
              )Weighted
      average shares of common stock outstanding
              
              
              10,890,717
              
              
              
              10,809,812
              
              
              
              10,853,109
              
              
              
              10,806,114


See Notes
to Consolidated Financial Statements (unaudited).
  Page
2


iSECUREtrac
Corp. AND SUBSIDIARY
 STATEMENT
OF STOCKHOLDERS' DEFICIT
 For
the Nine Months Ended September 30 2010
 (Unaudited)
  Common
      Stock
                
                
                Additional
                  Paid
      -in
                
                
                AccumulatedShares
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                TotalBalance,
      December 31, 2009
                
                
                10,816,100
                
                
                $
                10,816
                
                
                $
                55,516,568
                
                
                $
                (78,839,223
                )
                
                $
                (23,311,839
                )Shares
      issued for directors' fees
                
                
                9,666
                
                
                
                10
                
                
                
                5,990
                
                
                
                -
                
                
                
                6,000Shares
      issued upon exercise of Options
                
                
                82,041
                
                
                
                82
                
                
                
                32,676
                
                
                
                -
                
                
                
                32,758Stock
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                111,521
                
                
                
                -
                
                
                
                111,521Series
      C preferred stock dividends
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (920,351
                )
                
                
                (920,351
                )Accretion
      to redemption value of preferred stock
                
                
                -
                
                
                
                -
                
                
                
                (146,981
                )
                
                
                -
                
                
                
                (146,981
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (850,799
                )
                
                
                (850,799
                )Balance,
      September 30, 2010
                
                
                10,907,807
                
                
                $
                10,908
                
                
                $
                55,519,774
                
                
                $
                (80,610,373
                )
                
                $
                (25,079,691
                )


See Notes
to Consolidated Financial Statements (unaudited).
  Page
3
  iSECUREtrac
CORP. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Nine
Months Ended September 30, 2010 and 2009
 (Unaudited)
  2010
              
              
              2009Cash
      Flows From Operating ActivitiesNet
      loss
              
              $
              (850,799
              )
              
              $
              (1,362,695
              )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
              
              
              940,934
              
              
              
              1,653,182Stock
      based compensation
              
              
              117,521
              
              
              
              289,296Provision
      for Doubtful Accounts
              
              
              -
              
              
              
              194,077Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (157,344
              )
              
              
              326,667Inventories
              
              
              45,943
              
              
              
              (94,480
              )Prepaid
      expenses and other assets
              
              
              (59,503
              )
              
              
              (33,578
              )Accounts
      payable
              
              
              56,622
              
              
              
              42,988Accrued
      expenses
              
              
              (720,286
              )
              
              
              661,108Deferred
      revenues
              
              
              (24,469
              )
              
              
              (167,970
              )Accrued
      interest payable
              
              
              621,633
              
              
              
              471,455Net
      cash provided by (used in) operating activities
              
              
              (29,748
              )
              
              
              1,980,050Cash
      Flows From Investing ActivitiesPurchases
      of leasehold improvements and equipment
              
              
              (236,538
              )
              
              
              (1,801,804
              )Net
      cash used in investing activities
              
              
              (236,538
              )
              
              
              (1,801,804
              )Cash
      Flows From Financing ActivitiesPrincipal
      proceeds from long-term debt
              
              
              360,000
              
              
              
              1,700,000Proceeds
      from revolving line of credit
              
              
              400,000
              
              
              
              50,000Proceeds
      from equipment term loan
              
              
              618,805
              
              
              
              32,407Principal
      payments on long-term debt
              
              
              (1,289,994
              )
              
              
              (1,293,835
              )Proceeds
      from the exercise of options and warrants
              
              
              32,758
              
              
              
              162Net
      cash provided by financing activities
              
              
              121,569
              
              
              
              488,734Increase
      (Decrease) in cash
              
              
              (144,717
              )
              
              
              666,980Cash
      at beginning of period
              
              
              719,662
              
              
              
              423,361Cash
      at end of period
              
              $
              574,945
              
              
              $
              1,090,341Supplemental
      Disclosure of Cash Payments forInterest
              
              
              357,620
              
              
              
              427,888Supplemental
      Disclosure of Noncash TransactionsPurchase
      of leasehold improvements and equipment included in Accounts
      Payable
              
              
              103,285
              
              
              
              29,478


See Notes
to Consolidated Financial Statements (unaudited).
  Page
4


iSECUREtrac
CORP. AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Three
and nine months ended September 30, 2010 and 2009


(Unaudited)




Note
1.  General




The
unaudited interim condensed consolidated financial statements as of September
30, 2010 and for the three and nine month periods ended September 30, 2010 and
2009, included herein, have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X.




The
consolidated balance sheet of iSECUREtrac Corp. (“iSECUREtrac”, or the
“Company”) and its wholly-owned subsidiary, iSt Services, Inc., at December 31,
2009, has been taken from the audited consolidated financial statements at that
date.  The condensed consolidated financial statements for the three
and nine months ended September 30, 2010 and September 30, 2009 are unaudited
and reflect all normal and recurring accruals and adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim periods presented in
this quarterly report.  The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management’s discussion and analysis
of financial condition and results of operations, contained in our Annual Report
on Form 10-K for the year ended December 31, 2009.  The results of
operations and cash flows for the three months and nine months ended September
30, 2010 are not necessarily indicative of the results for the entire fiscal
year ending December 31, 2010.  Where appropriate, items of an
insignificant nature within the condensed consolidated financial statements have
been reclassified from the previous periods’ presentation.




The
Company believes that its current working capital and the undrawn amounts
available under the Company’s Revolving Line of Credit Agreement, which was
recently amended as described in Notes 5 and 8, combined with the amounts
available to it through the capital lease financing arrangements described in
Note 6 are sufficient to meet its liquidity needs through 2011.




Note
2.  Common Stock Options and Warrants




The
Company may issue stock options and other types of equity-based compensation
under its 2006 Omnibus Equity Incentive Plan (the “2006 Plan”) which was
implemented on May 31, 2006.  This is the only plan under which the
Company may now issue additional equity-based compensation.  The
Company also has outstanding stock options that were issued under its 2001
Omnibus Equity Incentive Plan (the “2001 Plan”) and which were issued under
employment agreements with executive officers.




During
the three and nine months ended September 30, 2010, the Company granted options
to purchase a total of 45,500 and 80,500 shares of common stock to seven and
fourteen employees, respectively, pursuant to the 2006 Plan.  During
the three and nine months ended September 30, 2010, 89,303 and 211,052 options
issued under the 2006 Plan were forfeited, 6,825 and 9,625 options issued under
the 2001 Plan were forfeited and 0 and 15,000 options issued under employment
agreements outside the 2006 Plan and the 2001 Plan, respectively, were
forfeited.  During the three and nine months ended September 30, 2010,
35,958 and 81,749 options were exercised, respectively.  The following
table shows stock option activity during the nine month period ended September
30, 2010:




Options
              
              Number
      of
                Shares
              
              
              Weighted
      Average
                Exercise
      Price Per
                Share
              
              
              Weighted
      Average
                Remaining
                Contractual
      Life
                (Years)
              
              
              Aggregate
      Intrinsic
                ValueOutstanding
      at December 31, 2009
              
              
              3,054,320
              
              
              $
              1.32
              
              
              
              
              
              $
              30,268Granted
              
              
              80,500
              
              
              
              0.86Exercised
              
              
              (81,749
              )
              
              
              0.40Forfeited
              
              
              (235,677
              )
              
              
              0.77Outstanding
      at September 30, 2010
              
              
              2,817,394
              
              
              $
              1.38
              
              
              
              5.79
              
              
              $
              592,786Exercisable
      at September 30, 2010
              
              
              2,406,188
              
              
              $
              1.53
              
              
              
              5.22
              
              
              $
              432,761




Page
5




At
September 30, 2010, the Company had 2,817,394 outstanding stock options,
6,287,045 shares issuable upon exercise of warrants to be issued upon exchange
of Preferred Stock, and 679,568 shares issuable upon the exercise of outstanding
warrants that were not included in the computation of diluted EPS because to do
so would have been anti-dilutive for the periods presented.




During
the three and nine months ended September 30, 2010, 0 and 1,547,519 warrants
expired, respectively, and no warrants were granted by the Company or exercised
by warrant holders.




The
Company accounts for its stock-based compensation by recognizing compensation
cost relating to share-based compensation awards, including grants of employee
stock options, as these awards become vested, based on the grant date fair value
of the equity instruments issued.




The
Company estimated the grant date fair value of each option granted during the
periods set forth below using the Black-Scholes option pricing model with the
following weighted average assumptions:




Nine
      Months Ended
                September
      30,
                2010
              
              
              Year
      Ended
                December
      31,
                2009Risk
      free interest rate
              
              
              3.65
              %
              
              
              3.60
              %Expected
      volatility factor
              
              
              80.03
              %
              
              
              81.50
              %Expected
      option term in years
              
              3.5
      to 6.5
              
              
              3.5
      to 6.5Dividends
              
              $
              0.00
              
              
              $
              0.00Forfeitures
      for senior executives and non-senior executives
              
              35%
      and 24
              %
              
              35% and
      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 of stock options. 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 rate is recalculated on an annual basis.




Page
6




The
annual rate of quarterly dividends is 0% since iSECUREtrac has historically not
paid dividends on its common stock.




The
Company recorded compensation expense of $32,079 and $111,521 for the three and
nine months ended September 30, 2010, respectively, compared to $79,045 and
$283,296 for the same periods in 2009 related to stock-based compensation
awards.




As of
September 30, 2010, there was approximately $138,255 of total unrecognized
compensation costs related to non-vested stock option agreements granted to the
Company’s executives and employees.  The future compensation expense
the Company will recognize if and as these options vest according to their
contractual terms is as follows:




2010
              
              $
              36,5742011
              
              
              95,2292012
              
              
              6,452Total
              
              $
              138,255




Note
3.  Leasehold Improvements and Equipment




The cost
and accumulated depreciation of our leasehold improvements and equipment as of
September 30, 2010 and December 31, 2009 are as follows:




September
      30, 2010
              
              
              December
      31, 2009Cost
              
              
              Accumulated
                Depreciation
              
              
              Net
      Book
                Value
              
              
              Cost
              
              
              Accumulated
                Depreciation
              
              
              Net
      Book
                ValueEquipment
              
              $
              1,067,348
              
              
              $
              820,876
              
              
              $
              246,472
              
              
              $
              1,055,794
              
              
              $
              719,639
              
              
              $
              336,155Leasehold
      improvements
              
              
              171,281
              
              
              
              93,530
              
              
              
              77,751
              
              
              
              249,081
              
              
              
              176,522
              
              
              
              72,559Components
      held for future monitoring equipment builds
              
              
              210,000
              
              
              
              -
              
              
              
              210,000
              
              
              
              210,000
              
              
              
              -
              
              
              
              210,000Software
      development costs
              
              
              419,587
              
              
              
              67,209
              
              
              
              352,378
              
              
              
              259,977
              
              
              
              -
              
              
              
              259,977Monitoring
      equipment
              
              
              14,161,755
              
              
              
              11,188,003
              
              
              
              2,973,752
              
              
              
              13,915,298
              
              
              
              10,332,523
              
              
              
              3,582,775Total
      leasehold improvements and equipment
              
              $
              16,029,971
              
              
              $
              12,169,618
              
              
              $
              3,860,353
              
              
              $
              15,690,150
              
              
              $
              11,228,684
              
              
              $
              4,461,466




During
the three month period ended June 30, 2010 management increased the estimated
useful life of certain monitoring equipment from three years to five years to
more accurately reflect the expected life of the related assets.  The
effect of the increase in estimated useful life was to decrease depreciation for
the three and nine months ended September 30, 2010 by $207,000 and $429,000, an
earnings per share impact of approximately $0.01 and $0.04,
respectively.




Note
4.  Goodwill




Goodwill
is the excess of the cash paid over the fair value of the net 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 or if certain events or
circumstances occur.  The Company determined that there was no impairment
of goodwill as of December 31, 2009.  No events transpired in the nine
months ended September 30, 2010 that required a reevaluation of this
conclusion.




Note
5.  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
for $750,000 for working capital via a Revolving Credit Commitment and the
second note for $1,750,000 for equipment financing via an Equipment Term
Loan.  The Loan Agreement 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.  Furthermore, on August 4, 2010, Crestpark amended the Loan
Agreement to increase the Revolving Credit Commitment by $350,000 with a
corresponding decrease in the amount available under the Equipment Term
Loan.  This change increased the Revolving Credit Commitment line from
$750,000 to $1,100,000 and reduced the amount available on the Equipment Term
Loan from $718,788 to $368,788.  All other terms of the Loan Agreement
remained unchanged.




Page
7


Accrued
interest on the promissory notes at September 30, 2010 and 2009 was $47,427 and
$0, respectively.




Revolving Credit
Commitment  -The proceeds of the Revolving Credit Commitment
of $1,100,000 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, including the unused commitment fee, to
Crestpark was $19,927 and $42,216 for the three and nine months ended September
30, 2010, respectively, as compared to $18,114 and $58,478 for the same periods
of 2009.  As of September 30, 2010, the Company had $750,000
outstanding under the Revolving Credit Commitment and $350,000 available,
compared with $350,000 outstanding and $400,000 available as of December 31,
2009.  Amounts borrowed and repaid remain available under the
Revolving Credit Commitment.




Equipment Term
Loan  -The proceeds of the $1,400,000 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, including the unused
commitment fee, to Crestpark for the three and nine months ended September 30,
2010 was $27,500 and $70,118, respectively, as compared to $2,796 and $5,835 for
the same periods of 2009.  As of September 30, 2010, the Company had
$898,805 outstanding under the Equipment Term Loan and $368,788 available,
compared with $280,000 outstanding and $1,337,593 available as of December 31,
2009.  Amounts borrowed and repaid are no longer available under the
Equipment Term Loan.




Subsequent
to September 30, 2010, Crestpark has amended the Loan Agreement
to  increase the Revolving Credit Commitment by $368,888 with a
corresponding decrease in the amount available under the Equipment Term
Loan.  This change increases the Revolving Credit Commitment line from
$1,100,000 to $1,468,788, of which $718,788 is available.  This change
decreases the amount available on the Equipment Term Loan from $368,788 to
$0.  All other terms of the Loan Agreement, as described above, remain
unchanged.




Subsequent
to September 30, 2010, the Company paid $300,000 towards the outstanding balance
on the Revolving Credit Commitment line, increasing the amount available to
$1,018,788.




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
Agreement were approved by a Special Committee of the Board of Directors
consisting solely of disinterested directors.




Page
8


Note
6.  Long-Term Debt




The
Company had the following long-term debt at September 30, 2010 and December 31,
2009:




September
      30,
                2010
              
              
              December
      31,
                2009Long-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
              
              $
              6,455,250
              
              
              $
              6,455,250Floating
      Tranche ~ with an interest rate of 2% over prime (5.25% at September 30,
      2010)
              
              
              5,422,225
              
              
              
              5,422,225Crestpark
      LP, Inc Total
              
              $
              11,877,475
              
              
              $
              11,877,475AHK
      Leasing, LLCThirteen
      separate capital leases with related parties that are carrying interest
      rates at 9.50% to 11.25% and maturing March 2011 to September
      2013
              
              
              1,993,537
              
              
              
              2,923,532Total
      long-term debt
              
              $
              13,871,012
              
              
              $
              14,801,007Less
      current maturities
              
              
              (1,396,983
              )
              
              
              (1,674,221
              )Total
      long-term debt less current maturities
              
              $
              12,474,029
              
              
              $
              13,126,786Accrued
      Interest on long-term debt
              
              
              2,002,984
              
              
              
              1,428,778Total
      long-term debt less current maturities, included accrued interest on
      long-term debt
              
              
              14,477,013
              
              
              
              14,555,564





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 was $2,002,984 and $1,428,778 at September
30, 2010 and December 31, 2009, respectively.




Page
9


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.




Capital
Leases - AHK Leasing, LLC.




AHK
Leasing, LLC (“AHK”) is a company controlled by three stockholders, one of which
is a current director.  These loans were in the form of capital leases
with 36 month terms and bearing interest at a rate of 9.50% to 11.25% per annum
and mature between March 2011 and September 2013.   There was no
accrued interest payable to AHK at September 30, 2010.




Total
interest expense, including unused commitment fees, for the three and nine
months ended September 30, 2010 and September 30, 2009 is as
follows:




Three
      Months
                Ended
                Sept
      30, 2010
              
              
              Three
      Months
                Ended
                Sept
      30, 2009
              
              
              Nine
      Months
                Ended
                Sept
      30, 2010
              
              
              Nine
      Months
                Ended
                Sept
      30, 2009AHK
      interest on long-term debt
              
              $
              53,013
              
              
              $
              91,943
              
              
              $
              195,427
              
              
              $
              260,509Crestpark
      LP interest on long-term debt
              
              
              221,219
              
              
              
              188,225
              
              
              
              656,443
              
              
              
              63,707Crestpark
      LP credit agreements
              
              
              47,427
              
              
              
              21,223
              
              
              
              109,197
              
              
              
              557,765Other
              
              
              5,207
              
              
              
              3,596
              
              
              
              18,186
              
              
              
              17,362Total
      interest expense
              
              $
              326,866
              
              
              $
              304,987
              
              
              $
              979,253
              
              
              $
              899,343




Note
7.  Redeemable Exchangeable Series C 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 at anytime at the discretion of the preferred
stockholder.




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 will be charged to Additional Paid-In
Capital.  As of September 30, 2010, the Company had accrued Series C
Preferred Stock dividends totaling $5,501,906 and accretion to redemption value
of the Series C Preferred Stock totaling $999,573.  Of these amounts,
$326,174 and $49,235, respectively, were accrued during the three months ended
September 30, 2010.




Upon any
liquidation of the Company, no distribution can 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 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%.




Page
10


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 Stockholders have the ability to appoint a majority of the Company’s
directors.




Note
8.  Subsequent Events.




Subsequent
to September 30, 2010, Crestpark has amended the Loan Agreement
to  increase the Revolving Credit Commitment by $368,888 with a
corresponding decrease in the amount available under the Equipment Term
Loan.  This change increases the Revolving Credit Commitment line from
$1,100,000 to $1,468,788, of which $718,788 is available.  This change
decreases the amount available on the Equipment Term Loan from $368,788 to
$0.  All other terms of the Loan Agreement, as described above, remain
unchanged.




Subsequent
to September 30, 2010, the Company paid $300,000 towards the outstanding balance
on the Revolving Credit Commitment line, increasing the amount available to
$1,018,788.




Subsequent
to September 30, 2010, the Company and Crestpark LP, Inc reached agreement in
principal to modify the terms of the Revolving Line of Credit, the Equipment
Term Loan and all Long-Term Debt.  The terms of the agreement are
effective December 31, 2010, and will include required principal payments of
$500,000 per year beginning in 2012 and extending the maturity date to January
1, 2015.  All other terms and conditions are similar to existing
terms.




Note
9.  Recent Accounting Pronouncements




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 currently
evaluating the impact of adopting ASU No. 2009-13.




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 currently evaluating the impact of adopting ASU
No. 2009-14.




Page
11


Note
10.  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 term nature of the outstanding debt.




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 $19,275,000 at September 30, 2010
using a discount rate of 5%.




Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations.




Forward-Looking
Statements




This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical fact, including statements regarding
guidance, industry prospects and future results of operations or financial
position, made in this Quarterly Report on Form 10-Q are forward-looking. We use
words such as anticipates, believes, expects, future, intends, and similar
expressions to identify forward-looking statements. Forward-looking statements
reflect management’s current expectations and are inherently uncertain. Actual
results could differ materially for a variety of reasons, including , among
others without limitation the risks set forth in Item 1A of Part I,
“Risk Factors” contained in the Company’s 2010 Annual Report on Form
10-K.




General




The
following discussion is intended to provide a better understanding of the
significant changes in trends relating to the Company’s financial condition and
results of operations.  Management’s Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the accompanying Consolidated Financial Statements and Notes
thereto.




Overview




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 basis.




Page
12


The
Company’s other revenue consists primarily of royalties earned by the Company
under the terms of a Patent License Agreement dated May 2006 (the “Patent
License Agreement”).




General
Outlook for Remainder of 2010




As
discussed in the Company’s 2009 Annual Report on Form 10-K and the Quarterly
Reports on Form 10-Q for the three
months ended March 31, 2010 and June 30, 2010, we expected the ongoing difficult
economic situation to cause many corrections agencies and other target customers
to be slow to approve new electronic monitoring programs and that has proven to
be the case thus far during 2010.  July 1, 2010 represented the
beginning of the new fiscal year for many of our target customers and we have
observed signs that indicate that the corrections market appears to be
responding to the reality that electronic monitoring, and specifically Active
GPS tracking, represents a way to increase public safety and at the same time
reduce costs when compared with incarceration.  We continue to believe
that the value proposition of the Company’s products and services remains
compelling as the costs of incarceration continue to escalate.




During
the latter portion of the three months ended June 30, 2010 and the three months
ended September 30, 2010, the Company signed a number of contracts that either
have deployed units or which we expect to deploy units in the near
future.  However, it is too early to predict when or how much revenue
will be generated by these contracts.




In
addition, as reported in the Company’s Quarterly Report on Form 10-Q for the
three months ended June 30, 2010, the Company signed a sales and marketing
agreement with Bob Barker Company on July 6th, 2010.
This agreement provides for a nationwide sales and marketing
relationship.  Management believes the Bob Barker Company relationship
will have a positive impact on the Company’s name recognition and market
position as well as future revenue growth and related profitability. However, it
is too early to predict when or how much revenue will be generated by the
relationship with the Bob Barker Company.




The
Company is seeing strong signs that the absence of major new
requests-for-proposals over the past several quarters appears to be
ending.  The Company is aggressively responding to these and other
opportunities and management remains optimistic about the possibility of being
awarded several of them.  Accordingly,  management continues
to expect that the Company’s revenue will begin to grow over the upcoming
quarters with cash flow positive operations to follow.




Results
of Operations




Highlights
of Operations for the three months ended September 30, 2010




Positive
Cash Flow from Operations.  For the
three months ended September 30, 2010, the operations of the Company returned to
generating positive cash flow from operating activities after experiencing
negative cash flow the preceding quarter due to the disbursement of annual
payments which were accrued in prior periods.  While the positive cash
flow from operating activities was not sufficient to cover principal payments on
long-term debt, the $105,000 of cash generated by operating activities
represents the most positive performance since the three months ended December
31, 2009.




In
addition, during this quarter cash receipts from one of the Company’s largest
customers were delayed and not received in a timely fashion, based on their
historical payment cycle.  Approximately $406,000 was received from
this customer on October 5th,
2010.  Had this customer maintained their account in accordance with
their historical payment cycle, the Company’s cash flow from operations would
have been $511,000 – sufficient to cover principal payments on long-term
debt.




Page
13


Decline
in Revenue.  The Company’s Equipment Leasing Revenue and
Service Revenue, in total, has been increasing since the three months ended
March 31, 2010.  However, in comparison to the same period a year ago
equipment leasing revenue for the three months ended September 30, 2010
declined  as a result of a decrease in the average daily lease rate on
multi-year contracts that were extended or renewed during the previous twelve
months.   We do not expect to continue to see significant
declines in the daily lease rates.




For the
three months ended September 30, 2010, the Company had approximately the same
number of GPS units deployed in comparison to the same period in the prior
year.  While the impact of the lower average daily lease rate has a
material impact on current revenue and cash flow, it is important to understand
that the related contract extensions are expected to result in continued cash
inflows after the related equipment has been paid for.




Decline
in Selling General & Administrative Expenses (“SG&A”).  SG&A
expenses for the three months ended September 30, 2010, declined approximately
21% over the same period a year ago.  The three months ended September
30, 2010 marks the seventh consecutive quarter that SG&A expenses have
declined.  This decline in SG&A expenses is the result of the
continuing cost reductions and cost control strategies implemented since
2008.  The Company continues to be deliberate about managing and
controlling expenditures and filling open positions.




Summary
of Financial Information




The
following table provides a comparison of selected financial highlights, in
thousands, for the three months ended September 30, 2010 and 2009:




2010
              
              
              2009
              
              
              Fav
      / (Unfav)
                ChangeRevenues:Equipment
      revenue
              
              $
              2,502
              
              
              $
              2,924
              
              
              $
              (422
              )Services
      revenue
              
              
              123
              
              
              
              107
              
              
              
              16Royalty
      revenue
              
              
              -
              
              
              
              180
              
              
              
              (180
              )Total
      revenues
              
              
              2,625
              
              
              
              3,211
              
              
              
              (586
              )Costs
      of revenue
              
              
              829
              
              
              
              1,172
              
              
              
              343Gross
      profit margin
              
              
              1,796
              
              
              
              2,039
              
              
              
              (243
              )Gross
      profit margin %
              
              
              68.4
              %
              
              
              63.5
              %Research
      and development expenses (R&D)
              
              
              286
              
              
              
              316
              
              
              
              30Sales,
      general and administrative expenses (SG&A)
              
              
              1,413
              
              
              
              1,796
              
              
              
              383Total
      R&D and SG&A
              
              
              1,699
              
              
              
              2,112
              
              
              
              413Operating
      income (loss)
              
              
              97
              
              
              
              (73
              )
              
              
              170Interest
      expense, net
              
              
              (327
              )
              
              
              (305
              )
              
              
              (22
              )Net
      loss
              
              $
              (230
              )
              
              $
              (378
              )
              
              $
              148Preferred
      stock dividends and accretion
              
              
              (376
              )
              
              
              (350
              )
              
              
              (26
              )Net
      loss available to common stockholders
              
              $
              (606
              )
              
              $
              (728
              )
              
              $
              122





Page
14




Quarterly
Highlights




In
addition to the selected financial highlights above, the following selected
quarterly financial and non-financial data over the past 5 quarters is important
in understanding the trend in the Company’s results of operations:




CONDENSED
CONSOLIDATED QUARTERLY  FINANCIAL HIGHLIGHTS
 Rolling 5 Quarter
Trend
 (In
Thousands)





Sept
      30
                2009
              
              
              Dec
      31
                2009
              
              
              Mar
      31
                2010
              
              
              Jun
      30
                2010
              
              
              Sept
      30
                2010Revenue:Equipment
      leasing
              
              $
              2,924
              
              
              $
              2,601
              
              
              $
              2,448
              
              
              $
              2,482
              
              
              $
              2,502Service
      Revenue
              
              
              107
              
              
              
              106
              
              
              
              115
              
              
              
              127
              
              
              
              123Royalty
      Revenue
              
              
              180
              
              
              
              125
              
              
              
              125
              
              
              
              158
              
              
              
              -Total
      Revenue
              
              
              3,211
              
              
              
              2,832
              
              
              
              2,688
              
              
              
              2,767
              
              
              
              2,625Costs
      of Revenue
              
              
              1,172
              
              
              
              1,014
              
              
              
              954
              
              
              
              803
              
              
              
              829Gross
      profit margin
              
              
              2,039
              
              
              
              1,818
              
              
              
              1,734
              
              
              
              1,964
              
              
              
              1,796Gross
      profit margin %
              
              
              63.5
              %
              
              
              64.2
              %
              
              
              64.5
              %
              
              
              71.0
              %
              
              
              68.4
              %Research
      & Development (R&D)
              
              
              316
              
              
              
              377
              
              
              
              314
              
              
              
              295
              
              
              
              286Selling
      General & Admin (SG&A)
              
              
              1,796
              
              
              
              1,688
              
              
              
              1,542
              
              
              
              1,515
              
              
              
              1,413Subtotal
      R&D and SG&A
              
              
              2,112
              
              
              
              2,065
              
              
              
              1,856
              
              
              
              1,810
              
              
              
              1,699Operating
      Income (Loss)
              
              $
              (73
              )
              
              $
              (247
              )
              
              $
              (122
              )
              
              $
              154
              
              
              $
              97Total
      Full-Time Employees at Quarter End
              
              
              73
              
              
              
              73
              
              
              
              71
              
              
              
              71
              
              
              
              67





Page
15




CONDENSED
CONSOLIDATED QUARTERLY  FINANCIAL HIGHLIGHTS


Rolling
5 Quarter Trend


(In
Thousands)







Sept
      30
              2009
            
            
            Dec
      31
              2009
            
            
            Mar
      31
              2010
            
            
            Jun
      30
              2010
            
            
            Sept
      30
              2010Cash
      Flows From Operating ActivitiesNet
      loss
            
            $
            (378
            )
            
            $
            (560
            )
            
            $
            (446
            )
            
            $
            (174
            )
            
            $
            (230
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            556
            
            
            
            470
            
            
            
            494
            
            
            
            185
            
            
            
            262Stock
      based compensation
            
            
            81
            
            
            
            50
            
            
            
            48
            
            
            
            34
            
            
            
            35Provision
      for Doubtful Accounts
            
            
            33
            
            
            
            10
            
            
            
            -
            
            
            
            -
            
            
            
            -Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            71
            
            
            
            37
            
            
            
            192
            
            
            
            (195
            )
            
            
            (154
            )Inventories
            
            
            (31
            )
            
            
            3
            
            
            
            8
            
            
            
            57
            
            
            
            (19
            )Prepaid
      expenses
            
            
            13
            
            
            
            3
            
            
            
            (28
            )
            
            
            27
            
            
            
            (59
            )Accounts
      payable
            
            
            190
            
            
            
            108
            
            
            
            (31
            )
            
            
            (17
            )
            
            
            105Accrued
      expenses
            
            
            47
            
            
            
            (8
            )
            
            
            (397
            )
            
            
            (288
            )
            
            
            (35
            )Deferred
      revenue
            
            
            (11
            )
            
            
            (35
            )
            
            
            (9
            )
            
            
            (15
            )
            
            
            (1
            )Accrued
      interest payable
            
            
            161
            
            
            
            181
            
            
            
            215
            
            
            
            205
            
            
            
            201Net
      cash provided by (used in) operating activities
            
            
            732
            
            
            
            259
            
            
            
            46
            
            
            
            (181
            )
            
            
            105Adjustment
      for payment of royalty expenses for comparative purposes
    (1)
            
            
            
            
            
            
            
            
            
            
            508Adjusted
      Net cash provided by (used in) operating activitie
            
            
            732
            
            
            
            259
            
            
            
            554
            
            
            
            (181
            )
            
            
            105Principal
      payments on long-term debt
            
            
            (344
            )
            
            
            (408
            )
            
            
            (421
            )
            
            
            (433
            )
            
            
            (436
            )Adjusted
      Net cash provided by (used in) operating activities less principal
      payments on long-term debt
            
            $
            388
            
            
            $
            (149
            )
            
            $
            133
            
            
            $
            (614
            )
            
            $
            (331
            )







(1)
            As
      outlined in the Company’s 2009 Annual Report on Form 10-K, on March 4,
      2010, the Company paid Pro Tech Monitoring, Inc $507,790  for a
      limited license to provide certain technology to specific customers and
      the settlement of all royalties due under the November 27, 2007
      Confidential Settlement Agreement (“Agreement”).   The
      decrease in Accrued Expenses in the cash flow statement above is
      reflective of this payment. Royalty expenses were estimated and accrued on
      a monthly basis throughout 2008 and 2009 and all royalties due under the
      Agreement were fully accrued at September 30,
      2009.   Management views the payment of these expenses
      during the three months ended March 31, 2010 as unrelated to operations
      which distorts the evaluation of cash provided by the operating activities
      for that same period. Management believes that removing the effect of this
      payment on Net cash
      provided by operating activitiesprovides a more
      accurate  picture of the cash flow trends of the Company which
      is consistent with the other periods presented
  above.





Because
the Company finances the majority of all equipment purchases through long-term
leases, the investing activities (e.g. purchase of leasehold improvements and
equipment) of the Company are generally offset by the proceeds of long-term debt
reported in financing activities.  Accordingly in evaluating the cash
flow of operations, management looks at the net cash provided by operating
activities (as per the Consolidated Statement of Cash Flows) and subtracts the
principal payments on long-term debt.  For the three and nine months
ended September 30, 2010, the Company reported net cash provided by operating
activities of $105,000 and $478,000, respectively, as adjusted
above.




For the
three and nine months ended September 30, 2010, the Company’s operations did not
generate sufficient cash flow to cover principal payments on long-term debt.
However, cash receipts from one of the Company’s largest
customers,  were delayed and not received in a timely fashion, based
on their historical payment cycle.  Approximately $406,000 was
received from this customer  on October 5th,
2010.  Had this customer maintained their account in accordance with
their historical payment cycle, the Company’s cash flow from operations for the
three months ended September 30, 2010 would have been $511,000 – sufficient to
cover principal payments on long-term debt.




Page
16


For
the three and nine months ended September 30, 2010 compared to the three and
nine months ended September 30, 2009





Revenue





Equipment
Revenue




Equipment
revenue consists of the daily leasing of electronic monitoring equipment and
periodic charges for lost or damaged equipment.  For the three and
nine month periods ended September 30, 2010 the Company had equipment revenue of
$2,502,000 and $7,432,000 compared with $2,924,000 and $8,523,000 for the same
periods in 2009 which represents decreases of approximately 15% and 13%,
respectively.





For the
three months ended September 30, 2010, approximately 80% of the decline in
equipment revenue is attributable to a decline in daily lease
rates.  The remainder of the decrease is the result of fewer GPS and
visual breath units deployed during the three months ended September 30, 2010 in
comparison to the same period of the prior year.





For the
nine months ended September 30, 2010, approximately 84% of the decline in
equipment revenue is attributable to a decline in daily lease rates, net of an
increase in the number of units deployed during the nine months ended September
30, 2010.   The remainder of the decline is the result of fewer
visual breath alcohol units deployed in comparison to the same period of the
prior year.





Service Revenues




Service
revenues consist of daily charges for Monitoring Center Intervention, in
connection with the leasing of GPS equipment outlined
above.   For the three and nine months ended September 30, 2010
the Company reported service revenue of $123,000 and $365,000 compared to
$107,000 and $355,000 for the same periods in 2009 which represents an increase
of approximately 15%  and 3% for the three and nine months ended
September 30, 2010, respectively.





The
increase for the three months ended September 30, 2010 is the net result of an
increase in the number of units subject to Monitoring Center Intervention offset
by a decline in the average daily price per unit.





Royalty Revenue




Through
June 30, 2010, the Company earned royalty revenues, which are paid annually by
March 31 of each year, 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 earned a
royalty equal to 2.5% of STOP’s revenue utilizing this technology. As
of September 30, 2010 the Company has earned the maximum amount of royalties it
can earn under the STOP Patent License Agreement. Accordingly, the Company
expects no future royalty revenue to be recognized.  The Company has a
remaining receivable of $210,000 to be received in March
2011.





For the
three and nine month periods ended September 30, 2010, the Company reported
royalty revenue of $0 and $283,000 in comparison to $180,000 and $629,000 for
the same periods in 2009 which represent a decrease for the three months ended
September 30, 2010 of $180,000 and a decrease for the nine month period ended
September 30, 2010 of $346,000.





Page
17





Cost
of Revenues





Cost of
revenues represents all direct costs related to delivery of proprietary and
third-party monitoring equipment including amortization of the acquisition
costs, lease costs on third-party equipment, repairs and maintenance of the
monitoring equipment, royalty expenses, transportation costs, communication
costs associated with the equipment, as well as costs to upgrade existing units
for advancements in technology.





For the
three and nine month periods ended September 30, 2010 the Company reported costs
of revenue of $829,000 and $2,586,000 compared to $1,172,000 and $3,511,000 for
the same periods in 2009 which represent decreases of approximately 29% and 26%,
respectively.





For the
three months ended September 30, 2010 the $343,000 decrease in cost of revenues
is attributable to the following:





·
            $242,000
      decrease in depreciation which is largely attributed to the increase in
      estimated useful life effected during the three months ended June 30,
      2010


·
            $116,000
      decrease in royalty costs as a result of the Pro Tech licensing settlement
      reached in the fourth quarter of 2009 and thus no royalty costs are
      reported in 2010


·
            $35,000
      increase in third party monitoring costs


·
            $20,000
      decrease in various other costs including communication costs, repairs and
      shipping





For the
nine months ended September 30, 2010 the $925,000 decrease in cost of revenues
is attributable to the following:





·
            $537,000
      decrease in depreciation which is largely attributed to the increase in
      estimated useful life effected during the three months ended June 30,
      2010


·
            $426,000
      decrease in royalty costs as a result of  the Pro Tech licensing
      settlement reached in the fourth quarter of 2009 and thus no royalty costs
      are reported in 2010


·
            $115,000
      increase in third party monitoring costs


·
            $77,000
      decrease in various other costs including communication costs, repairs and
      shipping




During
the three month period ended June 30, 2010 management increased the estimated
useful life of certain monitoring equipment to more accurately reflect the
expected life of the related assets.  The effect of the increase in
estimated useful life was a decrease in depreciation for the three months and
nine months ended September 30, 2010 by $207,000 and $429,000, respectively. In
the future, subject to the effect of purchasing additional monitoring equipment,
depreciation expense is expected to be similar to the depreciation expense
reported for the three months ended September 30, 2010.




Management
anticipates that as the Company experiences revenue growth there will be an
increase in Cost of Revenues proportionate to growth.




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.





R&D
expenses for the three and nine months ended September 30, 2010 were $286,000
and $895,000 in comparison to $316,000 and $886,000 for the same periods in 2009
a increase of $30,000 and a decrease of $9,000 for the three and nine months
ended September 30, 2010, respectively.  R&D expenses decreased
during the three months ended September 30, 2010 as a result of open positions
but increased for the nine months ended September 30, 2010 due to the Company’s
increased investment in system infrastructure and service delivery
applications.





Page
18


The
Company is currently in the process of redesigning several major software
systems and technology improvements and has capitalized certain payroll and
related costs associated with the related development of the applications and
technology.   For the three and nine months ended September 30,
2010 the Company capitalized $5,000 and $42,000 respectively.  For the
three and nine months ended September 30, 2009 the Company capitalized $52,000
and $133,000 respectively.





Over the
remainder of the year management anticipates continuing to have resources
dedicated to capitalizable projects.  Accordingly, the reported
R&D in future periods will be in part dependent on the resources devoted to
these projects.





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
three month period ended September 30, 2010, SG&A expenses decreased
$383,000 from $1,796,000 reported in 2009 to $1,413,000 reported in
2010.   Significant increases and decreases of SG&A expense
in the comparable periods are highlighted below:




·
            Personnel
      related expenses included salaries, benefits, incentive compensation,
      recruiting, and travel decreased approximately $210,000 as a result of the
      implemented cost control measures




·
            Consulting
      fees decreased $14,000 in connection with the use of fewer consultants to
      staff open positions




·
            Facility
      expenses decreased $10,000 as a result of consolidating office
      space




·
            Investor
      relations expenses increased $9,000




·
            Legal
      and accounting fees decreased
$60,000




·
            Bad
      debt expense decreased $48,000 in connection with the improvement in the
      uncertainty of collectability of certain accounts
    receivable




·
            Stock
      option expenses decreased $47,000




·
            Various
      other expenses including advertising, insurance, communications, and other
      expenses decreased an aggregate of
$3,000




Page
19




For the
nine month period ended September 30, 2010, SG&A expenses decreased
$1,103,000 from $5,574,000 reported in 2009 to $4,471,000 reported in
2010.   Significant increases and decreases of SG&A expense
in the comparable periods are highlighted below:




·
            Personnel
      related expenses included salaries, benefits, incentive compensation,
      recruiting, and travel decreased approximately $636,000 as a result of the
      implemented cost control measures.




·
            Consulting
      fees decreased $5,000 in connection with the use of fewer consultants to
      staff open positions




·
            Facility
      expenses decreased $19,000 as a result of consolidating office
      space




·
            Investor
      relation expenses increased $34,000




·
            Legal
      and accounting fees decreased
$99,000




·
            Bad
      debt expense decreased $214,000 in connection with the uncertainty of
      collectability of certain accounts
receivable




·
            Stock
      option expenses decreased $172,000




·
            Various
      other expenses including advertising, insurance, communications, and other
      expenses increased an aggregate of
$8,000




The cost
reductions implemented by management over the past several years have
significantly reduced SG&A expenses.   These reductions have
strategically positioned the Company to support material future revenue
growth.  As revenue increases SG&A expenses are expected to
decrease as a percentage of revenue.




Interest
Expense, Net




Net
interest expense represents the total interest expense incurred by the Company
reduced by the interest income earned by the Company during the year. During the
three and nine months ended September 30, 2010 the Company reported net interest
expense of $327,000 and $979,000, respectively, increases of $22,000 and $80,000
over the $305,000 and $899,000 reported for the three and nine months ended
September 30, 2009.  The increases are attributable to the increase in
net equipment purchased under capital leases, as well as the additional
borrowings from Crestpark.





As a
result of the additional borrowing from Crestpark and the Company’s continuing
use of capital leases to finance its equipment purchases, we expect to see net
interest expense continue at or slightly above the levels recorded in the three
months ended September 30, 2010.





Net
Loss





The
Company’s net loss for the three and nine month periods ended September 30, 2010
was $230,000, and $851,000 an improvement of $148,000 and $512,000 over the
$378,000 and $1,363,000 reported for the same periods in 2009 for the reasons
described above.





Preferred
Stock Dividends and Accretion




For the
three and nine month periods ended September 30, 2010, preferred stock dividends
and accretion totaled $375,000 and $1,067,000 as compared to $350,000 and
$996,000 for the three and nine month periods ended September 30,
2009.  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.




Page
20




Liquidity
and Capital Resources




The
Company’s principal uses of cash are the payment of operating expenses and debt
service payments on its debt obligations, including its capital lease
financing.   In general, the Company expects to meet these
liquidity needs by generating positive cash flow from operating
activities.  The Company also uses cash to acquire the monitoring
equipment that it leases or sells to its customers.  For the nine
months ended September 30, 2010, the Company used $30,000 of cash from operating
activities. Investing activities used $237,000  of cash and financing
activities generated cash of $122,000.   The total of all cash
flow activities resulted in a decrease in the balance of cash for the nine
months ended September 30, 2010 of $145,000.  For the same period of
2009, the Company generated $1,980,000 of cash in operating activities, used
$1,802,000 in investing activities, and generated $489,000 in cash from
financing activities.  The total of all cash flow activities in the
nine months ended September 20, 2009 resulted in an increase in the balance of
cash of $667,000,




The
Company believes that its current working capital and the undrawn amounts
available under the Company’s Revolving Line of Credit Agreement, which was
recently amended as described in Notes 5 and 8 to the Financial Statements,
combined with the amounts available to it through the capital lease financing
arrangements with AHK are sufficient to meet its liquidity needs through
2011.




The
Company expects to become cash flow positive during 2011 due to anticipated
increases in equipment and services revenues as new monitoring contracts begin
to produce revenues, the receipt of an annual royalty payment under the Patent
License Agreement with STOP in the first quarter of 2011, its continued efforts
to control operating costs and the decrease in principal payments on long-term
capital leases which mature beginning in February 2011.




Application of
Critical Accounting Estimates




Management
uses estimates and assumptions in preparing our financial statements in
accordance with accounting principles generally accepted in the United States.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. On an on-going basis, we evaluate our estimates
and assumptions based upon historical experience and various other factors and
circumstances.  Management believes that our estimates and assumptions
are reasonable under the circumstances; however, actual results may vary from
these estimates and assumptions under different future circumstances. We do not
believe that any of the accounting estimates are critical at this time, however
we expect to continue to review our accounting estimates in order to determine
if any of these accounting estimates are critical.  For further
discussion of our significant accounting policies, refer to Note 1 – “Nature of
Business and Significant Accounting Policies” in the Notes to the Consolidated
Financial Statements in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009.




Off-Balance Sheet
Arrangements




We do not
have any off-balance sheet arrangements.




Item
3.  Quantitative and Qualitative Disclosures About Market
Risk.




Not
required for smaller reporting companies.




Page
21


Item
4.  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 principal executive officer and principal 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 on such evaluation, such officers
have concluded that, as of the Evaluation Date, the Company’s disclosure
controls and procedures are effective in bringing to their attention on a timely
basis material information relating to the Company required to be included in
the Company’s periodic filings under the Exchange Act.




The
Company’s principal executive officer and principal financial officer determined
that 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.




PART
II. OTHER INFORMATION




Item
1.  Legal Proceedings.




The
Company is not subject to any material pending or threatened
lawsuits.




Item
1A.  Risk Factors.




Not
required for smaller reporting companies.




Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds.




On July
22, 2010, the Company issued an aggregate of 2,666 shares of common stock to two
directors in partial payment of directors’ fees.  The shares had a
market value on the date of the board meeting of $2,000.  The issuance
of these shares is exempt from registration under Section 4(2) of the Securities
Act of 1933.




On August
2, 2010, the Company issued an aggregate of 2,000 shares of common stock to two
directors in partial payment of directors’ fees.  The shares had a
market value on the date of the board meeting of $2,000.  The issuance
of these shares is exempt from registration under Section 4(2) of the Securities
Act of 1933.





Item
3.  Defaults Upon Senior Securities.




None




Item
4.  Reserved.




Item
5.  Other Information.




None




Page
22




Item
6.  Exhibits.






3.1
            Amended and Restated
      Certificate of Incorporation of the Company, as amended (3)3.2
            Restated Bylaws of
      the Company (1)3.3
            Certificate
      of Designations, Preferences and Rights of Series C 8% Cumulative,
      Compounding Exchangeable Preferred Stock of the Company
  (2)4.1
            Form of Common Stock
      Certificate (1)10.1
            Second Amendment to
      Loan Agreement.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
            Certification
      of Chief Executive Officer and Chief Financial Officer 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 on Form 10-SB,
      filed on June 22, 1999 (Commission File No.
  0-26455).




(2)
            Incorporated
      by reference from the registrant’s current report on Form 8-K, filed on
      June 23, 2005 (Commission File No.
0-26455).




(3)
            Incorporated
      by reference from the registrant’s current report on Form 8-K, filed on
      December 14, 2006 (Commission File No.
0-26455).




Page
23




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934 the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




iSECUREtrac
      Corp.By:
              /s/
      Peter A. MichelPeter
      A. MichelPresident &
      CEODated:  November
      10, 2010By:
              /s/
      Lincoln ZehrLincoln
      ZehrChief Financial
      OfficerDated:  November
      10, 2010
  Page
24