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 MARCH 31, 2010





or





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


Exchange
Act of 1934





For
the transition period from _______________ to _______________





Commission
File Number 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
 ̈





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


Yes   ̈                      No
 ̈





Indicate
by check mark 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  ̈       Accelerated
filer  ̈


Non-accelerated
filer  ̈ (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  ̈           No
x





The
number of shares of issuer’s common stock outstanding as of April 22, 2010 was
10,821,392.








iSecureTrac
Corp.


Table
of Contents





PART
      IItem
              
              Page1
              Financial
      Statements
              012.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              123.
              Quantitative
      and Qualitative Disclosures About Market Risk
              204.
              Controls
      and Procedures
              20PART
      II1.
              Legal
      Proceedings
              201A.
              Risk
      Factors (Not Required for SRC)
              212.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              213.
              Defaults
      Upon Senior Securities
              214.
              Reserved
              215.
              Other
      Information
              216.
              Exhibits
              21










PART
I.  FINANCIAL INFORMATION





Item 1.  Financial
Statements





iSECUREtrac
Corp. and SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS





(Unaudited)March 31,
                  2010
                
                
                December 31,
                  2009ASSETSCurrent
      AssetsCash
      and cash equivalents
                
                $
                840,672
                
                
                $
                719,662Accounts
      receivable, net of allowance for doubtful accounts of $666,630 in 2010 and
      $666,630 in 2009
                
                
                1,684,741
                
                
                
                1,877,330Inventories
                
                
                276,600
                
                
                
                284,838Prepaid
      expenses and other
                
                
                143,357
                
                
                
                115,004Total
      current assets
                
                
                2,945,370
                
                
                
                2,996,834Leasehold
      improvements and equipment, net of accumulated depreciation of $11,722,592
      in 2010 and $11,228,684 in 2009
                
                
                4,142,211
                
                
                
                4,461,466Goodwill
                
                
                2,302,179
                
                
                
                2,302,179Other
      assets
                
                
                69,184
                
                
                
                69,889Total
      assets
                
                $
                9,458,944
                
                
                $
                9,830,368LIABILITIES
      AND STOCKHOLDERS' (DEFICIT)Current
      LiabilitiesAccounts
      payable
                
                $
                575,242
                
                
                $
                554,592Accrued
      expenses
                
                
                780,473
                
                
                
                1,177,666Revolving
      Line of Credit
                
                
                350,000
                
                
                
                350,000Equipment
      Term Loan
                
                
                898,805
                
                
                
                280,000Current
      maturities of long-term debt
                
                
                1,638,645
                
                
                
                1,674,221Deferred
      revenues
                
                
                88,107
                
                
                
                96,937Accrued
      interest payable
                
                
                1,643,959
                
                
                
                1,428,778Total
      current liabilities
                
                
                5,975,231
                
                
                
                5,562,194Long-term
      debt, less current maturities
                
                
                12,741,031
                
                
                
                13,126,786Total
      liabilities
                
                
                18,716,262
                
                
                
                18,688,980Redeemable
      convertible Series C preferred stock
                
                
                14,797,427
                
                
                
                14,453,227Commitments
      and contingencyStockholders'  deficitCommon
      stock
                
                
                10,821
                
                
                
                10,816Additional
      paid-in capital
                
                
                55,515,460
                
                
                
                55,516,568Accumulated
      deficit
                
                
                (79,581,026
                )
                
                
                (78,839,223
                )Total
      stockholders' deficit
                
                
                (24,054,745
                )
                
                
                (23,311,839
                )Total
      liabilities and stockholders' deficit
                
                $
                9,458,944
                
                
                $
                9,830,368





See Notes
to Consolidated Financial Statements (unaudited).




Page |
1





iSECUREtrac
Corp. and SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


Three
Months Ended March 31, 2010 and 2009


(Unaudited)





2010
                
                
                2009Revenues:Equipment
      leasing
                
                $
                2,440,014
                
                
                $
                2,570,883Administrative,
      field & support service revenues
                
                
                114,647
                
                
                
                131,801Equipment
      sales
                
                
                8,185
                
                
                
                54,420Other
      revenues
                
                
                125,283
                
                
                
                346,612Total
      revenues
                
                
                2,688,129
                
                
                
                3,103,716Operating
      expenses:Cost
      of revenues
                
                
                954,053
                
                
                
                1,166,130Research
      and development
                
                
                314,236
                
                
                
                318,475Sales,
      general and administrative
                
                
                1,541,828
                
                
                
                1,916,044Total
      operating expenses
                
                
                2,810,117
                
                
                
                3,400,649Operating
      loss
                
                
                (121,988
                )
                
                
                (296,933
                )Interest
      income (expense):Interest
      income
                
                
                4
                
                
                
                286Interest
      expense
                
                
                (324,372
                )
                
                
                (288,201
                )Total
      interest income (expense)
                
                
                (324,368
                )
                
                
                (287,915
                )Loss
      before provision for income taxes
                
                
                (446,356
                )
                
                
                (584,848
                )Provision
      for income taxes
                
                
                -
                
                
                
                -Net
      loss
                
                $
                (446,356
                )
                
                $
                (584,848
                )Preferred
      stock dividends and accretion
                
                
                (344,200
                )
                
                
                (321,365
                )Net
      loss available to common stockholders
                
                $
                (790,556
                )
                
                $
                (906,213
                )Basic
      and diluted loss per common share
                
                $
                (0.07
                )
                
                $
                (0.08
                )Weighted
      average shares of common stock outstanding
                
                
                10,817,225
                
                
                
                10,800,042





See Notes
to Consolidated Financial Statements (unaudited).




Page |
2





iSECUREtrac Corp. AND SUBSIDIARY


STATEMENT
OF STOCKHOLDERS' DEFICIT


For
the Three Months Ended March 31, 2010


(Unaudited)




AdditionalCommon Stock
                    
                    
                    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
                    
                    
                    5,000
                    
                    
                    
                    5
                    
                    
                    
                    1,995
                    
                    
                    
                    -
                    
                    
                    
                    2,000Stock
      based compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    45,650
                    
                    
                    
                    -
                    
                    
                    
                    45,650Series
      C preferred stock dividends
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (295,447
                    )
                    
                    
                    (295,447
                    )Accretion
      to redemption value of preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (48,753
                    )
                    
                    
                    -
                    
                    
                    
                    (48,753
                    )Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (446,356
                    )
                    
                    
                    (446,356
                    )Balance,
      March 31, 2010
                    
                    
                    10,821,100
                    
                    
                    $
                    10,821
                    
                    
                    $
                    55,515,460
                    
                    
                    $
                    (79,581,026
                    )
                    
                    $
                    (24,054,745
                    )





See Notes
to Consolidated Financial Statements (unaudited).




Page |
3





iSECUREtrac CORP. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Three
Months Ended March 31, 2010 and 2009


(Unaudited)





2010
                
                
                2009Cash
      Flows From Operating ActivitiesNet
      loss
                
                $
                (446,356
                )
                
                $
                (584,848
                )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                
                
                493,909
                
                
                
                503,774Stock
      based compensation
                
                
                47,650
                
                
                
                104,971Provision
      for Doubtful Accounts
                
                
                -
                
                
                
                90,797Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                192,589
                
                
                
                (42,053
                )Inventories
                
                
                8,238
                
                
                
                45,261Prepaid
      expenses and other assets
                
                
                (27,648
                )
                
                
                (14,484
                )Accounts
      payable
                
                
                (31,819
                )
                
                
                148,451Accrued
      expenses
                
                
                (397,193
                )
                
                
                339,913Deferred
      revenues
                
                
                (8,830
                )
                
                
                (125,977
                )Accrued
      interest payable
                
                
                215,181
                
                
                
                153,557Net
      cash provided by operating activities
                
                
                45,721
                
                
                
                619,362Cash
      Flows From Investing ActivitiesPurchases
      of leasehold improvements and equipment
                
                
                (122,185
                )
                
                
                (689,655
                )Net
      cash used in investing activities
                
                
                (122,185
                )
                
                
                (689,655
                )Cash
      Flows From Financing ActivitiesPrincipal
      proceeds from long-term debt
                
                
                -
                
                
                
                1,100,000Proceeds
      from revolving line of credit
                
                
                -
                
                
                
                250,000Proceeds
      from equipment term loan
                
                
                618,805
                
                
                
                -Principal
      payments on long-term debt
                
                
                (421,331
                )
                
                
                (490,624
                )Net
      cash provided by financing activities
                
                
                197,474
                
                
                
                859,376Increase
      in cash
                
                
                121,010
                
                
                
                789,083Cash
      at beginning of period
                
                
                719,662
                
                
                
                423,361Cash
      at end of period
                
                $
                840,672
                
                
                $
                1,212,444Supplemental
      Disclosure of Cash Payments forInterest
                
                
                109,191
                
                
                
                134,644Supplemental
      Disclosure of Noncash TransactionsPurchase
      of leasehold improvements and equipment included in Accounts
      Payable
                
                
                52,469
                
                
                
                605,222





See Notes
to Consolidated Financial Statements (unaudited).




Page |
4





iSECUREtrac
CORP. AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Three
months ended March 31, 2010 and 2009


(Unaudited)




Note
1.  General




The
unaudited interim condensed consolidated financial statements as of March 31,
2010 and for the three month periods ended March 31, 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
months ended March 31, 2010 and March 31, 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 ended March 31, 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 with Crestpark
(Note 5), combined with the expected amounts available through lease financing
for our monitoring equipment (Note 6) are sufficient to meet its liquidity needs
through 2010.




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 months ended March 31, 2010, the Company granted options to purchase a
total of 3,000 shares of common stock to one employee pursuant to the 2006
Plan.  During the three months ended March 31, 2010, 70,646 options
issued under the 2006 Plan were forfeited, 150 options issued under the 2001
Plan were forfeited and 15,000 options issued under employment agreements
outside the 2006 Plan and the 2001 Plan were forfeited.  No options
were exercised during the three months ended March 31, 2010.  The
following table shows stock option activity during the three month period ended
March 31, 2010:




Page |
5




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
                      
                      
                      3,000
                      
                      
                      
                      0.70Exercised
                      
                      
                      -Forfeited
                      
                      
                      (85,796
                      )
                      
                      
                      0.82Outstanding
      at March 31, 2010
                      
                      
                      2,971,524
                      
                      
                      $
                      1.34
                      
                      
                      
                      6.26
                      
                      
                      $
                      213,448Exercisable
      at March 31, 2010
                      
                      
                      2,319,316
                      
                      
                      $
                      1.60
                      
                      
                      
                      5.38
                      
                      
                      $
                      109,073




At March
31, 2010, the Company had 2,971,524 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 period presented.




During
the three month period ended March 31, 2010, 1,547,519 warrants expired and no
warrants were granted 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:




Three Months Ended
                          March 31, 2010
                        
                        
                        Year Ended
                          December 31, 2009Risk
      free interest rate
                        
                        
                        3.62%
                        
                        
                        
                        3.60%Expected
      volatility factor
                        
                        
                        81.58%
                        
                        
                        
                        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 $45,650 and $102,970 for the three
months ended March 31, 2010 and March 31, 2009, respectively, related to
stock-based compensation awards.




As of
March 31, 2010, there was approximately $177,579 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
                  
                  $
                  99,9342011
                  
                  
                  77,4662012
                  
                  
                  179Total
                  
                  $
                  177,579




Note
3.  Leasehold Improvements and Equipment




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




March 31, 2010
                  
                  
                  December 31, 2009Cost
                  
                  
                  Accumulated
                    Depreciation
                  
                  
                  Net Book
                    Value
                  
                  
                  Cost
                  
                  
                  Accumulated
                    Depreciation
                  
                  
                  Net Book
                    ValueEquipment
                  
                  $
                  1,062,481
                  
                  
                  $
                  755,001
                  
                  
                  $
                  307,480
                  
                  
                  $
                  1,055,794
                  
                  
                  $
                  719,639
                  
                  
                  $
                  336,155Leasehold
      improvements
                  
                  
                  261,518
                  
                  
                  
                  191,636
                  
                  
                  
                  69,882
                  
                  
                  
                  249,081
                  
                  
                  
                  176,522
                  
                  
                  
                  72,559Components
      held for future monitoring equipment builds
                  
                  
                  210,000
                  
                  
                  
                  -
                  
                  
                  
                  210,000
                  
                  
                  
                  210,000
                  
                  
                  
                  -
                  
                  
                  
                  210,000Capitalization
      of software development costs
                  
                  
                  348,770
                  
                  
                  
                  2,778
                  
                  
                  
                  345,992
                  
                  
                  
                  259,977
                  
                  
                  
                  -
                  
                  
                  
                  259,977Monitoring
      equipment
                  
                  
                  13,982,034
                  
                  
                  
                  10,773,177
                  
                  
                  
                  3,208,857
                  
                  
                  
                  13,915,298
                  
                  
                  
                  10,332,523
                  
                  
                  
                  3,582,775Total
      leasehold improvements and equipment
                  
                  $
                  15,864,803
                  
                  
                  $
                  11,722,592
                  
                  
                  $
                  4,142,211
                  
                  
                  $
                  15,690,150
                  
                  
                  $
                  11,228,684
                  
                  
                  $
                  4,461,466




Note
4.  Goodwill and Intangible Assets Subject to
Amortization




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
quarter ended March 31, 2010 that required a reevaluation of this
conclusion.




Page |
7





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
is for $750,000 for working capital via a Revolving Credit Commitment and the
second note is for $1,750,000 for equipment financing via an Equipment Term
Loan.  The Loan Agreement, when executed in 2008 had a maturity date
of July 1, 2010.  On November 4, 2009, the parties executed an
amendment to the Loan Agreement extending the maturity date to January 1,
2012.  All other terms remain unchanged.




Accrued
interest on the promissory notes at March 31, 2010 and 2009 was $25,883 and $0,
respectively.




Revolving
Credit Commitment - The proceeds of the Revolving Credit Commitment of
$750,000 are to be used for working capital needs and are anticipated to be
repaid from cash flow generated by the operations of the Company.  The
Revolving Credit Commitment has a term ending on January 1, 2012, is unsecured
and bears interest at a fixed noncompounded rate of 12% per
annum.  The Company is also required to pay Crestpark an unused fee of
0.25% per annum on the average daily unused amount of the Revolving Credit
Commitment.  Interest expense, including the unused commitment fee, to
Crestpark for the three months ended March 31, 2010 and 2009 was $10,603 and
$17,836, respectively.  As of March 31, 2010, the Company had $350,000
outstanding under the Revolving Credit Commitment and $400,000
available.  There have been no additional borrowings or repayments
under the Revolving Credit Commitment since December 31,
2009.  Amounts borrowed and repaid remain available under the
Revolving Credit Commitment.




Equipment
Term Loan - The proceeds of the $1,750,000 Equipment Term Loan are to be
used to purchase GPS-based offender tracking and monitoring equipment that is
leased or sold by the Company to its clients.  It is anticipated that
borrowings under the Equipment Term Loan will be repaid from permanent equipment
financing secured by the Company from time to time.  At Crestpark’s
discretion, any borrowings under the Equipment Term Loan that remain outstanding
more than 30 days can be converted into separate 36 Month Notes, which are notes
payable over 36 month terms.  The Equipment Term Loan has a term
ending January 1, 2012, bears interest at a fixed rate of 12% per annum and is
secured by the monitoring equipment purchased with the proceeds of the Equipment
Term Loan.  The Company is also required to pay Crestpark an unused
fee of 0.25% per annum on the average daily unused amount of the Equipment Term
Loan.  Interest expense, including the unused commitment fee, to
Crestpark for the three months ended March 31, 2010 and 2009 was $15,280 and
$2,071 respectively.  As of March 31, 2010, the Company had $898,805
outstanding under the Equipment Term Loan and $718,788 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.




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




Page |
8




Note
6.  Long-Term Debt




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




March 31,
                        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 that date
                      
                      $
                      6,455,250
                      
                      
                      $
                      6,455,250Floating
      Tranche ~ with an interest rate of 2% over prime (5.25% at March 31,
      2010)
                      
                      
                      5,422,225
                      
                      
                      
                      5,422,225Crestpark
      LP, Inc Total
                      
                      $
                      11,877,475
                      
                      
                      $
                      11,877,475AHK
      Leasing, LLCTwelve
      separate capital leases with related parties that are carrying interest
      rates at 10.00% to 12.50% and maturing September 2010 to December
      2012
                      
                      
                      2,502,201
                      
                      
                      
                      2,923,532Total
      long term debt
                      
                      $
                      14,379,676
                      
                      
                      $
                      14,801,007Less
      current maturities
                      
                      
                      (1,638,645
                      )
                      
                      
                      (1,674,221
                      )Total
      long term debt less current maturities
                      
                      $
                      12,741,031
                      
                      
                      $
                      13,126,786





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 $1,617,763 and $1,428,778 at March 31,
2010 and December 31, 2009, respectively.





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 10.00% to 12.50% per annum
and mature between September 2010 and December 2012.   There was
no accrued interest payable to AHK at March 31, 2010.


Page |
9




Total
interest expense, including unused commitment fees, for the three months ended
March 31, 2010 and March 31, 2009 is as follows:




Three Months
                  Ended
                  March 31, 2010
                
                
                Three Months
                  Ended
                  March 31, 2009AHK
      interest on long term debt
                
                
                77,218
                
                
                
                77,145Crestpark
      LP interest on long term debt
                
                
                216,410
                
                
                
                184,133Crestpark
      LP revolving credit agreements
                
                
                25,883
                
                
                
                19,907Other
                
                
                4,861
                
                
                
                7,016Total
      interest expense
                
                
                324,372
                
                
                
                288,201




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 March 31, 2010, the Company had accrued Series C
Preferred Stock dividends totaling $4,877,002 and accretion to redemption value
of the Series C Preferred Stock totaling $901,345.  Of these amounts,
$295,447 and $48,753, respectively, were accrued during the three months ended
March 31, 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%.




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.




Page |
10




Note
8.  Subsequent Events.




The
Company evaluates all subsequent events and transactions for potential
recognition or disclosure in our consolidated financial
statements.  There are no matters which require
disclosure.




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 in the
process of 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 in the process of evaluating the impact of
adopting ASU No. 2009-14.




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 $18,825,000 at March 31, 2010 using
a discount rate 5%.


Page |
11




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 2009 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 Condensed 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/per day basis.




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”).




Results
of Operations





Highlights
of Operations for the three months ended March 31, 2010





New
Contracts and Contract Extensions with Existing Customers


Over the
past six months the Company has negotiated new multiyear contracts or the
multiyear extension of an existing contract with its top 3 customers based on
2009 revenue.   While the contracts and the extension do not
represent new revenue as they were executed with existing customers, they do
improve the financial stability of the Company by having these customers under
contract through 2012 to 2013.  In addition, it is anticipated that
these agencies will increase their use of the Company’s services over
time.





Decline
in Revenue


The
decline in equipment leasing revenue is not the result of lost contracts or
fewer units deployed.  The number of units leased during the three
months ended March 31, 2010 increased approximately 5% over the three months
ended March 31, 2009.  However the impact of the extended economic
downturn has resulted in a decline in the daily lease rate.  This
impact in combination with the lower daily lease rates of the multiyear
contracts outlined above has resulted in an overall decline in daily lease rates
of approximately 10%.


Page |
12





Decline
in Selling General & Administrative Expenses (“SG&A”)


As a
continuation of the cost reductions and cost control strategies implemented in
2008, the Company continues to be deliberate about managing and controlling
expenditures.  SG&A expenses for the three months ended March 31,
2010 declined approximately 19.6% over the same period a year ago.





Furthermore,
including the three months ended March 31, 2010, SG&A expenses have declined
five consecutive quarters.





System
Infrastructure and Service Delivery


We are
committed to delivering products and services to customers in the most efficient
and profitable means possible, for both iSECUREtrac and our
customers.  The ability of the Company to do so with existing products
and services, but also new products and services as technology evolves is
critical to ensure that the Company continues to attract new customers, retain
existing customers and become profitable.





To that
end, the Company continues to invest in its core proprietary infrastructure –
tracNet24 as well as the development of an additional service delivery platform
via Salesforce.com (“SFDC”).  In addition to continued improvements in
the speed, reliability and capacity of tracNet24, during the three months ended
March 31, 2010, the Company successfully moved its Solution Center to the SFDC
platform and rolled out a new SFDC-Inventory Management module to certain
customers.





The
Company will continue to invest in and leverage both its core proprietary
infrastructure and the service delivery capabilities of SFDC through 2010 and
likely into 2011.





General
Outlook for 2010


As
highlighted in the Company’s 2009 Annual Report on Form 10-K we expected the
ongoing difficult economic situation to cause many of the 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 in 2010.





However,
management continues to believe that the value proposition of the Company’s
products and services remains compelling.  The costs of incarceration
are overwhelming to the public agencies; our systems and services provide a
cost-effective supervision option for reintegrating offenders back into their
communities.





Management
has recently 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.  We believe that over the next three to six months, most
particularly after July 1st , which
is the new fiscal year for state and county agencies, we will begin to see
agencies award new programs and support growth in existing
programs.  Accordingly, we anticipate revenue will begin to grow again
in the third quarter of this year and cash flow positive operations to
follow.





Summary
of Financial Information





The
following table provides a comparison of selected financial highlights for the
three months ended March 31, 2010 and 2009:


Page |
13





CONDENSED CONSOLIDATED FINANCIAL HIGHLIGHTS


Three
Months Ended March 31, 2010 and 2009


(Rounded
to nearest thousand)





Fav / (Unfav)2010
                                      
                                      
                                      2009
                                      
                                      
                                      ChangeRevenues:Equipment
      revenue
                                      
                                      $
                                      2,448,000
                                      
                                      
                                      $
                                      2,625,000
                                      
                                      
                                      $
                                      (177,000
                                      )Services
      revenue
                                      
                                      
                                      115,000
                                      
                                      
                                      
                                      132,000
                                      
                                      
                                      
                                      (17,000
                                      )Royalty
      revenue
                                      
                                      
                                      125,000
                                      
                                      
                                      
                                      347,000
                                      
                                      
                                      
                                      (222,000
                                      )Total
      revenues
                                      
                                      
                                      2,688,000
                                      
                                      
                                      
                                      3,104,000
                                      
                                      
                                      
                                      (416,000
                                      )Costs of revenue
                                      
                                      
                                      954,000
                                      
                                      
                                      
                                      1,166,000
                                      
                                      
                                      
                                      212,000Gross profit margin
                                      
                                      
                                      1,734,000
                                      
                                      
                                      
                                      1,938,000
                                      
                                      
                                      
                                      (204,000
                                      )Gross
      profit margin %
                                      
                                      
                                      64.5
                                      %
                                      
                                      
                                      62.4
                                      %Research
      and development expenses (R&D)
                                      
                                      
                                      314,000
                                      
                                      
                                      
                                      319,000
                                      
                                      
                                      
                                      5,000Sales, general and administrative expenses
      (SG&A)
                                      
                                      
                                      1,542,000
                                      
                                      
                                      
                                      1,916,000
                                      
                                      
                                      
                                      374,000Total R&D and SG&A
                                      
                                      
                                      1,856,000
                                      
                                      
                                      
                                      2,235,000
                                      
                                      
                                      
                                      379,000Operating loss
                                      
                                      
                                      (122,000
                                      )
                                      
                                      
                                      (297,000
                                      )
                                      
                                      
                                      175,000Interest expense, net
                                      
                                      
                                      (324,000
                                      )
                                      
                                      
                                      (288,000
                                      )
                                      
                                      
                                      (36,000
                                      )Net loss
                                      
                                      $
                                      (446,000
                                      )
                                      
                                      $
                                      (585,000
                                      )
                                      
                                      $
                                      139,000Preferred stock dividends and
      accretion
                                      
                                      
                                      (344,000
                                      )
                                      
                                      
                                      (321,000
                                      )
                                      
                                      
                                      (23,000
                                      )Net loss available to common
      stockholders
                                      
                                      $
                                      (790,000
                                      )
                                      
                                      $
                                      (906,000
                                      )
                                      
                                      $
                                      116,000


Page |
14


Quarterly
Highlights




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





CONDENSED
CONSOLIDATED QUARTERLY  FINANCIAL HIGHLIGHTS


Rolling
5 Quarter Trend


(In
Thousands)


ThreeMonthsEnded:Mar312009
                        
                        
                        Jun302009
                        
                        
                        Sept302009
                        
                        
                        Dec312009
                        
                        
                        Mar312010Revenue:Equipment
      leasing
                        
                        $
                        2,625
                        
                        
                        $
                        2,974
                        
                        
                        $
                        2,924
                        
                        
                        $
                        2,601
                        
                        
                        $
                        2,448Service
      Revenue
                        
                        
                        132
                        
                        
                        
                        116
                        
                        
                        
                        107
                        
                        
                        
                        106
                        
                        
                        
                        115Royalty
      Revenue
                        
                        
                        347
                        
                        
                        
                        102
                        
                        
                        
                        180
                        
                        
                        
                        125
                        
                        
                        
                        125Total
      Revenue
                        
                        
                        3,104
                        
                        
                        
                        3,192
                        
                        
                        
                        3,211
                        
                        
                        
                        2,832
                        
                        
                        
                        2,688Costs
      of Revenue
                        
                        
                        1,166
                        
                        
                        
                        1,173
                        
                        
                        
                        1,172
                        
                        
                        
                        1,014
                        
                        
                        
                        954Gross
      profit margin
                        
                        
                        1,938
                        
                        
                        
                        2,019
                        
                        
                        
                        2,039
                        
                        
                        
                        1,818
                        
                        
                        
                        1,734Gross
      profit margin percentage*
                        
                        
                        62.4
                        %
                        
                        
                        63.3
                        %
                        
                        
                        63.5
                        %
                        
                        
                        64.2
                        %
                        
                        
                        64.5
                        %Research
      & Development (R&D)
                        
                        
                        319
                        
                        
                        
                        251
                        
                        
                        
                        316
                        
                        
                        
                        377
                        
                        
                        
                        314Selling
      General & Administrative (SG&A)
                        
                        
                        1,916
                        
                        
                        
                        1,862
                        
                        
                        
                        1,796
                        
                        
                        
                        1,688
                        
                        
                        
                        1,542Subtotal
      R&D and SG&A
                        
                        
                        2,235
                        
                        
                        
                        2,113
                        
                        
                        
                        2,112
                        
                        
                        
                        2,065
                        
                        
                        
                        1,856Operating
      Loss
                        
                        $
                        (297
                        )
                        
                        $
                        (94
                        )
                        
                        $
                        (73
                        )
                        
                        $
                        (247
                        )
                        
                        $
                        (122
                        )





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





Page |
15




Over the
past five quarters Company generated net cash from operations, adjusted as
described below, to cover the principal payments on long-term debt as
follows:





CONDENSED
CONSOLIDATED QUARTERLY  FINANCIAL HIGHLIGHTS


Rolling
5 Quarter Trend


(In
Thousands)


ThreeMonthsEndedCash Flows From Operating Activities
                        
                        Mar31
                          2009
                        
                        
                        Jun30
                          2009
                        
                        
                        Sept30
                          2009
                        
                        
                        Dec312009
                        
                        
                        Mar31
                          2010Net
      loss
                        
                        $
                        (585
                        )
                        
                        $
                        (400
                        )
                        
                        $
                        (378
                        )
                        
                        $
                        (560
                        )
                        
                        $
                        (446
                        )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization
                        
                        
                        504
                        
                        
                        
                        593
                        
                        
                        
                        556
                        
                        
                        
                        470
                        
                        
                        
                        494Stock
      based compensation
                        
                        
                        105
                        
                        
                        
                        103
                        
                        
                        
                        81
                        
                        
                        
                        50
                        
                        
                        
                        48Provision
      for Doubtful Accounts
                        
                        
                        91
                        
                        
                        
                        70
                        
                        
                        
                        33
                        
                        
                        
                        10
                        
                        
                        
                        -Changes
      in operating assets and liabilities:
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Accounts
      receivable
                        
                        
                        (42
                        )
                        
                        
                        298
                        
                        
                        
                        71
                        
                        
                        
                        37
                        
                        
                        
                        192Inventories
                        
                        
                        45
                        
                        
                        
                        (108
                        )
                        
                        
                        (31
                        )
                        
                        
                        3
                        
                        
                        
                        8Prepaid
      expenses and other assets
                        
                        
                        (14
                        )
                        
                        
                        (33
                        )
                        
                        
                        13
                        
                        
                        
                        3
                        
                        
                        
                        (27
                        )Accounts
      payable
                        
                        
                        148
                        
                        
                        
                        (295
                        )
                        
                        
                        190
                        
                        
                        
                        108
                        
                        
                        
                        (32
                        )Accrued
      expenses
                        
                        
                        340
                        
                        
                        
                        274
                        
                        
                        
                        47
                        
                        
                        
                        (8
                        )
                        
                        
                        (397
                        )Deferred
      revenue
                        
                        
                        (126
                        )
                        
                        
                        (31
                        )
                        
                        
                        (11
                        )
                        
                        
                        (35
                        )
                        
                        
                        (9
                        )Accrued
      interest payable
                        
                        
                        153
                        
                        
                        
                        158
                        
                        
                        
                        161
                        
                        
                        
                        181
                        
                        
                        
                        215Net
      cash provided by operating activities
                        
                        
                        619
                        
                        
                        
                        629
                        
                        
                        
                        732
                        
                        
                        
                        259
                        
                        
                        
                        46Adjustment
      for payment of royalty expenses for comparative purposes
    (1)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        508Adjusted
      Net cash provided by operating activities
                        
                        
                        619
                        
                        
                        
                        629
                        
                        
                        
                        732
                        
                        
                        
                        259
                        
                        
                        
                        554Principal
      payments on long-term debt
                        
                        
                        (491
                        )
                        
                        
                        (459
                        )
                        
                        
                        (344
                        )
                        
                        
                        (408
                        )
                        
                        
                        (421
                        )Adjusted
      Net cash provided by operating activities less principal payments on
      long-term debt
                        
                        $
                        128
                        
                        
                        $
                        170
                        
                        
                        $
                        388
                        
                        
                        $
                        (149
                        )
                        
                        $
                        133





(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 ending 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 onNet 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 vast 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 Statements of Cash
Flows) and subtracts the principal payments on long-term debt.


Page |
16





FOR
THE THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 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 months
ended March 31, 2010 the Company had equipment revenue of $2,448,000 compared
with $2,625,000 for the same period in 2009 which represents a decrease of
7%.





The
decline in equipment leasing revenue is not the result of lost contracts or
fewer units deployed.  The number of units leased during the three
months ended March 31, 2010 increased approximately 5% over the three months
ended March 31, 2009 offset by an overall decline in daily lease rates of
approximately 10%.





Service
Revenue


Service
revenue consists of daily charges for Monitoring Center Intervention, in
connection with the leasing of GPS equipment outlined
above.   For the three months ended March 31, 2010 the Company
reported service revenue of $115,000 compared to $132,000 for the same periods
in 2009 which represents a decrease of 12.9%. The decline in service revenue is
the result of a decline in the average daily price per unit subject to
Monitoring Center Intervention and a decline in the number of units utilizing
Monitoring Center Intervention.





Looking
forward in terms of management’s expectations for equipment and service revenue,
management does not expect to see significant further declines in the daily
lease rates.  We further expect agencies to begin approving new
programs and supporting the growth of existing programs such that the Company
expects to begin to see revenue begin growing again by the three months ending
September 30, 2010.





Royalty
Revenue


The
Company earns royalty revenues under a Patent License Agreement with Satellite
Tracking of People, L.L.C. (STOP) which grants STOP a license to utilize
specific technology that is patented by the Company.  The Company
earns a royalty equal to 2.5% of STOP’s revenue utilizing this
technology.





Royalty
revenue decreased $222,000 from $347,000 for the three months ended March 31,
2009 to $125,000 for the three months ended March 31, 2010.  Revenue
recognized under the STOP Patent License Agreement is based on estimates of
STOP’s revenue and fluctuates accordingly.  The maximum amount of
royalties that the Company can earn under the STOP Patent License Agreement is
$1,500,000.  Through March 31, 2010 the Company had earned $1,375,000,
leaving $125,000 which is expected to be recognized in the second quarter of
2010.





Cost
of Revenues





Cost of
revenues represents all direct costs related to delivery of proprietary and
third-party monitoring equipment including depreciation of equipment, 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.





Cost
of revenues for the three months ended March 31, 2010 were $954,000 compared to
$1,166,000 reported during the three months ended March 31, 2009.  The
decline in cost of revenues for the three months March 31, 2010 is mainly
attributable to the Company having no royalty expenses in the three months ended
March 31, 2010.  Royalty expense for the three months ended March 31,
2009 was $182,000.  The Company incurred no royalty expenses in the
three months ended March 31, 2010 as a result of the confidential settlement
agreement entered into in March of 2010.   The balance of the
decline in cost of revenues from March 31, 2010 to March 31, 2009 is
attributable to decreases in repairs, supplies and freight slightly offset by
increases in amortization of equipment costs and third party monitoring costs
related to increased units deployed.


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17





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, database
managers 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 months ended March 31, 2010 were $314,000 in comparison
to $319,000 reported for the three months ended March 31, 2009.





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, once technical feasibility was achieved.   For the
three months ended March 31, 2010 and 2009, the Company capitalized $26,000 and
$0, respectively.  During the three months ended March 31, 2010,
applications with a capitalized value of $100,000 were placed into
service.




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 March 31, 2010 SG&A expenses decreased $374,000
from $1,916,000 reported in 2009 to $1,542,000 reported in
2010.   Significant increases and decreases of SG&A expense
in the comparable periods are highlighted below:




o
            Personnel
      related expenses including salaries, bonuses, benefits, recruiting, and
      travel decreased approximately $247,000 as a result of reduced headcount
      and lower incentive compensation




o
            Bad
      debt expense decreased $94,000




o
            Stock
      option expense decreased $57,000




o
            Other
      SG&A expenses (including office and computer supplies, corporate
      insurance, etc) increased $24,000.




Management
anticipates that for the short-term SG&A expenses will remain
flat.  As the Company experiences revenue growth there may be a
relative increase in SG&A expenses commensurate with the
growth.


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18




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 months ended March 31, 2010, the Company reported net interest expense of
$324,000 in comparison to $288,000 reported for the three months ended March 31,
2009. The increase is attributable to the increase in equipment purchased under
capital leases as well as the additional borrowings from Crestpark LP,
Inc.





As a
result of the additional borrowing from Crestpark LP, Inc. 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 March 31, 2010.





Net
Loss


The
Company’s net loss for the three months ending March 31, 2010 and 2009 was
$446,000 and $585,000, respectively for the reasons described
above.





Preferred
Stock Dividends and Accretion




For the
three months ended March 31, 2010 preferred stock dividends and accretion
totaled $344,000 as compared to $321,000 for the three months ended March 31,
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.




Liquidity
and Capital Resources




For the
three months ended March 31, 2010, the Company generated $97,000 of cash from
operating activities. Investing activities used $174,000 of cash and financing
activities generated cash of $198,000.   The total of all cash
flow activities resulted in an increase in the balance of cash for the three
months ended March 31, 2010 of $121,000.




For the
same period of 2009, the Company generated $619,000 of cash from operating
activities. Investing activities used $689,000 of cash and financing activities
generated cash of $859,000.   The total of all cash flow
activities resulted in an increase in the balance of cash for the three months
ended March 31, 2009 of $789,000.




The
Company’s principal uses of cash are the payment of operating expenses and
payments on long-term leases, including interest.  In general, the
Company expects to meet these liquidity needs by generating positive cash flow
from operating activities.   The Company utilizes long-term
leases through AHK Leasing, LLC (“AHK”) or the Equipment Term Loan with
Crestpark (Notes 5 and 6) to finance the acquisition of monitoring
equipment.




The
Company believes that its current working capital and the undrawn amounts
available under the Company’s Revolving Line of Credit Agreement with Crestpark
(Note 5), combined with the expected amounts available through lease financing
for our monitoring equipment described above are sufficient to meet its
liquidity needs through 2010.




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.


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19




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.




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.


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20




Item
1A.  Risk Factors.




Not
required for smaller reporting companies.




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




On March
1, 2010, the Company issued an aggregate of 5,000 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




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)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).


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21





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:  May
      5, 2010By:
                          /s/Lincoln
      ZehrLincoln ZehrChief Financial OfficerDated:  May
      5,
2010


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