UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549-1004





Form
10-Q





(Mark
One)


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


Act
of 1934





FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009





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 November 3, 2009 was
10,816,392.





PART
I.  FINANCIAL INFORMATION





Item 1.  Financial
Statements





iSECUREtrac
Corp. and SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS





(Unaudited)September 30, 2009
                                  
                                  
                                  December 31, 2008ASSETSCurrent
      AssetsCash
      and cash equivalents
                                  
                                  $
                                  1,090,341
                                  
                                  
                                  $
                                  423,361Accounts
      receivable, net of allowance for doubtful accounts of $656,630 in 2009 and
      $462,553 in 2008
                                  
                                  
                                  1,924,761
                                  
                                  
                                  
                                  2,445,505Inventories
                                  
                                  
                                  288,300
                                  
                                  
                                  
                                  193,820Prepaid
      expenses and other
                                  
                                  
                                  117,802
                                  
                                  
                                  
                                  84,224Total
      current assets
                                  
                                  
                                  3,421,204
                                  
                                  
                                  
                                  3,146,910Leasehold
      improvements and equipment, net of accumulated depreciation of $10,764,157
      in 2009 and $9,125,376 in 2008
                                  
                                  
                                  4,427,515
                                  
                                  
                                  
                                  4,229,319Intangibles,
      net of accumulated amortization of $906,530 in 2009 and $892,128 in
      2008
                                  
                                  
                                  4,993
                                  
                                  
                                  
                                  19,394Goodwill
                                  
                                  
                                  2,302,179
                                  
                                  
                                  
                                  2,302,179Other
      assets
                                  
                                  
                                  77,690
                                  
                                  
                                  
                                  83,386Total
      assets
                                  
                                  $
                                  10,233,581
                                  
                                  
                                  $
                                  9,781,188LIABILITIES
      AND STOCKHOLDERS' (DEFICIT)Current
      LiabilitiesAccounts
      payable
                                  
                                  $
                                  475,866
                                  
                                  
                                  $
                                  403,399Accrued
      expenses
                                  
                                  
                                  1,185,447
                                  
                                  
                                  
                                  524,339Revolving
      Line of Credit
                                  
                                  
                                  550,000
                                  
                                  
                                  
                                  500,000Equipment
      Term Loan
                                  
                                  
                                  82,407
                                  
                                  
                                  
                                  50,000Current
      maturities of long-term debt
                                  
                                  
                                  1,589,745
                                  
                                  
                                  
                                  1,222,508Deferred
      revenues & gain on sale-leaseback transactions
                                  
                                  
                                  131,578
                                  
                                  
                                  
                                  299,548Accrued
      interest payable
                                  
                                  
                                  1,247,466
                                  
                                  
                                  
                                  776,011Total
      current liabilities
                                  
                                  
                                  5,262,509
                                  
                                  
                                  
                                  3,775,805Long-term
      debt, less current maturities
                                  
                                  
                                  13,319,296
                                  
                                  
                                  
                                  13,280,368Redeemable
      convertible Series C preferred stock
                                  
                                  
                                  14,102,700
                                  
                                  
                                  
                                  13,106,407Commitments
      and contingencyStockholders'  (deficit)Common
      stock
                                  
                                  
                                  10,811
                                  
                                  
                                  
                                  10,799Additional
      paid-in capital
                                  
                                  
                                  55,515,208
                                  
                                  
                                  
                                  55,369,880Accumulated
      deficit
                                  
                                  
                                  (77,976,943
                                  )
                                  
                                  
                                  (75,762,071
                                  )Total
      stockholders' (deficit)
                                  
                                  
                                  (22,450,924
                                  )
                                  
                                  
                                  (20,381,392
                                  )Total
      liabilities and stockholders' (deficit)
                                  
                                  $
                                  10,233,581
                                  
                                  
                                  $
                                  9,781,188





See Notes
to Consolidated Financial Statements (unaudited).


Page |
1





iSECUREtrac
Corp. and SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)




Three
      Months Ended
                            
                            
                            Nine
      Months Ended2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Revenues:Equipment
      revenue
                            
                            $
                            2,924,535
                            
                            
                            $
                            2,098,798
                            
                            
                            $
                            8,522,876
                            
                            
                            $
                            6,563,284Services
      revenue
                            
                            
                            106,786
                            
                            
                            
                            71,183
                            
                            
                            
                            354,652
                            
                            
                            
                            232,336Royalty
      revenue
                            
                            
                            179,869
                            
                            
                            
                            8,163
                            
                            
                            
                            628,933
                            
                            
                            
                            240,515Total
      revenues
                            
                            
                            3,211,190
                            
                            
                            
                            2,178,144
                            
                            
                            
                            9,506,461
                            
                            
                            
                            7,036,135Operating
      expenses:Cost
      of revenues
                            
                            
                            1,172,145
                            
                            
                            
                            843,715
                            
                            
                            
                            3,510,893
                            
                            
                            
                            2,879,730Research
      and development
                            
                            
                            315,801
                            
                            
                            
                            275,513
                            
                            
                            
                            885,239
                            
                            
                            
                            944,071Sales,
      general and administrative
                            
                            
                            1,796,365
                            
                            
                            
                            1,817,153
                            
                            
                            
                            5,574,317
                            
                            
                            
                            6,115,488Total
      operating expenses
                            
                            
                            3,284,311
                            
                            
                            
                            2,936,381
                            
                            
                            
                            9,970,449
                            
                            
                            
                            9,939,289Operating
      loss
                            
                            
                            (73,121
                            )
                            
                            
                            (758,237
                            )
                            
                            
                            (463,988
                            )
                            
                            
                            (2,903,154
                            )Other
      income (expense):Interest
      income
                            
                            
                            36
                            
                            
                            
                            2,148
                            
                            
                            
                            636
                            
                            
                            
                            26,215Interest
      expense
                            
                            
                            (304,987
                            )
                            
                            
                            (289,824
                            )
                            
                            
                            (899,343
                            )
                            
                            
                            (823,196
                            )Total
      other income (expense)
                            
                            
                            (304,951
                            )
                            
                            
                            (287,676
                            )
                            
                            
                            (898,707
                            )
                            
                            
                            (796,981
                            )Loss
      before provision for income taxes
                            
                            
                            (378,072
                            )
                            
                            
                            (1,045,913
                            )
                            
                            
                            (1,362,695
                            )
                            
                            
                            (3,700,135
                            )Provision
      for income taxes
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0Net
      loss
                            
                            $
                            (378,072
                            )
                            
                            $
                            (1,045,913
                            )
                            
                            $
                            (1,362,695
                            )
                            
                            $
                            (3,700,135
                            )Preferred
      stock dividends and accretion
                            
                            
                            (350,289
                            )
                            
                            
                            (328,771
                            )
                            
                            
                            (996,295
                            )
                            
                            
                            (939,151
                            )Net
      loss available to common stockholders
                            
                            $
                            (728,361
                            )
                            
                            $
                            (1,374,684
                            )
                            
                            $
                            (2,358,990
                            )
                            
                            $
                            (4,639,286
                            )Basic
      and diluted loss per common share
                            
                            $
                            (0.07
                            )
                            
                            $
                            (0.13
                            )
                            
                            $
                            (0.22
                            )
                            
                            $
                            (0.43
                            )Weighted
      average shares of common stock outstanding
                            
                            
                            10,809,812
                            
                            
                            
                            10,789,701
                            
                            
                            
                            10,806,114
                            
                            
                            
                            10,783,169




See Notes
to Consolidated Financial Statements (unaudited).


Page |
2





iSECUREtrac
Corp. AND SUBSIDIARY


STATEMENT
OF STOCKHOLDERS' (DEFICIT)


For
the Nine Months Ended September 30, 2009





AdditionalCommon Stock
                
                
                Paid
      -in
                
                
                AccumulatedShares
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                TotalBalance,
      December 31, 2008
                
                
                10,799,090
                
                
                $
                10,799
                
                
                $
                55,369,880
                
                
                $
                (75,762,071
                )
                
                $
                (20,381,392
                )Shares
      issued for director's fees
                
                
                12,248
                
                
                
                12
                
                
                
                5,988
                
                
                
                -
                
                
                
                6,000Stock
      issued upon exercise of options
                
                
                -
                
                
                
                -
                
                
                
                162
                
                
                
                -
                
                
                
                162Stock
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                283,296
                
                
                
                -
                
                
                
                283,296Series
      C preferred stock dividends
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (852,177
                )
                
                
                (852,177
                )Accretion
      to redemption value of preferred stock
                
                
                -
                
                
                
                -
                
                
                
                (144,118
                )
                
                
                -
                
                
                
                (144,118
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,362,695
                )
                
                
                (1,362,695
                )Balance,
      September 30, 2009
                
                
                10,811,338
                
                
                $
                10,811
                
                
                $
                55,515,208
                
                
                $
                (77,976,943
                )
                
                $
                (22,450,924
                )





See Notes
to Consolidated Financial Statements (unaudited).


Page |
3





iSECUREtrac
CORP. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Nine
Months Ended September 30, 2009 and 2008








2009
                  
                  
                  2008Cash
      Flows From Operating ActivitiesNet
      loss
                  
                  $
                  (1,362,695
                  )
                  
                  $
                  (3,700,135
                  )Depreciation
      and amortization
                  
                  
                  1,653,182
                  
                  
                  
                  1,657,553Stock
      based compensation
                  
                  
                  289,296
                  
                  
                  
                  314,350Increase
      in Allowance for Doubtful Accounts
                  
                  
                  194,077
                  
                  
                  
                  54,219(Increase)
      Decrease in accounts receivable
                  
                  
                  326,667
                  
                  
                  
                  (29,513
                  )(Increase)
      in inventories
                  
                  
                  (94,480
                  )
                  
                  
                  (68,180
                  )(Increase)
      in prepaid expenses
                  
                  
                  (33,578
                  )
                  
                  
                  (20,256
                  )Increase
      (Decrease) in accounts payable
                  
                  
                  42,988
                  
                  
                  
                  (660,256
                  )Increase
      (Decrease) in accrued expenses
                  
                  
                  661,108
                  
                  
                  
                  (113,885
                  )(Decrease)
      in deferred revenues and gain on sale - leaseback
    transactions
                  
                  
                  (167,970
                  )
                  
                  
                  (38,852
                  )Increase
      in accrued interest payable
                  
                  
                  471,455
                  
                  
                  
                  568,342Net
      cash provided by (used in) operating activities
                  
                  
                  1,980,050
                  
                  
                  
                  (2,036,613
                  )Cash
      Flows From Investing ActivitiesPurchases
      of leasehold improvements and equipment
                  
                  
                  (1,807,499
                  )
                  
                  
                  (2,138,839
                  )Decrease
      in other assets
                  
                  
                  5,695
                  
                  
                  
                  16,537Net
      cash (used in) investing activities
                  
                  
                  (1,801,804
                  )
                  
                  
                  (2,122,302
                  )Cash
      Flows From Financing ActivitiesPrincipal
      proceeds from long-term debt
                  
                  
                  1,700,000
                  
                  
                  
                  2,050,000Proceeds
      from revolving line of credit
                  
                  
                  50,000
                  
                  
                  
                  -Proceeds
      from equipment term loan
                  
                  
                  32,407
                  
                  
                  
                  50,000Principal
      payments on long-term debt
                  
                  
                  (1,293,835
                  )
                  
                  
                  (792,956
                  )Proceeds
      from the exercise of options and warrants
                  
                  
                  162
                  
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  488,734
                  
                  
                  
                  1,307,044Increase
      (Decrease) in cash
                  
                  
                  666,980
                  
                  
                  
                  (2,851,873
                  )Cash
      at beginning of period
                  
                  
                  423,361
                  
                  
                  
                  3,442,712Cash
      at end of period
                  
                  $
                  1,090,341
                  
                  
                  $
                  590,839Supplemental
      Disclosure of Cash Payments forInterest
                  
                  
                  427,888
                  
                  
                  
                  254,856Supplemental
      Disclosure of Noncash TransactionsPurchase
      of leasehold improvements and equipment included in accounts
      payable
                  
                  
                  29,478
                  
                  
                  
                  27,667





See Notes
to Consolidated Financial Statements (unaudited).


Page |
4


iSECUREtrac
CORP. AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




Note
1.  General




The
unaudited interim condensed consolidated financial statements as of September
30, 2009 and for the three and nine month periods ended September 30, 2009 and
2008, 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,
2008, has been taken from the audited consolidated financial statements at that
date.  The condensed consolidated financial statements for the three
and nine months ended September 30, 2009 and September 30, 2008 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, 2008.  The results of
operations and cash flows for the three and nine months ended September 30, 2009
are not necessarily indicative of the results for the entire fiscal year ending
December 31, 2009.  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, combined with the expected
amounts available through lease financing for its monitoring equipment described
in note 6, and positive cash flow expected to be generated from operating
activities will be sufficient to meet the Company’s liquidity needs through
2009.




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”) or which were issued under
employment agreements with executive officers.




During
the three and nine months ended September 30, 2009, the Company granted options
to purchase a total of 39,000 and 80,500 shares of common stock to seven and
twenty employees, respectively,  pursuant to the 2006
Plan.  During the three and nine months ended September 30, 2009,
42,187 and 97,260 options issued under the 2006 Plan were forfeited, 275 and
9,550 options issued under the 2001 Plan were forfeited and 0 and 56,250 options
issued under employment agreements outside the 2006 Plan and the 2001 Plan,
respectively, were forfeited.  During the three and nine months ended
September 30, 2009, 0 and 292 options were exercised.  The following
table shows stock option activity during the nine month period ended September
30, 2009:


Page |
5






Options
                      
                      Number of
                        Shares
                      
                      
                      Weighted
                        Average
                        Exercise Price
                        Per Share
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual Life
                        (Years)
                      
                      
                      Aggregate
                        Intrinsic
                        ValueOutstanding
      at December 31, 2008
                      
                      
                      2,734,376
                      
                      
                      $
                      1.59
                      
                      
                      
                      
                      
                      
                      -Granted
                      
                      
                      80,500
                      
                      
                      
                      0.56Exercised
                      
                      
                      (292
                      )
                      
                      
                      0.56Forfeited
                      
                      
                      (163,060
                      )
                      
                      
                      0.51Outstanding
      at September 30, 2009
                      
                      
                      2,651,524
                      
                      
                      $
                      1.56
                      
                      
                      
                      5.9
                      
                      
                      $
                      150,843Exercisable
      at September 30, 2009
                      
                      
                      2,194,346
                      
                      
                      $
                      1.80
                      
                      
                      
                      5.23
                      
                      
                      $
                      65,645




As of
September 30, 2009, the aggregate intrinsic value of outstanding and exercisable
options, which is the actual value of the options if exercised, was $150,843 and
$65,645, respectively.




During
the three and nine months ended September 30, 2009, warrants to purchase up to
32,609 and 1,116,374 shares of common stock expired and no warrants were granted
or exercised by warrant holders.




At
September 30, 2009, the Company had 2,651,524 outstanding stock options,
6,287,045 shares issuable upon exercise of warrants to be issued upon exchange
of Preferred Stock, and 2,428,161 shares issuable upon the exercise of
outstanding warrants not based on the exchange of Preferred stock; that were not
included in the computation of diluted EPS because to do so would have been
anti-dilutive for the period presented.




The
Company accounts for its share-based compensation awards by recognizing the
compensation expense in the financial statements as the awards become
vested.  Compensation expense is based on the grant date fair value of
the equity instrument issued.  The Company estimated the grant date
fair value of each option granted during the periods set forth below using the
Black-Scholes option pricing model with the following weighted average
assumptions:




Nine Months Ended
                  September 30, 2009
                
                
                Year Ended
                  December 31, 2008Risk
      free interest rate
                
                
                3.78
                %
                
                
                3.79
                %Expected
      volatility factor
                
                
                83.28
                %
                
                
                82.84
                %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
                
                23% and 24%
                
                
                23% and 24%


Page |
6




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 estimates the forfeiture 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 are 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.  The estimated forfeiture rate for senior executive and
non-senior executive option grants is 23% and 24%, respectively.  This
rate is recalculated on an annual basis.




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




The
Company recorded compensation expense of $79,045 and $283,296 for the three and
nine months ended September 30, 2009, respectively, compared to $98,798 and
$309,350 for the same periods in 2008 related to stock-based compensation
awards. All expenses related to stock-based compensation awards are reflected in
sales, general and administrative expenses.




As of
September 30, 2009, there was approximately $119,715 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:




2009
                          
                          $
                          41,4582010
                          
                          $
                          71,9472011
                          
                          $
                          6,310Total
                          
                          $
                          119,715




Note
3.  Leasehold Improvements and Equipment




The cost
and accumulated depreciation of our leasehold improvements and equipment as of
September 30, 2009 and December 31, 2008 are as follows:




September 30, 2009
                  
                  
                  December 31, 2008Cost
                  
                  
                  Accumulated
                    Depreciation
                  
                  
                  Net Book
                    Value
                  
                  
                  Cost
                  
                  
                  Accumulated
                    Depreciation
                  
                  
                  Net Book
                    ValueEquipment
                  
                  $
                  1,062,705
                  
                  
                  $
                  696,532
                  
                  
                  $
                  366,173
                  
                  
                  $
                  969,624
                  
                  
                  $
                  592,072
                  
                  
                  $
                  377,552Leasehold
      improvements
                  
                  
                  239,340
                  
                  
                  
                  160,884
                  
                  
                  
                  78,456
                  
                  
                  
                  239,341
                  
                  
                  
                  113,924
                  
                  
                  
                  125,417Monitoring
      equipment
                  
                  
                  13,889,627
                  
                  
                  
                  9,906,741
                  
                  
                  
                  3,982,886
                  
                  
                  
                  12,145,730
                  
                  
                  
                  8,419,380
                  
                  
                  
                  3,726,350Total
      leasehold improvements and equipment
                  
                  $
                  15,191,671
                  
                  
                  $
                  10,764,158
                  
                  
                  $
                  4,427,515
                  
                  
                  $
                  13,354,695
                  
                  
                  $
                  9,125,376
                  
                  
                  $
                  4,229,319


Page |
7




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, 2008.




The
Company also separately records other intangible assets that can be identified
and assigned a value.  At September 30, 2009, such intangible assets
consisted solely of customer monitoring contracts acquired in a prior
acquisition.  The Company amortizes the initial carrying value
attributable to these monitoring contracts based on the projected revenue stream
of the monitoring contracts.  This amortization expense is included in
sales, general and administrative expenses in the consolidated statements of
operations and equaled $4,800 and $14,401 for the three and nine month periods
ended September 30, 2009, respectively, compared to $10,490 and $31,471 for the
same periods in 2008.  These intangible assets are also tested for
impairment on an annual basis.




The
composition of goodwill and intangible assets at September 30, 2009 and December
31, 2008, is as follows:




September 30, 2009
                    
                    
                    December 31, 2008Intangibles,
      subject
                    
                    
                    
                    
                    
                    Intangibles,
      subjectGoodwill
                    
                    
                    to
      Amortization
                    
                    
                    Goodwill
                    
                    
                    to
      AmortizationGross
      Carrying Amount
                    
                    $
                    2,302,179
                    
                    
                    $
                    911,522
                    
                    
                    $
                    2,302,179
                    
                    
                    $
                    911,522Accumulated
      Amortization
                    
                    
                    -
                    
                    
                    
                    (906,529
                    )
                    
                    
                    -
                    
                    
                    
                    (892,128
                    )Balance
                    
                    $
                    2,302,179
                    
                    
                    $
                    4,993
                    
                    
                    $
                    2,302,179
                    
                    
                    $
                    19,394





The
estimated aggregate future amortization expense of the intangibles is as
follows:





2009
                    
                    
                    4,993Total
                    
                    $
                    4,993





Note
5.  Accounts Payable





The
Company has recorded accounts payable as follows as of September 30, 2009 and
December 31, 2008:





September 30, 2009
                  
                  
                  December 31, 2008Accounts
      Payable, trade
                  
                  
                  446,388
                  
                  
                  
                  403,399Accounts
      Payable, equipment manufacturer 1
                  
                  
                  29,478
                  
                  
                  
                  -Total
      Accounts Payable
                  
                  
                  475,866
                  
                  
                  
                  403,399





1These
invoice amounts are yet to be financed.  The Company expects to
finance these invoices through


AHK
Leasing, LLC as described in Note 7, or via the Equipment Term Loan as described
in Note 6.





The
Company expects to finance the acquisition of all monitoring equipment through
AHK Leasing, LLC (“AHK”) as described in Note 7 or via the Equipment Term Loan
as described in Note 6.


Page |
8


Note
6.  Credit Facilities




On
November 10, 2008, the Company entered into a loan agreement (the “Loan
Agreement”) with Crestpark LP, Inc. (the “Lender”) 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
proceeds of the Revolving Credit Commitment of $750,000 were 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 July 1, 2010, is unsecured and bears interest at a fixed noncompounded
rate of 12% per annum.  The Company is also required to pay the Lender
an unused commitment fee of 0.25% per annum on the average daily unused amount
of the Revolving Credit Commitment.  For the three and nine months
ended September 30, 2009, interest expense for the Revolving Credit Commitment,
including any applicable unused commitment fee, was $18,114 and $58,388,
respectively.  As of September 30, 2009, the Company had $200,000 of
proceeds available under the Revolving Credit Commitment .




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 the Lender’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 July
1, 2010, 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 the Lender an unused
commitment fee of 0.25% per annum on the average daily unused amount of the
Equipment Term Loan.  For the three and nine months ended September
30, 2009, interest expense for the Equipment Term Loan, including any applicable
unused commitment fee, was $2,796 and $5,927, respectively, as compared to $0
for the three and nine months ended September 30, 2008.  As of
September 30, 2009, the Company had $1,617,593 in proceeds still available under
the Equipment Term Loan, as amounts borrowed and repaid are no longer available
under the loan.  As of September 30, 2009, the Company had $82,407
outstanding under the Equipment Term Loan.




As
further described in Note 9 – Subsequent Events, subsequent to September 30,
2009, the Company and Crestpark LP, Inc extended the maturity date of the
Revolving Credit Commitment and Equipment Term Loan to January 1,
2012.




Note
7.  Long-Term Debt




Long-term
debt consists of capital leases used to finance the acquisition of monitoring
equipment and secured borrowings for working capital.





Under its
capital lease arrangements, the Company sells its equipment to AHK, a company
controlled by three stockholders of the Company, one of which is a current
director.  Maturity dates on these capital leases run from July 2010
to June 2012.  During the three and nine months ended September 30,
2009, the Company financed $0 and $1,700,000, respectively, under capital lease
arrangements with AHK.  As of September 30, 2009, the aggregate
balance on these capital leases totaled $3,031,566. For the three and nine
months ended September 30, 2009 interest expense to AHK was $91,943 and
$260,509, respectively, as compared to $72,008 and $154,286 for the three and
nine months ended September 30, 2008, respectively.  There was no
accrued interest at September 30, 2009 and December 31, 2008 due to
AHK.


Page |
9


As of
September 30, 2009, the Company had outstanding borrowings of $11,877,475 under
a secured Promissory Note payable and associated Credit and Security Agreement
(the “Crestpark Note”) with Crestpark LP, Inc. (the
“Lender”).  Principal on the Crestpark Note is due on the earlier of
(i) July 1, 2010 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 the
Crestpark Note, plus all accrued but unpaid interest.  The Company may
prepay the Crestpark Note at any time without premium or penalty.  The
Crestpark Note provides, among other things, that $6,455,250 of the borrowings
thereunder bears interest at 7.0% per annum and that such interest will be due
and payable at maturity of the Crestpark Note.  The remaining
$5,422,225 of borrowings (the “Floating Tranche”) under the Crestpark Note bears
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 is
payable monthly.  Accrued interest on the Crestpark Note at September
30, 2009 and December 31, 2008, equaled $1,247,466 and $772,545,
respectively.





Total
interest expense for the Company for the three and nine months ended September
30, 2009 was $304,987 and $899,343, respectively, compared to $289,824 and
$823,196 during the same periods in 2008.  Of that amount, $301,165
and $838,350 was expensed to related parties under the AHK capital leases and
the Crestpark Note for the three and nine months ended September 30, 2009,
respectively, compared to $284,483 and $804,865 during the same periods in
2008.




As
further described in Note 9 – Subsequent Events, subsequent to September 30,
2009, the Company and Crestpark LP, Inc extended the maturity date of all debt
due to Crestpark LP, Inc. ($11,877,475) to January 1,
2012.  Accordingly, all debt due to Crestpark LP, Inc. has been
classified as long-term in the accompanying balance sheet.




Note
8.  Redeemable Exchangeable Series C Preferred Stock




On June
27, 2005, the Company issued 1,000,000 shares of its $0.01 par value Series C 8%
Cumulative, Compounding Exchangeable Preferred Stock (the “Series C Preferred
Stock”).  The Series C Preferred Stock is exchangeable for 4,782,609 shares
of common stock and warrants to acquire 6,287,045 shares of common stock at an
exercise price of $2.30 per share at anytime at the discretion of the preferred
stockholder.




If, after
June 27, 2010, the closing price of the common stock exceeds $20.00 per share
for at least 120 consecutive trading days, the Company can require the
conversion of the Series C Preferred Stock into common stock in accordance with
the above exchange provisions.




The
Series C Preferred Stock is redeemable on the tenth anniversary of the original
issue date. The redemption price per share of the Series C Preferred Stock will
equal the per share original issue price ($11.00 per share) plus an amount equal
to all accrued but unpaid dividends thereon (and any interest payable thereon).
 The interest method will be utilized to accrete the carrying amount of the
Series C Preferred Stock over the ten year period to the earliest redemption
date so that the carrying amount will equal the redemption amount at the
earliest possible redemption date.  Due to the accumulated deficit position
of the Company, the periodic accretion will be charged to Additional Paid-In
Capital.  As of September 30, 2009, the Company had accrued Series C
Preferred Stock dividends totaling $4,279,543 and accretion to redemption value
of the Series C Preferred Stock totaling $804,078.  Of these amounts,
$302,013 and $48,276, respectively, were accrued during the three months ended
September 30, 2009.




Upon any
liquidation of the Company, no distribution can be made to the holders of shares
of common stock or other stock ranking junior to the Series C Preferred Stock
unless, prior thereto, the holders of shares of Series C Preferred Stock have
received an amount per share equal to the per share original issue price plus an
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment, multiplied by a factor of
105%.


Page |
10




Except as
otherwise required by law, the holders of shares of Series C Preferred Stock
vote together with the holders of shares of the common stock of the Company on
all matters submitted to the stockholders of the Company and not as a separate
class, and each share of Series C Preferred Stock entitles the holder thereof to
11 votes or the equivalent amount of voting power thereof as determined by the
Board of Directors.  In addition, until such time that less than
500,000 shares of Series C Preferred Stock are outstanding, the Series C
Preferred Stockholders have the ability to appoint a majority of the Company’s
directors.




Note
9.  Subsequent Events.




On
October 13, 2009, the Company paid down $200,000 of the $550,000 borrowed under
the Company’s Revolving Credit Commitment  with Crestpark LP,
Inc.  The terms of the Revolving Credit Commitment, as outlined in
Note 6 allow for the Company to re-draw these funds and as such, subsequent to
this payment to Crestpark LP, Inc.  the Company has $400,000 available
to be borrowed under the Revolving Credit Commitment.




On
November 4, 2009, the Company executed an extension of the maturity date of all
credit facilities with Crestpark LP, Inc as described in Note 6 – Credit
Facilities and Note 7 – Long-Term Debt to January 1, 2012.  In
connection with that extension, the interest rate  on the outstanding
debt of the non-floating tranche was increased from 7% to 9%.  All
other terms in the original agreements remain unchanged by the extension of the
maturity date.




The
Company evaluated events and transactions through November 5, 2009 for potential
recognition or disclosure in our financial statements.  Besides those
noted above, there are no additional matters which require
disclosure.




Note
10.  Recent Accounting Pronouncements




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




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


Page |
11


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




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




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





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


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12


In June
2009, the FASB issued updates to ASC 405 – “Liabilities” and ASC 860 –
“Transfers and Servicing” (“updates”) (formerly  SFAS No. 166, “Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No.
140”).  These updates improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferor’s continuing involvement, if any, in transferred
financial assets.   The updates shall be effective as of the first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual reporting
periods thereafter. Earlier application is prohibited. Our adoption of these
updates to ASC 405 and ASC 860 will not have a material effect on our
consolidated financial statements.





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





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


Page |
13


Note
11.  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 $18,375,000 at September 30, 2009
using a discount rate 5%.




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




General




Discussions
of certain matters contained in this Quarterly Report on Form 10-Q may contain
statements that plan for or anticipate the future.  Forward-looking
statements include statements about the future of our products and the industry,
statements about our future business plans and strategies, and most other
statements that are not historical in nature. In this Form 10-Q, forward-looking
statements are generally identified by the words "anticipate," "plan,"
"believe," "expect," "estimate," and the like. Because forward-looking
statements involve future risks and uncertainties, there are factors that could
cause actual results to differ materially from those expressed or
implied.  The actual outcomes of these matters may differ
significantly from the outcomes expressed or implied in these forward-looking
statements and are subject to certain risks and uncertainties that may affect
such outcomes, including without limitation the risks set forth in “ITEM 1A. Risk Factors”
contained in the Company’s Annual Report on Form 10-K filed for the year ended
December 31, 2008.




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 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”).


Page |
14




Results
of Operations





Highlights
of Operations for the three  and nine months ended September 30,
2009





Revenue
Growth and Reduced Loss


For the
three months ended September 30, 2009, the Company reported a 47% increase in
total revenue and a $685,000 decrease in the reported operating loss in
comparison to the same period a year ago.





For the
nine months ended September 30, 2009, the Company reported a 35% increase in
total revenue and a $2,439,000 decrease in the reported operating loss in
comparison to the same period a year ago.





Positive
Cash Flow


For the
three months ended September 30, 2009, the Company reported approximately
$732,000 of net cash provided by operating activities - as defined in the
Consolidated Statement of Cash Flows.  This was the third consecutive
quarter of net cash provided by operating activities and year-to-date the
Company has reported $1,980,000 of net cash provided by operating
activities.





More
specifically, the positive cash flow from operating activities for the three
months ended September 30, 2009 was sufficient to cover the Company’s principal
payments on long-term debt for the third consecutive quarter as more fully
discussed below.


Page |
15


Summary
of  Financial Information





The
following table provides a comparison of selected financial highlights for the
three months ended September 30, 2009 and 2008:





CONDENSED
CONSOLIDATED FINANCIAL HIGHLIGHTS


Three
Months Ended September 30, 2009 and 2008


(Rounded
to nearest thousand)





Fav (Unfav)2009
                      
                      
                      2008
                      
                      
                      DifferenceRevenues:Equipment
      revenue
                      
                      $
                      2,924,000
                      
                      
                      $
                      2,099,000
                      
                      
                      $
                      825,000Services
      revenue
                      
                      
                      107,000
                      
                      
                      
                      71,000
                      
                      
                      
                      36,000Royalty
      revenue
                      
                      
                      180,000
                      
                      
                      
                      8,000
                      
                      
                      
                      172,000Total
      revenues
                      
                      
                      3,211,000
                      
                      
                      
                      2,178,000
                      
                      
                      
                      1,033,000Costs
      of revenue
                      
                      
                      1,172,000
                      
                      
                      
                      844,000
                      
                      
                      
                      (328,000
                      )Gross
      profit margin
                      
                      
                      2,039,000
                      
                      
                      
                      1,334,000
                      
                      
                      
                      705,000Gross
      profit margin %
                      
                      
                      63.5
                      %
                      
                      
                      61.2
                      %Research
      and development expenses (R&D)
                      
                      
                      316,000
                      
                      
                      
                      275,000
                      
                      
                      
                      (41,000
                      )Sales,
      general and administrative expenses (SG&A)
                      
                      
                      1,796,000
                      
                      
                      
                      1,817,000
                      
                      
                      
                      21,000Total
      R&D and SG&A
                      
                      
                      2,112,000
                      
                      
                      
                      2,092,000
                      
                      
                      
                      (20,000
                      )Operating
      loss
                      
                      
                      (73,000
                      )
                      
                      
                      (758,000
                      )
                      
                      
                      685,000Interest
      expense, net
                      
                      
                      (305,000
                      )
                      
                      
                      (288,000
                      )
                      
                      
                      (17,000
                      )Net
      loss
                      
                      $
                      (378,000
                      )
                      
                      $
                      (1,046,000
                      )
                      
                      $
                      668,000Preferred
      stock dividends and accretion
                      
                      
                      (350,000
                      )
                      
                      
                      (329,000
                      )
                      
                      
                      (21,000
                      )Net
      loss available to common stockholders
                      
                      $
                      (728,000
                      )
                      
                      $
                      (1,375,000
                      )
                      
                      $
                      647,000


Page |
16


Quarterly
Highlights




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





CONDENSED
CONSOLIDATED QUARTERLY  FINANCIAL HIGHLIGHTS


5
Quarter Trend


(Rounded
to nearest thousand)


Three Months
                  
                  
                  Three Months
                  
                  
                  Three Months
                  
                  
                  Three Months
                  
                  
                  Three MonthsEnded
                  
                  
                  Ended
                  
                  
                  Ended
                  
                  
                  Ended
                  
                  
                  EndedSeptember 30
                  
                  
                  December 31
                  
                  
                  March 31
                  
                  
                  June 30
                  
                  
                  Sept 302008
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2009
                  
                  
                  2009Revenue:Equipment
      leasing
                  
                  $
                  2,099,000
                  
                  
                  $
                  2,312,000
                  
                  
                  $
                  2,625,000
                  
                  
                  $
                  2,974,000
                  
                  
                  $
                  2,924,000Service
      Revenue
                  
                  
                  71,000
                  
                  
                  
                  102,000
                  
                  
                  
                  132,000
                  
                  
                  
                  116,000
                  
                  
                  
                  107,000Royalty
      Revenue
                  
                  
                  8,000
                  
                  
                  
                  252,000
                  
                  
                  
                  347,000
                  
                  
                  
                  102,000
                  
                  
                  
                  180,000Total
      Revenue
                  
                  
                  2,178,000
                  
                  
                  
                  2,666,000
                  
                  
                  
                  3,104,000
                  
                  
                  
                  3,192,000
                  
                  
                  
                  3,211,000Costs
      of Revenue
                  
                  
                  844,000
                  
                  
                  
                  989,000
                  
                  
                  
                  1,166,000
                  
                  
                  
                  1,173,000
                  
                  
                  
                  1,172,000Gross
      profit margin
                  
                  
                  1,334,000
                  
                  
                  
                  1,677,000
                  
                  
                  
                  1,938,000
                  
                  
                  
                  2,019,000
                  
                  
                  
                  2,039,000Gross
      profit margin percentage*
                  
                  
                  61.2
                  %
                  
                  
                  62.9
                  %
                  
                  
                  62.4
                  %
                  
                  
                  63.3
                  %
                  
                  
                  63.5
                  %Research
      & Development (R&D)
                  
                  
                  275,000
                  
                  
                  
                  296,000
                  
                  
                  
                  319,000
                  
                  
                  
                  251,000
                  
                  
                  
                  316,000Selling
      General & Administrative (SG&A)
                  
                  
                  1,817,000
                  
                  
                  
                  2,001,000
                  
                  
                  
                  1,916,000
                  
                  
                  
                  1,862,000
                  
                  
                  
                  1,796,000Subtotal
      R&D and SG&A
                  
                  
                  2,092,000
                  
                  
                  
                  2,297,000
                  
                  
                  
                  2,235,000
                  
                  
                  
                  2,113,000
                  
                  
                  
                  2,112,000Operating
      Loss
                  
                  $
                  (758,000
                  )
                  
                  $
                  (620,000
                  )
                  
                  $
                  (297,000
                  )
                  
                  $
                  (94,000
                  )
                  
                  $
                  (73,000
                  )Total
      Full-Time Employees at  Quarter End
                  
                  
                  80
                  
                  
                  
                  74
                  
                  
                  
                  73
                  
                  
                  
                  74
                  
                  
                  
                  73





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





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 Statement of Cash
Flows) and subtracts the principal payments on long-term debt.





For the
three months ended March 31, 2009, June 30, 2009 and  September 30,
2009, the Company generated positive cash flow from operations as described
above, to cover the principal payments on long-term debt as
follows:


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17





CONDENSED
CONSOLIDATED QUARTERLY  FINANCIAL HIGHLIGHTS


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


and
nine months ended September 30, 2009


(Rounded
to nearest thousand)


ThreeMonthsEnded
                
                
                Nine MonthsMarch31,
                  2009
                
                
                June30,
                  2009
                
                
                September30,
                  2009
                
                
                Ended
                  September30,
                  2009Cash
      Flows From Operating ActivitiesNet
      loss
                
                $
                (585,000
                )
                
                $
                (400,000
                )
                
                $
                (378,000
                )
                
                $
                (1,363,000
                )Depreciation
      and amortization
                
                
                504,000
                
                
                
                593,000
                
                
                
                556,000
                
                
                
                1,653,000Stock
      based compensation
                
                
                105,000
                
                
                
                103,000
                
                
                
                81,000
                
                
                
                289,000Increase
      in Allowance for Doubtful Accounts
                
                
                91,000
                
                
                
                70,000
                
                
                
                33,000
                
                
                
                194,000(Increase)
      Decrease in accounts receivable
                
                
                (42,000
                )
                
                
                298,000
                
                
                
                71,000
                
                
                
                327,000(Increase)
      Decrease in inventories
                
                
                45,000
                
                
                
                (108,000
                )
                
                
                (31,000
                )
                
                
                (94,000
                )(Increase)
      Decrease in prepaid expenses
                
                
                (14,000
                )
                
                
                (33,000
                )
                
                
                13,000
                
                
                
                (34,000
                )Increase
      (Decrease) in accounts payable
                
                
                148,000
                
                
                
                (295,000
                )
                
                
                190,000
                
                
                
                43,000Increase
      in accrued expenses
                
                
                340,000
                
                
                
                274,000
                
                
                
                47,000
                
                
                
                661,000Decrease
      in deferred revenues
                
                
                (126,000
                )
                
                
                (31,000
                )
                
                
                (11,000
                )
                
                
                (168,000
                )Increase
      in accrued interest payable
                
                
                153,000
                
                
                
                158,000
                
                
                
                161,000
                
                
                
                472,000-Net
      cash provided by  operating activities
                
                
                619,000
                
                
                
                629,000
                
                
                
                732,000
                
                
                
                1,980,000Principal
      payments on long-term debt
                
                
                (491,000
                )
                
                
                (459,000
                )
                
                
                (344,000
                )
                
                
                (1,294,000
                )Net
      cash provided by  operating activities less
      principal  payments on long-term debt
                
                $
                128,000
                
                
                $
                170,000
                
                
                $
                388,000
                
                
                $
                686,000





For
the three and nine months ended September 30, 2009 compared to the three and
nine months ended September 30, 2008





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 month
and nine month periods ended September 30, 2009, the Company had equipment
revenue of $2,924,000 and $8,523,000, respectively compared with $2,099,000 and
$6,564,000 for the same periods in 2008 which represent increases of 39% and
30%, respectively.  The growth in equipment revenue is the result of
increased units under lease.





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 and nine month periods ended September 30,
2009, the Company reported service revenue of $107,000 and $355,000,
respectively compared to $71,000 and $232,000 for the same periods in 2008 which
represent increases of 51% and 53%, respectively. The growth in service revenue
is the result of increased units subject to Monitoring Center
Intervention.


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18


Royalty
Revenue





Royalty
revenue consists of income in connection with a  Patent License
Agreement signed in May of 2006 which is dependent on the revenue levels of the
licensee  For the three and nine month periods ended September 30,
2009, the Company reported royalty revenue of $180,000, and $629,000 an increase
of $172,000 and $388,000 over the $8,000 and $241,000 recorded for the three and
nine months ended September 30, 2008.




For all
periods prior to and including the period ending September 30, 2008, revenue
related to the Patent License Agreement was accounted for on a cash basis.
During the three months ended December 31, 2008, the Company began accounting
for these revenues on an accrual basis as the amount was then estimable and
probable of collection.  Accordingly, within the limits of the Patent
License Agreement, the Company expects to continue to report this revenue on an
accrual basis.




The
maximum amount of revenue the Company can receive under the Patent License
Agreement is capped at $1,500,000.  The Company expects to stop
recognizing revenue under this agreement during the quarter ending September 30,
2010.




Looking
forward in terms of management’s expectations for equipment and service revenue,
as we have discussed in previous quarters as the Company’s  multi-year
contracts renew, they tend to renew at lower daily lease
rates.  During the three months ended September 30, 2009, the Company
renewed several such contracts.  In addition the Company has recently
observed a general lowering of price points on equipment leasing and
services.  Management does not expect the price points to fall
further, however the combination of these conditions is likely to exert downward
pressure on revenue for the next several quarters.





Cost
of Revenues





Cost of
revenues represents all direct costs related to delivery of proprietary and
third-party monitoring equipment including amortization of the acquisition
costs, lease costs on third-party equipment,  repairs and maintenance
of the monitoring equipment, royalty expenses, transportation costs,
communication costs associated with the equipment, as well as costs to upgrade
existing units for advancements in technology.  Cost of revenues for
the three and nine months ended September 30, 2009 are $1,172,000 and
$3,511,000, respectively, representing increases of $328,000 and $631,000 over
the $844,000 and $2,880,000 reported during the three and nine months ended
September 30, 2008.  The increased cost of revenues for the three
months and nine months ended September 30, 2009 are generally associated with
the increased number of proprietary and third-party units deployed and increased
royalty expense.




While the
cost of revenues for have increased in terms of absolute amounts, as a
percentage of revenue the Company’s cost of revenues have declined from 41% for
the nine months ended September 30, 2008 to 37% for the nine months ended
September 30, 2009. Management anticipates that as the Company continues to
experience revenue growth there will be an increase in Cost of Revenues
proportionate to growth.




With
respect to the royalty expense, the Company continues to bring GPS tracking
units into compliance with the Settlement Agreement.  As of September
30, 2009 7.4% of the Company’s GPS tracking units available to generate revenue
were subject to royalties; down from 13.5% at December 31, 2008 and 9% at March
31, 2009 and 7.6% at June 30, 2009.


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19


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 and nine months ended September 30, 2009 were $316,000
and $885,000 respectively,  an increase of $40,000 over the $275,000
reported during the three months ended September 30, 2008  and a
decrease of $59,000 from the $944,000 reported during the nine months ended
September 30, 2008.  The main reasons for the decrease in year-to-date
R&D expenses were the cost reduction and cost control plans implemented in
2008  which were partially offset by the increase in headcount
experienced in the three months ended September 30, 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.   For the three and nine months ended September 30,
2009 the Company capitalized $52,000 and
$133,000,  respectively.  For the three and nine months
ended September 30, 2008 the Company capitalized $59,000 and $111,000
respectively.





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





Sales,
General and Administrative Expenses


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





For the
three month period ended September 30, 2009, SG&A expenses decreased $21,000
from  $1,817,000 reported in 2008 to $1,796,000 reported in
2009.   Significant increases and decreases of SG&A expense
in the comparable periods are highlighted below:




o
            Personnel
      related expenses included salaries, benefits, recruiting, and travel
      decreased approximately $70,000 as a result of the implemented cost
      control measures




o
            Consulting
      fees increased $41,000 in connection with the outsourcing of several
      projects




o
            Office
      supplies decreased $23,000 as a result of the implemented cost control
      measures




o
            Corporate
      insurance decreased $15,000




o
            Professional
      fees including accounting and legal increased
  $53,000




o
            Various
      other expenses including depreciation, advertising and other expenses
      decreased an aggregate of $7,000 as a result of the implemented cost
      control measures


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20


For the
nine month period ended September 30, 2009, SG&A expenses decreased $541,000
from $6,115,000 reported in 2008 to  $5,574,000 reported in
2009.   Significant increases and decreases of SG&A expense
in the comparable periods are highlighted below:




o
            Personnel
      related expenses included salaries, benefits, recruiting, and travel
      decreased approximately $503,000 as a result of the implemented cost
      control measures




o
            Consulting
      fees decreased $30,000 as a result of the implemented cost control
      measures




o
            Office
      supplies decreased $44,000 as a result of the implemented cost control
      measures




o
            Corporate
      insurance decreased $33,000




o
            Bad
      debt expense increased $84,000 in connection with the uncertainty of
      collectability of certain accounts
receivable




o
            Professional
      fees including accounting and legal fees increased
  $54,000




o
            Various
      other expenses including depreciation, advertising and other expenses
      decreased an aggregate of $69,000 as a result of the implemented cost
      control measures




Management
anticipates that as the Company continues to experience revenue growth there
will be a relative increase in SG&A expenses commensurate with the
growth.




Interest
Expense, Net


Net
interest expense represents the total interest expense incurred by the Company
reduced by the interest income earned by the Company during the year. During the
three and nine months ended September 30, 2009 the Company reported net interest
expense of $305,000 and $899,000, respectively, increases of $15,000 and $76,000
over the $290,000 and $823,000 reported for the three  and nine months
ended September 30, 2008.  The increases are attributable to the
increase in equipment purchased under capital leases, offset slightly by
principal paydowns, as well as the additional borrowings from Crestpark LP, Inc.
in late 2008 and the three months ended March 31, 2009.





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 September 30, 2009.





Net
Loss


The
Company’s net loss for the three and nine month periods ended September 30, 2009
was $378,000, and $1,363,000 an improvement of $668,000 and $2,337,000 over the
comparable periods in 2008 for the reasons described above.





Preferred
Stock Dividends and Accretion




For the
three and nine month periods ended September 30, 2009, preferred stock dividends
and accretion totaled $350,000 and $996,000 as compared to $329,000 and $939,000
for the three and nine month periods ended September 30, 2008.  This
increase was due to compounding interest on accrued but unpaid dividends on our
Series C Preferred Stock.  The Series C Exchangeable Preferred Stock
accrues interest at a cumulative compounded rate of 8.0% per
annum.


Page |
21




Liquidity
and Capital Resources




For the
nine months ended September 30, 2009, the Company generated $1,980,000 of cash
from operating activities. Investing activities used $1,802,000 of cash and
financing activities generated cash of $489,000.   The total of
all cash flow activities resulted in an increase in the balance of cash for the
nine months ended September 30, 2009 of $667,000.




For the
same period of 2008, the Company used $2,037,000 of cash in operating
activities, used another $2,122,000 in investing activities, and generated
$1,307,000 in cash from financing activities.  The total of all cash
flow activities in the nine months ended September 30, 2008 resulted in a
decrease in the balance of cash of $2,852,000




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 (Note 6) to finance the acquisition of monitoring
equipment.




The
Company believes that its current working capital, the undrawn amounts available
under the Company’s Revolving Line of Credit Agreement with
Crestpark,  combined with the expected amounts available through lease
financing for our monitoring equipment described above are sufficient to meet
its liquidity needs through 2009.




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, 2008.




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.


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22


Item
4T.  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.


Page |
23


PART
II. OTHER INFORMATION




Item
1.  Legal Proceedings.




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




Item
1A.  Risk Factors.




Not
required for smaller reporting companies.




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




On August
3, 2009, the Company issued an aggregate of 3,636 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.  Submission of Matters to a Vote of Security Holders.




None




Item
5.  Other Information.


On
November 4, 2009, iSecureTrac Corp. (the “Company”) executed two amendments to
its existing credit facilities with Crestpark LP, Inc. as follows:
 
 FIRST
AMENDMENT TO AMENDED AND RESTATED PROMISSORY NOTE
 Amends
Section 2.1 of the Amended and Restated Promissory Note last modified on
December 18, 2007 to change the interest rate on the Fixed Tranche from 7% to 9%
and extend the maturity date of the agreement to January 1, 2012
and
 
 FIRST
AMENDMENT TO LOAN AGREEMENT
 Amends
Section 1.1 of Loan Agreement originally entered into on November 10, 2008 to
change the maturity date of the agreement to January 1, 2012.
 
 The
foregoing description of the amendments is not intended to be complete and is
qualified in its entirety by reference to the FIRST AMENDMENT TO AMENDED AND
RESTATED PROMISSORY NOTE and FIRST AMENDMENT TO LOAN AGREEMENT copies of which
are attached hereto as Exhibits 10.1 and 10.2.




Item
6.  Exhibits.





3.1
                    Amended
      and Restated Certificate of Incorporation of the Company, as amended.
      (3)3.2
                    Restated
      Bylaws of the Company. (1)3.3
                    Certificate
      of Designations, Preferences and Rights of Series C 8% Cumulative,
      Compounding Exchangeable Preferred Stock of the Company.
    (2)4.1
                    Form
      of Common Stock Certificate. (1)10.1
                    First
      Amendment to Amended and Restated Promissory Note.10.2
                    First
      Amendment to Loan Agreement .31.1
                    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
                    Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32
                    Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002.


(1)
            Incorporated
      by reference from the registrant’s registration statement on Form 10-SB,
      filed on June 22, 1999 (Commission File No.
  0-26455).




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


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24


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




SIGNATURES





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





iSECUREtrac
      Corp.By:
                    /s/ Peter A. MichelPeter
      A. MichelPresident
      & CEODated:  November
      5, 2009By:
                    /s/Lincoln
      ZehrLincoln
      ZehrChief
      Financial OfficerDated:  November
      5, 2009




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