UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC 20549-1004
 
 Form
10-Q
 
 (Mark
One)
 xQuarterly report
pursuant to Section 13 or 15(d) of the Securities Exchange
 Act
of 1934
 
 FOR
THE QUARTERLY PERIOD ENDED JUNE 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 August 7, 2009 was
10,811,630.
  
  PART
I.  FINANCIAL INFORMATION
 
 Item 1.  Financial
Statements
 
 iSECUREtrac
Corp. and SUBSIDIARY
 CONSOLIDATED
BALANCE SHEETS
 
 (Unaudited)June 30, 2009
                                                
                                                
                                                December 31, 2008ASSETSCurrent
      AssetsCash
      and cash equivalents
                                                
                                                $
                                                1,018,743
                                                
                                                
                                                $
                                                423,361Accounts
      receivable, net of allowance for doubtful accounts of
    $623,334in
      2009 and $462,553 in 2008
                                                
                                                
                                                2,028,417
                                                
                                                
                                                
                                                2,445,505Inventories
                                                
                                                
                                                256,619
                                                
                                                
                                                
                                                193,820Prepaid
      expenses and other
                                                
                                                
                                                131,431
                                                
                                                
                                                
                                                84,224Total
      current assets
                                                
                                                
                                                3,435,210
                                                
                                                
                                                
                                                3,146,910Leasehold
      improvements and equipment, net of accumulated depreciation of $10,212,734in 2009 and $9,125,376 in 2008
                                                
                                                
                                                4,883,640
                                                
                                                
                                                
                                                4,229,319Intangibles,
      net of accumulated amortization of $901,728in
      2009 and $892,128 in 2008
                                                
                                                
                                                9,794
                                                
                                                
                                                
                                                19,394Goodwill
                                                
                                                
                                                2,302,179
                                                
                                                
                                                
                                                2,302,179Other
      assets
                                                
                                                
                                                77,691
                                                
                                                
                                                
                                                83,386Total
      assets
                                                
                                                $
                                                10,708,514
                                                
                                                
                                                $
                                                9,781,188LIABILITIES
      AND STOCKHOLDERS' (DEFICIT)Current
      LiabilitiesAccounts
      payable
                                                
                                                $
                                                339,575
                                                
                                                
                                                $
                                                403,399Accrued
      expenses
                                                
                                                
                                                1,138,064
                                                
                                                
                                                
                                                524,339Revolving
      Line of Credit
                                                
                                                
                                                750,000
                                                
                                                
                                                
                                                500,000Current
      maturities of long-term debt
                                                
                                                
                                                1,594,112
                                                
                                                
                                                
                                                1,272,508Deferred
      revenues & gain on sale-leaseback transactions
                                                
                                                
                                                142,244
                                                
                                                
                                                
                                                299,548Accrued
      interest payable
                                                
                                                
                                                1,086,640
                                                
                                                
                                                
                                                776,011Total
      current liabilities
                                                
                                                
                                                5,050,635
                                                
                                                
                                                
                                                3,775,805Long-term
      debt, less current maturities
                                                
                                                
                                                13,709,078
                                                
                                                
                                                
                                                13,280,368Redeemable
      convertible Series C preferred stock
                                                
                                                
                                                13,752,411
                                                
                                                
                                                
                                                13,106,407Commitments
      and contingencyStockholders'  (deficit)Common
      stock
                                                
                                                
                                                10,808
                                                
                                                
                                                
                                                10,799Additional
      paid-in capital
                                                
                                                
                                                55,482,443
                                                
                                                
                                                
                                                55,369,880Accumulated
      deficit
                                                
                                                
                                                (77,296,861
                                                )
                                                
                                                
                                                (75,762,071
                                                )Total
      stockholders' (deficit)
                                                
                                                
                                                (21,803,610
                                                )
                                                
                                                
                                                (20,381,392
                                                )Total
      liabilities and stockholders' (deficit)
                                                
                                                $
                                                10,708,514
                                                
                                                
                                                $
                                                9,781,188
 
 See Notes
to Consolidated Financial Statements (unaudited).
  Page |
2
 
 iSECUREtrac
Corp. and SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)
 
 Three Months Ended
                            
                            
                            Six Months Ended2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Revenues:Equipment
      leasing
                            
                            $
                            2,947,849
                            
                            
                            $
                            2,239,019
                            
                            
                            $
                            5,518,732
                            
                            
                            $
                            4,418,596Administrative,
      field & support service revenues
                            
                            
                            116,065
                            
                            
                            
                            86,700
                            
                            
                            
                            247,866
                            
                            
                            
                            161,153Equipment
      sales
                            
                            
                            25,807
                            
                            
                            
                            23,958
                            
                            
                            
                            79,918
                            
                            
                            
                            59,390Other
      revenues
                            
                            
                            101,834
                            
                            
                            
                            6,004
                            
                            
                            
                            448,755
                            
                            
                            
                            218,852Total
      revenues
                            
                            
                            3,191,555
                            
                            
                            
                            2,355,681
                            
                            
                            
                            6,295,271
                            
                            
                            
                            4,857,992Operating
      expenses:Cost
      of revenues
                            
                            
                            1,172,618
                            
                            
                            
                            948,121
                            
                            
                            
                            2,338,748
                            
                            
                            
                            2,036,015Research
      and development
                            
                            
                            250,963
                            
                            
                            
                            328,747
                            
                            
                            
                            569,438
                            
                            
                            
                            668,558Sales,
      general and administrative
                            
                            
                            1,861,908
                            
                            
                            
                            2,046,532
                            
                            
                            
                            3,777,952
                            
                            
                            
                            4,298,335Total
      operating expenses
                            
                            
                            3,285,489
                            
                            
                            
                            3,323,400
                            
                            
                            
                            6,686,138
                            
                            
                            
                            7,002,908Operating
      loss
                            
                            
                            (93,934
                            )
                            
                            
                            (967,719
                            )
                            
                            
                            (390,867
                            )
                            
                            
                            (2,144,916
                            )Other
      income (expense):Interest
      income
                            
                            
                            314
                            
                            
                            
                            4,843
                            
                            
                            
                            600
                            
                            
                            
                            24,067Interest
      expense
                            
                            
                            (306,155
                            )
                            
                            
                            (268,388
                            )
                            
                            
                            (594,356
                            )
                            
                            
                            (533,372
                            )Total
      other income (expense)
                            
                            
                            (305,841
                            )
                            
                            
                            (263,545
                            )
                            
                            
                            (593,756
                            )
                            
                            
                            (509,305
                            )Loss
      before provision for income taxes
                            
                            
                            (399,775
                            )
                            
                            
                            (1,231,264
                            )
                            
                            
                            (984,624
                            )
                            
                            
                            (2,654,220
                            )Provision
      for income taxes
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0Net
      loss
                            
                            $
                            (399,776
                            )
                            
                            $
                            (1,231,264
                            )
                            
                            $
                            (984,624
                            )
                            
                            $
                            (2,654,220
                            )Preferred
      stock dividends and accretion
                            
                            
                            (324,641
                            )
                            
                            
                            (305,190
                            )
                            
                            
                            (646,006
                            )
                            
                            
                            (610,380
                            )Net
      loss available to common stockholders
                            
                            $
                            (724,417
                            )
                            
                            $
                            (1,536,454
                            )
                            
                            $
                            (1,630,630
                            )
                            
                            $
                            (3,264,601
                            )Basic
      and diluted loss per common share
                            
                            $
                            (0.07
                            )
                            
                            $
                            (0.14
                            )
                            
                            $
                            (0.15
                            )
                            
                            $
                            (0.30
                            )Weighted
      average shares of common stock outstanding
                            
                            
                            10,806,399
                            
                            
                            
                            10,785,534
                            
                            
                            
                            10,803,963
                            
                            
                            
                            10,783,583
 
 See Notes
to Consolidated Financial Statements (unaudited).
  Page |
3
 
 iSECUREtrac
Corp. AND SUBSIDIARY
 STATEMENT
OF STOCKHOLDERS' (DEFICIT)
 For
the Six Months Ended June 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
                      
                      
                      8,612
                      
                      
                      
                      9
                      
                      
                      
                      3,991
                      
                      
                      
                      -
                      
                      
                      
                      4,000Stock
      issued upon exercise of options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      162
                      
                      
                      
                      -
                      
                      
                      
                      162Stock
      based compensation
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      204,251
                      
                      
                      
                      -
                      
                      
                      
                      204,251Series
      C preferred stock dividends
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (550,166
                      )
                      
                      
                      (550,166
                      )Accretion
      to redemption value of preferred stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (95,842
                      )
                      
                      
                      -
                      
                      
                      
                      (95,842
                      )Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (984,624
                      )
                      
                      
                      (984,624
                      )Balance,
      June 30, 2009
                      
                      
                      10,807,702
                      
                      
                      $
                      10,808
                      
                      
                      $
                      55,482,443
                      
                      
                      $
                      (77,296,861
                      )
                      
                      $
                      (21,803,610
                      )
 
 See Notes
to Consolidated Financial Statements (unaudited).
  Page |
4
 
 iSECUREtrac
CORP. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Six
Months Ended June 30, 2009 and 2008
 
 2009
                              
                              
                              2008Cash
      Flows From Operating ActivitiesNet
      loss
                              
                              $
                              (984,624
                              )
                              
                              $
                              (2,654,220
                              )Depreciation
      and amortization
                              
                              
                              1,096,958
                              
                              
                              
                              1,143,794Stock
      based compensation
                              
                              
                              208,251
                              
                              
                              
                              214,347Increase
      in Allowance for Doubtful Accounts
                              
                              
                              160,781
                              
                              
                              
                              33,112(Increase)
      Decrease in accounts receivable
                              
                              
                              256,307
                              
                              
                              
                              (254,606
                              )(Increase)
      in inventories
                              
                              
                              (62,799
                              )
                              
                              
                              (57,681
                              )(Increase)
      Decrease in prepaid expenses
                              
                              
                              (47,207
                              )
                              
                              
                              29,129(Decrease)
      in accounts payable
                              
                              
                              (146,514
                              )
                              
                              
                              (708,771
                              )Increase
      (Decrease) in accrued expenses
                              
                              
                              613,725
                              
                              
                              
                              (23,625
                              )(Decrease)
      in deferred revenues and gain on sale - leaseback
    transactions
                              
                              
                              (157,304
                              )
                              
                              
                              (22,845
                              )Increase
      in accrued interest payable
                              
                              
                              310,629
                              
                              
                              
                              383,580Net
      cash provided by (used in) operating activities
                              
                              
                              1,248,203
                              
                              
                              
                              (1,917,786
                              )Cash
      Flows From Investing ActivitiesPurchases
      of leasehold improvements and equipment
                              
                              
                              (1,658,992
                              )
                              
                              
                              (1,960,112
                              )Decrease
      in other assets
                              
                              
                              5,695
                              
                              
                              
                              14,537Net
      cash (used in) investing activities
                              
                              
                              (1,653,297
                              )
                              
                              
                              (1,945,575
                              )Cash
      Flows From Financing ActivitiesPrincipal
      proceeds from long-term debt
                              
                              
                              1,700,000
                              
                              
                              
                              1,600,000Proceeds
      from revolving line of credit
                              
                              
                              250,000
                              
                              
                              
                              -Principal
      payments on long-term debt
                              
                              
                              (949,686
                              )
                              
                              
                              (473,109
                              )Proceeds
      from the exercise of options and warrants
                              
                              
                              162
                              
                              
                              
                              -Net
      cash provided by financing activities
                              
                              
                              1,000,476
                              
                              
                              
                              1,126,891Increase
      (Decrease) in cash
                              
                              
                              595,382
                              
                              
                              
                              (2,736,470
                              )Cash
      at beginning of period
                              
                              
                              423,361
                              
                              
                              
                              3,442,712Cash
      at end of period
                              
                              $
                              1,018,743
                              
                              
                              $
                              706,242Supplemental
      Disclosure of Cash Payments forInterest
                              
                              
                              283,727
                              
                              
                              
                              149,792Supplemental
      Disclosure of Noncash TransactionsPurchase
      of leasehold improvements and equipment included in accounts
      payable
                              
                              
                              82,686
                              
                              
                              
                              97,535
 
 See Notes
to Consolidated Financial Statements (unaudited).
  Page |
5
  iSECUREtrac
CORP. AND SUBSIDIARY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Note
1.  General
  The
unaudited interim condensed consolidated financial statements as of June 30,
2009 and for the three and six month periods ended June 30, 2009 and 2008,
included herein, have been prepared in accordance with accounting principals
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 six months ended June 30, 2009 and June 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 six months ended June 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 5, 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 six months ended June 30, 2009, the Company granted options to
purchase a total of 38,000 and 41,500 shares of common stock to nine and
thirteen employees, respectively,  pursuant to the 2006
Plan.  During the three and six months ended June 30, 2009, 22,646 and
55,073 options issued under the 2006 Plan were forfeited, 2,500 and 9,275
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 six months ended
June 30, 2009, 292 and 292 options were exercised.  The following
table shows stock option activity during the six month period ended June 30,
2009:
  Page |
6
 
 Options
                          
                          Number of
                            Shares
                          
                          
                          Weighted
                            Average
                            Exercise Price
                            Per Share
                          
                          
                          Weighted
                            Average
                            Remaining
                            ContractualLife
                            (Years)
                          
                          
                          Aggregate
                            Intrinsic
                            ValueOutstanding
      at December 31, 2008
                          
                          
                          2,734,376
                          
                          
                          $
                          1.59
                          
                          
                          
                          
                          
                          $
                          -Granted
                          
                          
                          41,500
                          
                          
                          
                          0.64Exercised
                          
                          
                          (292
                          )
                          
                          
                          0.56Forfeited
                          
                          
                          (120,598
                          )
                          
                          
                          0.71Outstanding
      at June 30, 2009
                          
                          
                          2,654,986
                          
                          
                          $
                          1.56
                          
                          
                          
                          6.26
                          
                          
                          $
                          151,996Exercisable
      at June 30, 2009
                          
                          
                          2,045,053
                          
                          
                          $
                          1.88
                          
                          
                          
                          5.38
                          
                          
                          $
                          45,629
  As of
June 30, 2009, the aggregate intrinsic value of outstanding and exercisable
options, which is the actual value of the options if exercised, was $151,996 and
$45,629, respectively.
  During
the three and six months ended June 30, 2009, warrants to purchase up to 459,028
and 1,083,765 shares of common stock expired and no warrants were granted or
exercised by warrant holders.
  At June
30, 2009, the Company had 2,654,986 outstanding stock options, 6,287,045 shares
issuable upon exercise of warrants to be issued upon exchange of Preferred
Stock, and 2,460,770 shares issuable upon the exercise of outstanding warrants
that were not included in the computation of diluted EPS because to do so would
have been anti-dilutive for the period presented.
  The
Company accounts for its share-based compensation awards under Financial
Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS
No. 123(R)” or the “Statement”) which requires that the compensation cost
relating to share-based compensation awards, including grants of employee stock
options, be recognized in financial statements as these awards become vested,
based on the grant date fair value of the equity instruments
issued.
  For
purposes of FAS No. 123(R), 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:
  Page |
7
 
 Six Months Ended
                      June 30, 2009
                    
                    
                    Year Ended
                      December 31, 2008Risk
      free interest rate
                    
                    
                    3.77
                    %
                    
                    
                    3.79
                    %Expected
      volatility factor
                    
                    
                    83.22
                    %
                    
                    
                    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%
  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.
  Under FAS
No. 123(R), the Company is required to estimate forfeitures of stock options.
The forfeiture rate is the rate at which options are expected to be forfeited
prior to full vesting.  The forfeiture rate is determined based on
actual forfeiture rate experience as follows:  For each historical
year of option issuance, the total options issued for the year 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 $101,281 and $204,251 for the three and
six months ended June 30, 2009, respectively, compared to $105,218 and $210,347
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
June 30, 2009, there was approximately $192,411 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
                      
                      $
                      122,4952010
                      
                      $
                      69,3612011
                      
                      $
                      555Total
                      
                      $
                      192,411
  Page |
8
  Note
3.  Leasehold Improvements and Equipment
  The cost
and accumulated depreciation of our leasehold improvements and equipment as of
June 30, 2009 and December 31, 2008 are as follows:
  June 30, 2009
                    
                    
                    December 31, 2008Cost
                    
                    
                    Accumulated
                      Depreciation
                    
                    
                    Net Book
                      Value
                    
                    
                    Cost
                    
                    
                    Accumulated
                      Depreciation
                    
                    
                    Net Book
                      ValueEquipment
                    
                    $
                    1,067,086
                    
                    
                    $
                    660,693
                    
                    
                    $
                    406,393
                    
                    
                    $
                    969,624
                    
                    
                    $
                    592,072
                    
                    
                    $
                    377,552Leasehold
      improvements
                    
                    
                    239,341
                    
                    
                    
                    145,231
                    
                    
                    
                    94,110
                    
                    
                    
                    239,341
                    
                    
                    
                    113,924
                    
                    
                    
                    125,417Monitoring
      equipment
                    
                    
                    13,789,947
                    
                    
                    
                    9,406,810
                    
                    
                    
                    4,383,137
                    
                    
                    
                    12,145,730
                    
                    
                    
                    8,419,380
                    
                    
                    
                    3,726,350Total
      leasehold improvements and equipment
                    
                    $
                    15,096,374
                    
                    
                    $
                    10,212,734
                    
                    
                    $
                    4,883,640
                    
                    
                    $
                    13,354,695
                    
                    
                    $
                    9,125,376
                    
                    
                    $
                    4,229,319
  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 June 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 $9,600 for the three and six month periods
ended June 30, 2009, respectively, compared to $10,490 and $20,981 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 June 30, 2009 and December 31,
2008, is as follows:
  June
      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
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (901,728
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (892,128
                                                        )Balance
                                                        
                                                        $
                                                        2,302,179
                                                        
                                                        
                                                        $
                                                        9,794
                                                        
                                                        
                                                        $
                                                        2,302,179
                                                        
                                                        
                                                        $
                                                        19,394The
      estimated aggregate future amortization expense of the intangibles is as
      follows:2009
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        9,794Total
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        9,794
  Page |
9
  Note
5.  Accounts Payable
 
 The
Company has recorded accounts payable as follows for the six months ended June
30, 2009 and December 31, 2008:
 
 June 30,
                      2009
                    
                    
                    December 31,
                      2008Accounts
      Payable, trade
                    
                    
                    256,889
                    
                    
                    
                    403,399Accounts
      Payable, equipment manufacturer 1
                    
                    
                    57,680
                    
                    
                    
                    -Accounts
      Payable, equipment manufacturer 2
                    
                    
                    25,006
                    
                    
                    
                    -Total
      Accounts Payable
                    
                    
                    339,575
                    
                    
                    
                    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.
 
 2These
invoice amounts have been financed through AHK Leasing prior to the close of the
quarter as described in Note 7.  The proceeds from the financing of
the equipment related to these invoices is reflected in the Company's
cash  balance at June 30, 2009.
 
 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.
 
 At June
30, 2009, the Company had completed the financing of $25,006 of equipment
through AHK but had not yet remitted payment to the manufacturer for all the
related equipment.  This $25,006 is included in the Company’s cash
balance at June 30, 2009 and will be paid to the manufacturer when the
underlying invoices become due.
 
 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 six months
ended June 30, 2009, interest expense for the Revolving Credit Commitment,
including any applicable unused commitment fee, was $22,438 and $40,274,
respectively, as compared to $0 for the three and six months ended June 30,
2008.  As of June 30, 2009, the Company had drawn down all of the
funds available under the Revolving Credit Commitment.
  Page |
10
  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 six months ended June 30,
2009, interest expense for the Equipment Term Loan, including any applicable
unused commitment fee, was $1,060 and $3,131, respectively, as compared to $0
for the three and six months ended June 30, 2008.  As of June 30,
2009, the Company had $1,700,000 in proceeds still available under the Equipment
Term Loan, as amounts borrowed and repaid are no longer available under the
loan.  As of June 30, 2009, all amounts previously borrowed under the
Equipment Term Loan have been repaid.
  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 August 2009
to June 2012.  During the three and six months ended June 30, 2009,
the Company financed $600,000 and $1,700,000, respectively, under capital lease
arrangements with AHK.  As of June 30, 2009, the aggregate balance on
these capital leases totaled $3,425,715. For the three and six months ended June
30, 2009 interest expense to AHK was $91,422 and $168,566, respectively, as
compared to $47,869 and $82,278 for the three and six months ended June 30,
2008, respectively.  There was no accrued interest at June 30, 2009
and December 31, 2008 due to AHK.
 
 As of
June 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 June 30,
2009 and December 31, 2008, equaled $1,086,640 and $772,545,
respectively.
 
 Total
interest expense for the Company for the three and six months ended June 30,
2009 was $306,155 and $594,356, respectively, compared to $268,388 and $533,372
during the same periods in 2008.  Of that amount, $275,907 and
$537,185 was expensed to related parties under the AHK capital leases and the
Crestpark Note for the three and six months ended June 30, 2009, respectively,
compared to $259,126 and $520,382 during the same periods in
2008.
  Page |
11
  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 June 30, 2009, the Company had accrued Series C
Preferred Stock dividends totaling $3,977,530 and accretion to redemption value
of the Series C Preferred Stock totaling $755,802.  Of these amounts,
$276,602 and $48,039, respectively, were accrued during the three months ended
June 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%.
  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 July
21, 2009, the Company paid down $200,000 of the $750,000 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 $200,000 available
to be borrowed under the Revolving Credit Commitment.
  On July
28, 2009, the Company drew down approximately $82,000 from the Equipment Term
Loan with Crespark LP, Inc. also described in Note 6.  As a result of
this advance, the Company has remaining approximately $1,618,000 of credit
available under the agreement.
  The
Company evaluated events and transactions through August 11, 2009 for
potential recognition or disclosure in our financial
statements.  Besides those noted above, there are no additional
matters which require disclosure.
  Page |
12
  Note
10.  Recent Accounting Pronouncements
  In
September 2006 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurement.  SFAS No. 157 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 SFAS No. 157, fair value measurements are disclosed by
level within that hierarchy.  The Company adopted SFAS No. 157 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 SFAS No. 157;  (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
SFAS No. 157 on January 1, 2009. The adoption of the remaining provisions of
SFAS No. 157 had no material impact on the Company’s financial position, results
of operations or cash flows.
 
 In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
consolidated Financial Statements - an Amendment of ARB No. 51." 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.
SFAS No. 160 is effective for the fiscal years beginning on or after December
15, 2008.  The Company adopted SFAS No. 160 for the fiscal year
beginning January 1, 2009.  The adoption of SFAS No. 160 had no
material impact on the financial statements of the Company.
  In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”.
SFAS No. 141 (Revised) 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.The
Company adopted SFAS No. 141 for the fiscal year beginning January 1, 2009. SFAS
No. 141 (Revised) will have an impact on any future acquisitions.
  In April
2009, the FASB issued Financial Staff Position (“FSP”) 107-1 “Interim
Disclosures about Fair Value of Financial Instruments”.  FSP 107-1
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.
  FSP 107-1
is effective for periods ending after June 15, 2009.   The
Company adopted the staff positions for its second  quarter 10-Q. The
staff positions had no material impact on the financial statements. Additional
disclosures have been provided where applicable.
  Page |
13
  In May
2009, the FASB issued SFAS No. 165 “Subsequent Events”.  SFAS 165
provides guidance on when a subsequent event should be recognized in the
financial statements. Subsequent events that provide additional evidence about
conditions that existed at the date of the balance sheet should be recognized at
the balance sheet date. Subsequent events that provide evidence about conditions
that arose after the balance sheet date but before financial statements are
issued, or are available to be issued, are not required to be recognized. The
date through which subsequent events have been evaluated must be disclosed as
well as whether it is the date the financial statements were issued or the date
the financial statements were available to be issued. For nonrecognized
subsequent events which should be disclosed to keep the financial statements
from being misleading, the nature of the event and an estimate of its financial
effect, or a statement that such an estimate cannot be made, should be
disclosed. The standard is effective for interim or annual periods ending after
June 15, 2009. See Note 9 for Management’s evaluation of subsequent
events.
 
 In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140. In SFAS No.
166, the FASB improves 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.
  SFAS No. 166 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 SFAS No. 166 will
not have a material effect on our consolidated financial
statements.
 
 In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R). In SFAS No. 167, the FASB replaces the quantitative-based
risks and rewards calculation for determining whether an enterprise is the
primary beneficiary in a variable interest entity with an approach that is
primarily qualitative, requires ongoing assessments of whether an enterprise is
the primary beneficiary of a variable interest entity, and requires additional
disclosures about an enterprise’s involvement in variable interest entities.
 SFAS No. 167 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 SFAS No. 167 will
not have a material effect on our consolidated financial
statements.
 
 In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles. In SFAS No. 168, the FASB identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities.
  SFAS No. 168 shall be effective for financial statements issued for
interim and annual periods ending after September 15, 2009. Our adoption of SFAS
No. 168 will not have a material effect on our consolidated financial
statements.
 
 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 approximate fair value.
 
 Long-term
debt:  Based on the borrowing rates available to the Company for bank
loans with similar terms and maturities, the carrying value approximates fair
value due to the short maturity dates.
 
 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 $18,600,000 at June 30, 2009 using
a discount rate 5%.
  Page |
14
  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 (reflected below as Recurring 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”).
  Results
of Operations
 
 Highlights
of Operations for the three months ending June 30, 2009
 
 Revenue
Growth and Reduced Loss
 The
deployment of the contracts signed in late 2008 and early 2009 continued into
the three months ended June 30, 2009 during which the Company again reported
record levels of recurring revenue.  In addition, the cost reduction
plan and cost control measures implemented in mid-2008 continue to return
benefits through lower costs.
 
 In
comparison to the same period in 2008, during the three months ended June 30,
2009, the Company reported a 35% increase in total revenue and an $874,000
decrease in the reported operating loss.  Dating back to January 2008,
the Company has now reported six consecutive quarters of significantly improving
(lower) operating loss and net loss.
 
 Positive
Cash Flow
 For the
three months ended June 30, 2009, the Company reported approximately $629,000 of
net cash provided by operating activities - as defined in the Consolidated
Statement of Cash Flows.  This was the second consecutive quarter of
net cash provided by operating activities and year-to-date the Company has
reported over $1,200,000 of net cash provided by operating
activities.
  Page |
15




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





Summary
of  Financial Information


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





CONDENSED
CONSOLIDATED FINANCIAL HIGHLIGHTS


Three
months ended June 30, 2009 and 2008


(Rounded
to nearest thousand)





2009
                            
                            
                            2008
                            
                            
                            ChangeRevenues:Recurring
      revenues
                            
                            $
                            3,064,000
                            
                            
                            $
                            2,326,000
                            
                            
                            $
                            738,000Other
      revenues
                            
                            
                            128,000
                            
                            
                            
                            30,000
                            
                            
                            
                            98,000Total
      revenues
                            
                            
                            3,192,000
                            
                            
                            
                            2,356,000
                            
                            
                            
                            836,000Costs
      of revenue
                            
                            
                            1,173,000
                            
                            
                            
                            948,000
                            
                            
                            
                            225,000Gross
      profit margin
                            
                            
                            2,019,000
                            
                            
                            
                            1,408,000
                            
                            
                            
                            611,000Gross
      profit margin %
                            
                            
                            63.3
                            %
                            
                            
                            59.8
                            %Research
      and development expenses (R&D)
                            
                            
                            251,000
                            
                            
                            
                            329,000
                            
                            
                            
                            (78,000
                            )Sales,
      general and administrative expenses (SG&A)
                            
                            
                            1,862,000
                            
                            
                            
                            2,047,000
                            
                            
                            
                            (185,000
                            )Total
      R&D and SG&A
                            
                            
                            2,113,000
                            
                            
                            
                            2,376,000
                            
                            
                            
                            (263,000
                            )Operating
      loss
                            
                            
                            (94,000
                            )
                            
                            
                            (968,000
                            )
                            
                            
                            874,000Interest
      expense, net
                            
                            
                            (306,000
                            )
                            
                            
                            (264,000
                            )
                            
                            
                            (42,000
                            )Net
      loss
                            
                            $
                            (400,000
                            )
                            
                            $
                            (1,232,000
                            )
                            
                            $
                            832,000Preferred
      stock dividends and accretion
                            
                            
                            (325,000
                            )
                            
                            
                            (305,000
                            )
                            
                            
                            20,000Net
      loss available to common stockholders
                            
                            $
                            (725,000
                            )
                            
                            $
                            (1,537,000
                            )
                            
                            $
                            812,000


Page |
15


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 MonthsEnding
                      
                      
                      Ending
                      
                      
                      Ending
                      
                      
                      Ending
                      
                      
                      EndingJune 30
                      
                      
                      September 30
                      
                      
                      December 31
                      
                      
                      March 31
                      
                      
                      June 302008
                      
                      
                      2008
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2009Recurring
      RevenueEquipment
      leasing
                      
                      
                      2,239,000
                      
                      
                      
                      2,099,000
                      
                      
                      
                      2,254,000
                      
                      
                      
                      2,571,000
                      
                      
                      
                      2,948,000Admin
      Revenue
                      
                      
                      87,000
                      
                      
                      
                      71,000
                      
                      
                      
                      102,000
                      
                      
                      
                      132,000
                      
                      
                      
                      116,000Total
      Recurring Revenue
                      
                      
                      2,326,000
                      
                      
                      
                      2,170,000
                      
                      
                      
                      2,356,000
                      
                      
                      
                      2,703,000
                      
                      
                      
                      3,064,000Other
      Revenue
                      
                      
                      30,000
                      
                      
                      
                      8,000
                      
                      
                      
                      310,000
                      
                      
                      
                      401,000
                      
                      
                      
                      128,000Total
      Revenue
                      
                      
                      2,356,000
                      
                      
                      
                      2,178,000
                      
                      
                      
                      2,666,000
                      
                      
                      
                      3,104,000
                      
                      
                      
                      3,192,000Costs
      of Revenue
                      
                      
                      948,000
                      
                      
                      
                      844,000
                      
                      
                      
                      989,000
                      
                      
                      
                      1,166,000
                      
                      
                      
                      1,173,000Gross
      profit margin
                      
                      
                      1,408,000
                      
                      
                      
                      1,334,000
                      
                      
                      
                      1,677,000
                      
                      
                      
                      1,938,000
                      
                      
                      
                      2,019,000Gross
      profit margin percentage*
                      
                      
                      59.8
                      %
                      
                      
                      61.2
                      %
                      
                      
                      62.9
                      %
                      
                      
                      62.4
                      %
                      
                      
                      63.3
                      %Research
      & Development (R&D)
                      
                      
                      329,000
                      
                      
                      
                      275,000
                      
                      
                      
                      296,000
                      
                      
                      
                      319,000
                      
                      
                      
                      251,000Selling
      General & Administrative (SG&A)
                      
                      
                      2,047,000
                      
                      
                      
                      1,817,000
                      
                      
                      
                      2,001,000
                      
                      
                      
                      1,916,000
                      
                      
                      
                      1,862,000Subtotal
      R&D and SG&A
                      
                      
                      2,376,000
                      
                      
                      
                      2,092,000
                      
                      
                      
                      2,297,000
                      
                      
                      
                      2,235,000
                      
                      
                      
                      2,113,000Operating
      Loss
                      
                      
                      (968,000
                      )
                      
                      
                      (758,000
                      )
                      
                      
                      (620,000
                      )
                      
                      
                      (297,000
                      )
                      
                      
                      (94,000
                      )Total
      Full-Time Employees at  Quarter End
                      
                      
                      89
                      
                      
                      
                      80
                      
                      
                      
                      74
                      
                      
                      
                      73
                      
                      
                      
                      74


*Gross
profit 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 and June 30, 2009, the Company generated
positive cash flow from operations as described above, to cover the principal
payments on long-term debt as follows:





Page |
16




CONDENSED
CONSOLIDATED QUARTERLY  FINANCIAL HIGHLIGHTS


Three  months
ended March 31, 2009  and June 30, 2009 and six months ended June 30,
2009


(Rounded
to nearest thousand)


Six MonthsThree Months Ended
                  
                  
                  EndedMarch 31,2009
                  
                  
                  June 30, 2009
                  
                  
                  June 30, 2009Cash
      Flows From Operating ActivitiesNet
      loss
                  
                  $
                  (585,000
                  )
                  
                  $
                  (400,000
                  )
                  
                  $
                  (985,000
                  )Depreciation
      and amortization
                  
                  
                  504,000
                  
                  
                  
                  593,000
                  
                  
                  
                  1,097,000Stock
      based compensation
                  
                  
                  105,000
                  
                  
                  
                  103,000
                  
                  
                  
                  208,000Increase
      in Allowance for Doubtful Accounts
                  
                  
                  91,000
                  
                  
                  
                  70,000
                  
                  
                  
                  161,000(Increase)
      Decrease in accounts receivable
                  
                  
                  (42,000
                  )
                  
                  
                  298,000
                  
                  
                  
                  256,000(Increase)
      Decrease in inventories
                  
                  
                  45,000
                  
                  
                  
                  (108,000
                  )
                  
                  
                  (63,000
                  )(Increase)
      in prepaid expenses
                  
                  
                  (14,000
                  )
                  
                  
                  (33,000
                  )
                  
                  
                  (47,000
                  )Increase
      (Decrease) in accounts payable
                  
                  
                  148,000
                  
                  
                  
                  (295,000
                  )
                  
                  
                  (147,000
                  )Increase
      in accrued expenses
                  
                  
                  340,000
                  
                  
                  
                  274,000
                  
                  
                  
                  614,000Decrease
      in deferred revenues and gain on sale - leaseback
    transactions
                  
                  
                  (126,000
                  )
                  
                  
                  (31,000
                  )
                  
                  
                  (157,000
                  )Increase
      in accrued interest payable
                  
                  
                  153,000
                  
                  
                  
                  158,000
                  
                  
                  
                  311,000-Net
      cash provided by  operating activities
                  
                  
                  619,000
                  
                  
                  
                  629,000
                  
                  
                  
                  1,248,000Principal
      payments on long-term debt
                  
                  
                  (491,000
                  )
                  
                  
                  (459,000
                  )
                  
                  
                  (950,000
                  )Net
      cash provided by  operating activities less principal payments
      on long-term debt
                  
                  $
                  128,000
                  
                  
                  $
                  170,000
                  
                  
                  $
                  298,000





For
the three and six months ended June 30, 2009 compared to the three and six
months ended June 30, 2008





Revenue





Total
Revenue


For the
three month and six month periods ended June 30, 2009, the Company had total
revenue of $3,192,000, and $6,296,000, respectively compared with $2,356,000 and
$4,858,000 for the same periods in 2008 which represent increases of 35% and
30%.





Recurring
Revenue


The
Company’s principal sources of revenue (daily leasing of electronic monitoring
equipment and administrative, field and support services) which are reflected
above as Recurring Revenue, grew 32% and 26% for the three and six month periods
ended June 30, 2009, respectively,  in comparison to the three and six
month periods ended June 30, 2008. The increase in revenue is a result of an
increase in the number of units under lease and an increase in the number of
units utilizing the Company’s administrative, field and support
services.




Other
Revenue




For the
three and six month periods ended June 30, 2009, the Company had other revenue
of $128,000, and $529,000 an increase of $98,000 and $251,000 over the $30,000
and $278,000  recorded for the three and six months ended June 30,
2008.  This revenue consists primarily of income in connection with
a  Patent License Agreement signed in May of 2006 which is dependent
on the revenue levels of the licensee  as well as the periodic sale of
equipment to customers.




Page |
17




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
Company has historically experienced a slight seasonal dip in revenue during the
three months ended September 30th.  Management
believes the cause of the seasonality is the result of several of the Company’s
multi-year contracts re-pricing to a lower daily price as well as agencies
delaying the award of new contracts or rolling out or increasing programs in the
preceding quarter due to  the state or local agency being out of funds
until the new budget year begins on July 1st.  The
result is that revenue for the three months ending September 30th has
historically been flat or below the revenue for the preceding three month
period.





In
looking forward management recognizes it is possible that the revenue for the
three months ending September 30, 2009, could be flat in relation to the revenue
for the three months ended June 30, 2009 but is expected to remain 30%+ above
the revenue reported for the comparable period in 2008.





Subsequent
to June 30, 2009 the Company has been verbally awarded several contracts that
are expected to  begin implementation during the second half of
2009.   The exact timing of those implementations will have an
impact on the revenue reported for the three months ended September 30, 2009 and
December 31, 2009.





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.





The
increased cost of revenues for the three months and six months ended June 30,
2009 are generally associated with the increased number of proprietary and
third-party units deployed and increased royalty expense.





With
respect to the royalty expense, the Company continues to bring GPS tracking
units into compliance with the Settlement Agreement.  As of June 30,
2009 7.6% 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.




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




Research
and Development Expenses


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





Page |
18




R&D
expenses for the three and six months ended June 30, 2009 were $251,000 and
$569,000 respectively, decreases of $78,000 and $100,000 over the $329,000 and
$669,000 reported during the three and six months ended June 30,
2008.  The main reasons for the decrease in R&D costs were the
cost reduction and cost control plans implemented in 2008 and the capitalization
of costs as outlined below.





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 six months ended June 30,
2009  the Company capitalized $81,000 of costs. For the three and six
months ended June 30, 2008 the Company capitalized $24,000 and $52,000
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 June 30, 2009, SG&A expenses decreased $185,000
from  $2,047,000 reported in 2008 to $1,862,000 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 $182,000 as a result of the implemented cost
      control measures.




o
            Consulting
      fees decreased $21,000 as a result of the implemented cost control
      measures.




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




o
            Corporate
      insurance decreased $19,000




o
            Legal
      and accounting fees increased
$25,000




o
            Bad
      debt expense increased $41,000 in connection with the uncertainty of
      collectability of certain accounts
receivable




o
            Various
      other expenses including depreciation, advertising and ether expenses
      decreased an aggregate of $6,000 as a result of the implemented cost
      control measures




For the
six month period ended June 30, 2009, SG&A expenses decreased $520,000 from
$4,298,000 reported in 2008 to  $3,778,000 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 $430,000 as a result of the implemented cost
      control measures.




Page |
19




o
            Consulting
      fees decreased $71,000 as a result of the implemented cost control
      measures.




o
            Office
      supplies decreased $39,000 as a result of the implemented cost control
      measures




o
            Corporate
      insurance decreased $18,000




o
            Bad
      debt expense increased $100,000 in connection with the uncertainty of
      collectability of certain accounts
receivable




o
            Various
      other expenses including depreciation, advertising and other expenses
      decreased an aggregate of $62,000 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 six months ended June 30, 2009 the Company reported net interest
expense of $306,000 and $594,000, respectively, increases of $42,000 and $85,000
over the $264,000 and $509,000 reported for the three  and six months
ended June 30, 2008.  The increases are attributable to the increase
in equipment purchased under capital leases, 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 June 30, 2009.





Net
Loss


The
Company’s net loss for the three and six month periods ended June 30, 2009 was
$400,000, and $985,000 an improvement of $831,000 and $1,669,000 over the
comparable periods in 2008 for the reasons described above.




Preferred
Stock Dividends and Accretion




For the
three and six month periods ended June 30, 2009, preferred stock dividends and
accretion totaled $325,000 and $646,000 as compared to $305,000 and $610,000 for
the three and six month periods ended June 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.




Liquidity
and Capital Resources




For the
six months ended June 30, 2009, the Company generated $1,248,000 of cash from
operating activities. Investing activities used $1,653,000 of cash and financing
activities generated cash of $1,000,000.   The total of all cash
flow activities resulted in an increase in the balance of cash for the six
months ended June 30, 2009 of $595,000.




Page |
20




For the
same period of 2008, the Company used $1,918,000 of cash in operating
activities, used another $1,946,000 in investing activities, and generated
$1,127,000 in cash from financing activities.  The total of all cash
flow activities in the six months ended June 30, 2008 resulted in a decrease in
the balance of cash of $2,736,000




The
Company’s principal uses of cash are the payment of operating expenses, payments
on long-term leases, including interest, and working capital (e.g. accounts
receivable).   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, 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.





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.




Page |
21




The
Company’s principal executive officer and principal financial officer determined
that there have not been any changes in the Company's internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
that occurred during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.


PART
II. OTHER INFORMATION




Item
1.  Legal Proceedings.




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




Item
1A.  Risk Factors.




Not
required for smaller reporting companies.




Page |
22




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




On June
30, 2009, the Company issued an aggregate of 2,898 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.




The
annual meeting of stockholder was held on April 29, 2009.  At the
annual meeting, stockholders voted to:




(i)
            elect
      three directors of  the Company by the holders of the Common
      Stock to serve for a one-year term;




(ii)
            elect
      two directors of  the Company by the holders of the Series C
      Preferred Stock to serve for a one-year term;
  and




(iii)
            ratify
      the appointment of McGladrey & Pullen, LLP  as our
      independent auditors for the fiscal year ending December 31,
      2009




There
were 10,804,804  shares of Common Stock entitled to vote at the
meeting, of which 8,960,134 (82.93%)  were represented at the meeting,
and 1,000,000 shares of Series C Preferred Stock entitled to vote at the
meeting, of which 100% were represented at the meeting.


Page |
23


The
voting results were as follows:




Election
of  Directors by holders of Common Stock




Name
                              
                              For
                              
                              
                              Authority
                                WithheldRoger
      J. Kanne
                              
                              
                              7,667,315
                              
                              
                              
                              1,292,819Peter
      A. Michel
                              
                              
                              7,667,315
                              
                              
                              
                              1,292,819Ravi
      Nath
                              
                              
                              7,667,315
                              
                              
                              
                              1,292,819







Election
of Directors by holders of Series C Preferred Stock




Name
                            
                            For
                            
                            
                            Authority
                              WithheldRobert
      Korba
                            
                            
                            1,000,000
                            
                            
                            
                            -Joseph
      Ethridge
                            
                            
                            1,000,000
                            
                            
                            
                            -







Ratification
of Auditors




For
                            
                            
                            Against
                            
                            
                            Abstained7,549,281
                            
                            
                            
                            203,031
                            
                            
                            
                            1,410,980




As a
result, each nominee for director was elected to the Board of Directors for the
term set forth above and the appointment of McGladrey & Pullen, LLP as our
independent auditors for the fiscal year ending December 31, 2009 was duly
ratified by the stockholders.




Item
5.  Other Information.




None




Item
6.  Exhibits.





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




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




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


Page |
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:  August
      11, 2009By:
              /s/Lincoln
      ZehrLincoln
      ZehrChief
      Financial OfficerDated:  August
      11, 2009


Page |
25