Unassociated Document

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.

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).

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

	Three Months Ended						Nine Months Ended

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

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

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

The unaudited interim condensed consolidated financial statements as of September 30, 2009 and for the three and nine month periods ended September 30, 2009 and 2008, included herein, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.

The consolidated balance sheet of iSECUREtrac Corp. (“iSECUREtrac”, or the “Company”) and its wholly-owned subsidiary, iSt Services, Inc., at December 31, 2008, has been taken from the audited consolidated financial statements at that date. The condensed consolidated financial statements for the three and nine months ended September 30, 2009 and September 30, 2008 are unaudited and reflect all normal and recurring accruals and adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, operating results and cash flows for the interim periods presented in this quarterly report. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2008. The results of operations and cash flows for the three and nine months ended September 30, 2009 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2009. Where appropriate, items of an insignificant nature within the condensed consolidated financial statements have been reclassified from the previous periods’ presentation.

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

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

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

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

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

The Company estimates the forfeiture of stock options. The forfeiture rate is the rate at which options are expected to be forfeited prior to full vesting. The forfeiture rate is determined based on actual forfeiture rate experience as follows: For each historical year of option issuance, the total options issued for the year are compared to the options forfeited prior to having vested. For option years in which the two year vesting period has not passed, past experience is used to project future forfeitures. The total of pro forma forfeitures is then compared to total options awarded and the resultant percentage is used as the forfeiture rate. The estimated forfeiture rate for senior executive and non-senior executive option grants is 23% and 24%, respectively. This rate is recalculated on an annual basis.

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

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

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

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

On November 10, 2008, the Company entered into a loan agreement (the “Loan Agreement”) with Crestpark LP, Inc. (the “Lender”) and in connection with the Loan Agreement executed two separate promissory notes. The first note is for $750,000 for working capital via a Revolving Credit Commitment and the second note is for $1,750,000 for equipment financing via an Equipment Term Loan.

The proceeds of the Revolving Credit Commitment of $750,000 were used for working capital needs and are anticipated to be repaid from cash flow generated by the operations of the Company. The Revolving Credit Commitment has a term ending on July 1, 2010, is unsecured and bears interest at a fixed noncompounded rate of 12% per annum. The Company is also required to pay the Lender an unused commitment fee of 0.25% per annum on the average daily unused amount of the Revolving Credit Commitment. For the three and nine months ended September 30, 2009, interest expense for the Revolving Credit Commitment, including any applicable unused commitment fee, was $18,114 and $58,388, respectively. As of September 30, 2009, the Company had $200,000 of proceeds available under the Revolving Credit Commitment .

The proceeds of the $1,750,000 Equipment Term Loan are to be used to purchase GPS-based offender tracking and monitoring equipment that is leased or sold by the Company to its clients. It is anticipated that borrowings under the Equipment Term Loan will be repaid from permanent equipment financing secured by the Company from time to time. At the Lender’s discretion, any borrowings under the Equipment Term Loan that remain outstanding more than 30 days can be converted into separate 36 Month Notes, which are notes payable over 36 month terms. The Equipment Term Loan has a term ending July 1, 2010, bears interest at a fixed rate of 12% per annum and is secured by the monitoring equipment purchased with the proceeds of the Equipment Term Loan. The Company is also required to pay the Lender an unused commitment fee of 0.25% per annum on the average daily unused amount of the Equipment Term Loan. For the three and nine months ended September 30, 2009, interest expense for the Equipment Term Loan, including any applicable unused commitment fee, was $2,796 and $5,927, respectively, as compared to $0 for the three and nine months ended September 30, 2008. As of September 30, 2009, the Company had $1,617,593 in proceeds still available under the Equipment Term Loan, as amounts borrowed and repaid are no longer available under the loan. As of September 30, 2009, the Company had $82,407 outstanding under the Equipment Term Loan.

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

As of September 30, 2009, the Company had outstanding borrowings of $11,877,475 under a secured Promissory Note payable and associated Credit and Security Agreement (the “Crestpark Note”) with Crestpark LP, Inc. (the “Lender”). Principal on the Crestpark Note is due on the earlier of (i) July 1, 2010 or (ii) the first date on which the Company either issues equity securities or arranges for additional indebtedness (other than trade indebtedness incurred in the ordinary course of its business) in a transaction or series of transactions which generates aggregate net proceeds to the Company of not less than the then current principal amount outstanding under the Crestpark Note, plus all accrued but unpaid interest. The Company may prepay the Crestpark Note at any time without premium or penalty. The Crestpark Note provides, among other things, that $6,455,250 of the borrowings thereunder bears interest at 7.0% per annum and that such interest will be due and payable at maturity of the Crestpark Note. The remaining $5,422,225 of borrowings (the “Floating Tranche”) under the Crestpark Note bears interest at a floating rate equal to 2% over the prime rate (the “Base Rate”). The portion of the interest on the Floating Tranche determined by the Base Rate will be payable at maturity, but the remaining portion of the interest representing the 2% premium over the Base Rate is payable monthly. Accrued interest on the Crestpark Note at September 30, 2009 and December 31, 2008, equaled $1,247,466 and $772,545, respectively.

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

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.

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

							Fav (Unfav)
	2009			2008			Difference
Revenues:
Equipment revenue	$	2,924,000		$	2,099,000		$	825,000
Services revenue		107,000			71,000			36,000
Royalty revenue		180,000			8,000			172,000
Total revenues		3,211,000			2,178,000			1,033,000
Costs of revenue		1,172,000			844,000			(328,000	)
Gross profit margin		2,039,000			1,334,000			705,000
Gross profit margin %		63.5	%		61.2	%

Research and development expenses (R&D)		316,000			275,000			(41,000	)
Sales, general and administrative expenses (SG&A)		1,796,000			1,817,000			21,000
Total R&D and SG&A		2,112,000			2,092,000			(20,000	)
Operating loss		(73,000	)		(758,000	)		685,000
Interest expense, net		(305,000	)		(288,000	)		(17,000	)
Net loss	$	(378,000	)	$	(1,046,000	)	$	668,000
Preferred stock dividends and accretion		(350,000	)		(329,000	)		(21,000	)
Net loss available to common stockholders	$	(728,000	)	$	(1,375,000	)	$	647,000

	Three Months			Three Months			Three Months			Three Months			Three Months
	Ended			Ended			Ended			Ended			Ended
	September 30			December 31			March 31			June 30			Sept 30
	2008			2008			2009			2009			2009
Revenue:
Equipment leasing	$	2,099,000		$	2,312,000		$	2,625,000		$	2,974,000		$	2,924,000
Service Revenue		71,000			102,000			132,000			116,000			107,000
Royalty Revenue		8,000			252,000			347,000			102,000			180,000
Total Revenue		2,178,000			2,666,000			3,104,000			3,192,000			3,211,000

Costs of Revenue		844,000			989,000			1,166,000			1,173,000			1,172,000

Gross profit margin		1,334,000			1,677,000			1,938,000			2,019,000			2,039,000
Gross profit margin percentage*		61.2	%		62.9	%		62.4	%		63.3	%		63.5	%

Research & Development (R&D)		275,000			296,000			319,000			251,000			316,000

Selling General & Administrative (SG&A)		1,817,000			2,001,000			1,916,000			1,862,000			1,796,000

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

	Nine Months Ended September 30, 2009			Year Ended December 31, 2008
Risk free interest rate		3.78	%		3.79	%
Expected volatility factor		83.28	%		82.84	%
Expected option term in years	3.5 to 6.5			3.5 to 6.5
Dividends	$	0.00		$	0.00
Forfeitures for senior executives and non-senior executives	23% and 24%			23% and 24%

2009	$	41,458
2010	$	71,947
2011	$	6,310
Total	$	119,715

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

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