As filed
with the Securities and Exchange Commission on March 24, 2009.


UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





x   ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
      the fiscal year ended December 31, 2008
                Commission
      file number: 000-26455





OR




 ̈  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For the
transition period from _____________ to _____________.




iSecureTrac
Corp.


(Exact
name of registrant as specified in its charter)





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





5078
South 111th
Street


Omaha,
Nebraska 68137


(Address
of principal executive offices)(Zip Code)


Registrant’s
telephone number: (402) 537-0022





Securities
registered under Section 12(b) of the Exchange Act:  None


Securities
registered under Section 12(g) of the Exchange Act:  Common Stock, par
value $0.001 per share





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act Yes  ̈ No
x





Indicated
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. Yes  ̈ No
x




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated file, or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act)


Large
accelerated filer  ̈
Accelerated filer  ̈
  Non-accelerated filer   ̈    Smaller
reporting company  x


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





The
aggregate market value of the common stock of the registrant held by
non-affiliates, all of which is voting, was approximately $5,900,000, based on
the closing sale price reported on June 30, 2008.





As of
March 2, 2009, there were 10,799,090 shares of the registrant’s common stock
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the definitive Proxy Statement for the Registrant’s 2009 Annual Meeting of
Stockholders to be filed within 120 days of the fiscal year ended December 31,
2008, are incorporated by reference in Items  10, 11, 12, 13 and 14 of
Part III of this Annual Report on Form 10-K










iSecureTrac
Corp.





Table
of Contents





Item
                                              
                                              
                                              
                                              PagePART
      I1
                                              
                                              Business
                                              
                                              011A.
                                              
                                              Risk
      Factors
                                              
                                              081B.
                                              
                                              Unresolved
      Staff Comments2.
                                              
                                              Properties
                                              
                                              123.
                                              
                                              Legal
      Proceedings
                                              
                                              134.
                                              
                                              Submission
      of Matters to a Vote of Security Holders
                                              
                                              13PART
      II5.
                                              
                                              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                              
                                              136.
                                              
                                              Selected
      Financial Data ( Not Required for SRC)
                                              
                                              147.
                                              
                                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                              
                                              147A.
                                              
                                              Quantitative
      and Qualitative Disclosures about Market Risk ( Not Required for
      SRC)
                                              
                                              228.
                                              
                                              Financial
      Statements and Supplementary Data
                                              
                                              229.
                                              
                                              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                                              
                                              429A.(T)
                                              
                                              Controls
      and Procedures
                                              
                                              439B.
                                              
                                              Other
      Information
                                              
                                              44PART
      III10.
                                              
                                              Directors,
      Executive, Officers and Corporate Governance
                                              
                                              4411.
                                              
                                              Executive
      Compensation
                                              
                                              4412.
                                              
                                              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                              
                                              4413.
                                              
                                              Certain
      Relationships and Related Transactions, and Director
      Independence
                                              
                                              4414.
                                              
                                              Principal
      Accounting Fees and Services
                                              
                                              45PART
      IV15.
                                              
                                              Exhibits
      and Financial Statement Schedules
                                              
                                              45Signatures
                                              
                                              48







PART
I




Regarding
Forward-Looking Statements




This Form
10-K contains forward-looking statements including statements about the future
of iSECUREtrac Corp.’s (“iSECUREtrac” or the “Company” or “we” or “our”)
products and the industry, statements about future business plans and
strategies, and most other statements that are not historical in
nature.  In this Form 10-K, forward-looking statements are
generally identified by the words “believes,” “intends,” “expects,” “may,”
“will,” “should,” “plan,” “projected,” “contemplates,” “anticipates,”
“estimates,” “predicts,” “potential,” “continue,” or similar
terminology.  Readers of this Form 10-K should understand that a
number of factors could cause the Company’s actual results to differ materially
from those expressed in the forward-looking statements contained
herein.  Many of these factors are described in Item 7 Managements’
Discussion and Analysis of Financial Condition and Results of Operations and
under the heading “Risk Factors”.  Other factors discussed elsewhere
in this report, in filings with the Securities and Exchange Commission or in
materials incorporated herein or therein by reference may also affect the
Company’s future financial condition and results of operations.




Item
1.  Business




Background




The
Company is a Delaware corporation that is the successor in interest to a
Colorado corporation initially incorporated in 1983.  For more than a
decade, the Company has been engaged in its current business of providing
electronic monitoring products and services for individuals under community
supervision with the objective of “monitoring compliance and modifying
behavior.”  In 1997 the Company introduced its first Global
Positioning System (“GPS”) tracking system (1600 series), followed by the 2000
Series in 2003, and the latest generation system – the System 5000 in the fourth
quarter of 2007.




Market
Overview




At
December 31, 2007, the latest date statistics are available; over 7.3 million
people in the United States were under some form of correctional supervision –
probation, prison, jail or parole.  Approximately 70% of those people
were included in the population most likely to utilize the Company’s technology
– community supervision.




Additionally,
according to the Pew Public Safety Performance Project, for the first time more
than one in every 100 adults is now confined in an American jail or
prison.  The United States now incarcerates more people than any
country in the world.  The growing number of incarcerated offenders is
burdening states’ budgets with soaring costs.  Agencies are seeing
increases in facilities, health care, geriatrics and overtime costs while at the
same time seeing a lag in victim restitution, child support and tax payments as
incarcerated persons lose their jobs and become a tax burden.




Electronic
monitoring systems (e.g. GPS, House Arrest, and Visual Breath Alcohol) enable an
agency to monitor, at a greater level of supervision, the activities of a
growing number of probationers and parolees without having to allocate
additional labor resources to such monitoring efforts.  Community
supervision programs give corrections and law enforcement agencies more
flexibility in solving budget-related problems.  Since public safety
is maintained or improved by linking alternative sentencing programs with
electronic monitoring, programs like work release become viable, cost-effective
tools for today’s correctional system.




In
summary, the use of products and services offered by iSECUREtrac offer three
distinct advantages over incarceration:




(1)
            it
      reduces the public's tax burden by allowing the offender to work thereby
      providing the offender the opportunity to meet their financial
      obligations,




(2)
            it
      reduces prison and jail overcrowding by providing a viable alternative to
      incarceration at a significantly lower cost to the community,
      and




1




(3)
            it
      helps to reduce the rate of recidivism (re-offense) when combined with
      regular rehabilitation/reintegration
counseling.




Industry/Technology
Advancements




The
electronic monitoring market remains an emerging, early stage
industry.   Accordingly, new technology is being developed and
introduced at a rapid pace.  In general, the technological advancements of
the new products are able to demand a higher price point.  However, the
industry has historically demonstrated that in most instances, there remains a
steady and consistent demand for the existing technology and
products.




Business




iSECUREtrac
develops, markets, leases and services products that assist in “monitoring
compliance and modifying behavior” of individuals who are under the supervision
of the criminal justice system and social service agencies, primarily in the
United States.




The
Company’s principal sources of revenue are daily leasing of electronic
monitoring equipment including access to the corresponding web-based monitoring
software, and providing administrative, field and support services, generally
charged on a per offender basis.




Our
Products and Services




iSECUREtrac
has a full suite of electronic monitoring products and services consisting
of:




·
            GPS
      Tracking Systems




·
            House
      Arrest




·
            Visual
      Breath Alcohol Testing




·
            Supplemental
      Monitoring Center Services




In order
to position the Company to remain competitive in the electronic monitoring
industry, in 2007   we invested in both the GPS (System 5000) and
Visual Breath Alcohol (MEMS 3000) technology.   The Company sees a
continued demand for its existing product offerings and remains committed to
continuing to provide and support all product lines.




GPS
Tracking Systems




GPS
tracking systems enable law enforcement agencies to continuously monitor an
individual’s location, and thereby compliance, with pre-determined
terms.




Operated
by the United States Department of Defense and provided free of charge, the
Global Positioning System consists of at least 24 operational satellites that
orbit the Earth every 12 hours.  Eight to twelve GPS satellites are
visible from any point on Earth at any given moment in time.  A
position fix can be acquired when a GPS receiver receives signals from at least
three of these satellites.




Our GPS
tracking products use this state-of-the-art positioning technology to monitor
the movements of individuals under community supervision to a degree not
previously possible or cost efficient.




The
Company’s Series 2000 and Series 5000 GPS systems are manufactured in the United
States and consist of:




·
            Personal
      Tracking Unit (PTU) that is carried by the offender when not in the
      charging base.  The PTU may include cellular communication
      capabilities.  The reception of the RF signal from the ankle
      cuff indicates the cuff and PTU are in proximity. The absence of that RF
      signal indicates a possible
violation.




·
            An
      ankle cuff that is worn continuously by the offender. The cuff emits a
      radio frequency (RF) signal to the
PTU.




2




·
            A
      charging base that re-charges the PTU battery and in some systems contains
      traditional land line communication
capability.




Our GPS
unit tracks an individual by collecting data points regarding their location and
time, at intervals as short as every 10 seconds.   All data
processing and compliance assessments take place in the PTU, a capability we
call on-board intelligence.  When operating in an “active” mode, this
feature provides officers with near real-time compliance reporting and
potentially quicker response to violations by high risk offenders.




Our GPS
systems offer:




·
            Tracking
      units equipped with on-board intelligence allowing them to compute GPS
      locations and discern violation status without the assistance of a
      monitoring center or other secondary
sources




·
            Advanced
      circumvention sub-systems to identify, report and log attempts by the
      offender to tamper with the equipment or render it
    inoperable




·
            The
      latest generation GPS chip sets for greater accuracy and sensitivity in
      areas that typically have weak GPS signals (e.g., urban canyons, terrain
      under dense foliage)




·
            Secure,
      web-based management reporting through any Internet-ready device, anywhere
      in the world




·
            Geo-fencing
      to control entrance and/or egress from geographically defined locations
      (e.g., home, work, spouse’s residence, elementary schools,
      etc.)




·
            Automated
      voice notification with escalation to an unlimited number of parties
      including but not limited to supervising officers, law enforcement
      officials, judicial personnel and potential
  victims




·
            Equipment
      designed and manufactured specifically for the corrections market that is
      hypoallergenic (ankle bracelet or cuff), tamper and shock resistant and
      water resistant or water proof (ankle bracelet or
  cuff)




·
            Crime
      scene analysis (Crime Scene Inquiry) to assist agencies in identifying or
      eliminating potential suspects based upon their proximity to a specific
      crime location within a specified time
period.




All of
the Company’s GPS products collect data points regarding the individual’s time
and location and provide the individual immediate feedback regarding compliance
violations.  Depending on the specifications of the law enforcement or
social services agency, the agency or monitoring center is notified of
compliance violations based on the modes of operations outlined
below:




·
            Active GPS - uses
      on-board intelligence and a cellular communications network to report
      locations and violation status in near real time (Series 2000 and Series
      5000).  In addition, the Company’s System 5000 also offers the
      capability of reporting locations and violation status via a traditional
      land-line when the PTU is returned to the charging base.  This
      service is particularly useful in areas where cellular coverage is
      weak.




·
            Passive GPS - uses the
      same on-board intelligence as the Active GPS unit, but reports the
      locations and violation status via a traditional land-line telephone only
      when the PTU is returned to the charging base (Series 2000
      only)




House
Arrest




House
Arrest is a system that enables law enforcement agencies to verify an offender’s
presence at a particular location (house, residence, work release facility,
etc.).  Equipment and features of the iSECUREtrac House Arrest System
include:




3




·
            The
      ability to move from House Arrest to Active or Passive GPS remotely with
      the flip of a switch




·
            A
      hypoallergenic and water proof ankle bracelet or cuff worn continuously by
      the offender which is equipped with tamper-detecting sub-systems and a
      radio frequency (RF) transmitter




·
            A
      shock resistant monitoring base with enhanced signal reception to ensure
      superior signal monitoring at range of
distances




·
            Reporting
      through a single, secure, web-based platform utilizing common management
      software for monitoring offenders on House Arrest, Active or Passive
      GPS




The
agency can set a schedule for each offender corresponding to the rules of
release.  For example, the offender must be at home between 6:00 p.m.
and 7:00 a.m. every day.  Offender deviation from the schedule results
in a violation notification sent to the agency.If the offender takes
off the ankle bracelet or tampers with it, it sends out a unique signal alerting
the monitoring base of the violation.  The base then communicates with
the monitoring center which, in turn, automatically alerts the appropriate
authorities.




Visual
Breath Alcohol Testing




Our
breath alcohol monitoring system enables an offender’s breath alcohol levels to
be tested remotely and at the offender’s residence.  The system calls
the offender on a scheduled, random, or on-demand basis, giving him clear
instructions.  The offender blows into a drinking straw inserted in
the HomeStation while a camera on the unit photographs the
offender.  Breath Alcohol Test data and photographs are sent
electronically to our data center.  Our personnel confirm the
offender’s identity by comparing the event verification photo with original
reference picture provided by the agency.  Deviation from program
parameters, as defined by the agency, results in monitoring center staff
contacting appropriate agency personnel.




Advantages
of the iSECUREtrac Alcohol Testing System include:




·
            In-home
      testing of individuals who may not have convenient access to a central
      testing facility


·
            A
      proven alcohol testing methodology that yields court admissible
      evidence


·
            The
      ability to customize a testing schedule (fixed, random or on-demand) to
      fit an individual’s supervision/corrections
plan


·
            The
      use of a time-tested reliable system designed to meet agency program
      parameters and budget




Many
agency programs use a combination of iSECUREtrac systems to better monitor
compliance and shape more socially responsible behavior.  For example,
it is not unusual for individuals accused or convicted of domestic violence to
be supervised with both active GPS and remote alcohol monitoring.




Supplemental
Monitoring Center Services




To effect
a more seamless integration with agency protocols and programs, iSECUREtrac
provides supplemental services.  These optional services
include:




·
            Direct Monitoring Center
      Intervention in which iSECUREtrac will attempt to resolve common
      compliance issues through direct contact with the monitored
      individual.  If iSECUREtrac cannot resolve the issue, the
      situation is escalated in accordance with agency
  protocols.




·
            Equipment Install and
      Removal frees agents from the task of fitting their clients and
      retrieving the equipment at the end of the
  program.




·
            Automated Voice
      Notificationprovides voice
      alerts to officers in addition to text, pager and email notifications when
      those individuals under community supervision violate the terms of their
      release. These automated voice alerts can be customized by offender,
      violation and content. Voice messages can be automatically and
      simultaneously sent to a virtually unlimited number of recipients
      including potential victims.




4




·
            On-Site Inventory
      Management provides precise control and safeguarding of
      equipment.  An on-site iSECUREtrac administrator maintains
      accurate inventory records including data pertaining to equipment receipt,
      the movement of equipment within and between locations and inventory
      assignments that match equipment serial numbers with client case
      numbers.




·
            Extended Trainingincludes follow-up
      training and refresher courses to ensure agents, officers and supervisors
      are comfortable with the operation of the equipment and proficient in
      reading and interpreting electronic monitoring
  reports.




·
            Program Development and
      Consulting can help fine tune protocols and procedures to reduce
      program “noise”, annoyance alerts and unnecessary
  data.




·
            Financial Services and
      Administrationprovides agencies
      several options in the financial administration of community supervision
      programs.  For example, iSECUREtrac provides client billing
      services in which the offender/client is directly invoiced by iSECUREtrac
      for the cost of their electronic
supervision.




·
            Day Reporting
      Servicesincludes the
      provision by iSECUREtrac of a reporting center and staff to effectively
      supervise release compliance by those individuals under community
      supervision.




Web-Based
Software/System Interface (tracNET24)




Our
web-based software/system interface, known as tracNET24, is provided to end-user
agencies through the Internet.  Probation or corrections officers with
a secure log-in can access the system and know where his or her clients have
been over any given time period.  With GPS monitoring, the officer can
create or modify a schedule of locations where the offender must be at certain
times of the day, week or month (e.g., a place of work, medical appointments,
counseling appointments, meetings with the probation officer,
etc.).  He/she merely enters a drop down menu for the schedule and
either enters an address or points to a spot on the map and specifies a
radius.  He/she thereby creates “inclusion zones” for the
offender.  Similarly, the officer can create “exclusion zones” (e.g.,
schools, home of an ex-spouse, etc.).  Once the parameters are
entered, the officer clicks “synchronize with Personal Tracking Unit” which
causes the scheduling and zone information to be downloaded to the tracking
unit.




Features
of iSECUREtrac’s proprietary reporting and management software include but are
not limited to:




·
            The
      ability to establish boundaries or geo-fences via “inclusion” and
      “exclusion” zones, either for individual clients or entire caseload
      populations




·
            The
      flexibility to change the content, delivery method and timing of alert
      notifications to best fit agency
needs




·
            Access
      to all reports and key events pertaining to monitored individuals through
      a secure, web-based program




·
            Utilization
      of Microsoft’s Virtual Earth® as a mapping system overlay as well as
      recognizable and easy-to-read names of countries, states, counties,
      cities, municipalities, landmarks, points of interest, and street
      names




·
            The
      ability to present mapping and monitoring information for all enrolled
      clients in the vicinity of a crime at the time the crime was committed,
      enabling the officer to research multiple clients
      simultaneously




5




Customers




Our
principal customers are federal, state, county, and municipal law enforcement
and corrections agencies in the United States.  Our customers also
include social service agencies dealing with curbing juvenile delinquency and
domestic violence/abuse.




Sales
and Distribution Channels




The
Company markets and sells its products and services to governmental and
not-for-profit agencies throughout the United States directly through its
in-house sales force and indirectly through third party
distributors.  We also market our products and services through other
service providers that have direct relationships with law enforcement and
correction agencies and other end users of our products and who integrate
iSECUREtrac systems with their own localized offender management
services.




Competition




The
Company competes for GPS-based offender monitoring with a number of different
companies, including G4S, Omnilink Systems, ProTech Monitoring, Inc., BI
Incorporated,  STOP LLC and SecureAlert.  Neither the
Company nor any of these competitors has attained a dominant market position,
however, several of the Company’s principal competitors have access to
financial, technical, marketing, distribution and procurement resources that are
greater than those of the Company.  In addition, there are several
other companies that use GPS, electronic mapping and Internet technologies to
provide tracking and monitoring products and services.  The markets served
by these companies include vehicle and rail car tracking, vehicle fleet
management, container tracking as well as cell phones and 911 emergency response
services.  While the companies serving these markets do not currently sell
products or services to the corrections and social services markets, these
companies or others may enter this market in the future.




In
general, contracts with our targeted customer base in the offender tracking
market are awarded through a competitive bid process in which we must
demonstrate the ability to provide services meeting stated customer
specifications at competitive prices.  We compete by providing
state-of-the-art equipment, a proprietary web-based reporting solution, and
customer support that we believe offers the highest value to our
customers.  In addition, we are the only provider that offers Active
GPS, Passive GPS, and traditional House Arrest products that are integrated into
a single web application.




Principal
Suppliers




The
Company’s products are manufactured in the United States by third party contract
manufacturers in accordance with manufacturing specifications set by the
Company.  The PTUs and other hardware components are designed to use
off-the-shelf electronic components available for any standard electronic
assembly.  The Company works in partnership with contract
manufacturers to manage the supply chain of electronic components for the
manufacture of the Company’s products.  In January of 2003, the
Company contracted with Altron Inc. of Anoka, Minnesota, an ISO-9002 qualified
electronics manufacturer, to be the primary manufacturer of PTUs.




Intellectual
Property Rights




We have
been issued four patents to date by the United States Patent Office: (i) No.
6,072,396 for an "Apparatus and Method for Continuous Electronic Monitoring and
Tracking of Individuals" was issued on June 6, 2000 and will expire on December
30, 2014; (ii) No. 6,100,806, also for an "Apparatus and Method for Continuous
Electronic Monitoring and Tracking of Individuals" was issued on August 8, 2000
and will expire on December 30, 2014; (iii) No. 6,337,665 was issued on January
8, 2002 for an "Antenna Orientation Maintaining System in a System for Tracking
Individuals and Method of Use" and will expire on April 24, 2017; and (iv) No.
6,646,617 was issued on November 11, 2003, for an "Antenna Orientation
Maintaining System in a System for Tracking Individuals and Method of Use" and
will expire on April 24, 2017.




6




We have
been issued patent rights in Australia, patent No. 2000235013, issued November
17, 2005 relating to an “Apparatus and Method for Continuous Electronic
Monitoring and Tracking of Individuals” and will expire on February 24,
2020.




We have
been granted a non-exclusive software license from SiRF Technology Incorporated
(“SiRF”) allowing us to embed SiRF’s patented GPS technology into our
products.




We assert
common law copyright and statutory trade secret protection to our proprietary
software. Our logo, the words “tracNET24”, Reg No. 3114715, “iSECUREtrac”, Reg
No. 3159632, “IntelliCuff”, Reg No. 3313220  and the word
"iSecureTrack”, Reg. No. 2520981 are registered trademarks.




In
addition, we have applied for several additional patents and
trademarks.




Regulation




The
manufacture, sale and use of devices that utilize any part of the radio
frequency radiation spectrum are subject to regulation. The Federal
Communications Commission (the "FCC") is the principal agency responsible for
regulations relating to the manufacture, sale and use of devices that transmit
radio frequency radiation.  All of our equipment utilizing radio
frequency has each received full FCC compliance certification.




Similarly,
insofar as GPS remains funded and controlled by the U.S. government, devices
utilizing GPS must conform to government specifications.




Research
and Development




The
electronic monitoring market remains an emerging, early stage
industry.  Accordingly, new technology is being developed and
introduced at a rapid pace.  In order to maintain our competitive
position, we must constantly improve our products and services.  Our
research and development staff designs and develops products incorporating GPS
technology, wireless communications, web-based reporting and data storage and
transmission.  Our research and development activities are primarily
related to our GPS products.  During 2008, these activities were mainly
related to addressing the engineering and design issues related to the System
5000 as identified in the 10-KSB filed for the year ended December 31, 2007, and
efforts directed toward the improvement in the functionality of the related
web-based software and interfaces including the development and enhancement of
crime scene inquiry.   During 2008 and 2007, our research and
development expenses totaled $1,240,000 and $1,892,000,
respectively.




Employees




As of
December 31, 2008, the Company had 74 full-time employees, one part-time
employee and one contractor on staff.  Of the 74 full-time employees,
five are executives, five are administrative personnel, seven are in sales, 14
are in customer support, 13 operate the monitoring center, one is in technology
services, 17 are in operations and 12 are in engineering and
development.  The part-time employee works in the monitoring center
and the contractor is assisting in technology services.




General
Information




The
Company’s principal office is located at 5078 South 111th Street, Omaha,
Nebraska, 68137 (telephone: 402-537-0022) and its internet address is
www.isecuretrac.com.  The Company’s annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports are available free of charge through its website as soon as
reasonably practicable after these documents are filed with the Securities and
Exchange Commission.  The information contained in the Company’s
website is not part of this Report on Form 10-K.




7




Item
1A.  Risk Factors




The
Company’s business and financial condition are subject to a number of risks and
uncertainties, many of which are beyond the control of the
Company.  These risks and uncertainties include the
following:




The
current economic downturn could adversely impact our future
revenue.




Our
revenues are primarily derived from contracts with state, local and county
government agencies in the United States.  The budgets of many of
these government agencies have been, or are expected to be, negatively impacted
by the current economic downturn.  As a result, the amount spent by
the Company’s current clients on equipment and services supplied by the Company
may be reduced or grow at rates slower than anticipated and it may be more
difficult to attract additional government clients for the Company’s equipment
and services.  As a result, our ability to maintain or increase our
revenues may be negatively affected.




We
have incurred significant losses and expect losses to continue.




Our
revenues have not been sufficient to cover our cost of operations and other
expenses, and we have yet to establish profitable operations.  We
incurred net losses of $4,601,000 and $7,202,000 for the years ending December
31, 2008 and 2007 respectively.   As a result, on
December 31, 2008, the Company is reporting an accumulated deficit of
$75,762,000.  There is no assurance that we will be able to increase
our revenues or manage our operating expenses so that our revenues will be
sufficient to cover our operating expenses or that we will achieve profitability
in the future.




We
have incurred a substantial amount of secured debt and may not have enough cash
to repay it at maturity.




We have
borrowed a total of $11,900,000 under a Credit and Security Agreement with
Crestpark LP, Inc., an affiliate of our controlling shareholder.  The
entire principal of this loan, plus an estimated $2,075,000 of accrued interest,
will be due and payable no later than July 1, 2010.  The borrowings
under the loan are secured by a first priority security interest in all of the
assets of the Company except that Lender’s security interest in certain
monitoring equipment is subordinate to the interest of AHK Leasing
LLC  under its sale leaseback arrangements.  To the extent
that the Company is not able to retain sufficient cash flow from operations to
repay principal and interest on this loan, we will need to refinance the loan
through additional debt or equity financings.  There is no assurance
that the Company will be able to generate sufficient cash flow from operations
to service this loan and there is no assurance that we will be able to refinance
this loan or otherwise raise capital in order to repay all amounts that will be
due and payable on the loan.  If we cannot repay all principal and
interest on this loan as due, we will be subject to all of the remedies
available to the lender upon default, including foreclosure of virtually all of
our assets.  It is unlikely that the holders of our common stock would
recover any of their investment if that were to occur.




Markets
for our products and services may develop slowly.




The
long-term financial viability of our company depends on our ability to attract
additional customers for our GPS tracking system in order to increase
revenues.  There are many factors that affect the demand for our
products and services that we cannot control.  In particular, we sell
our products to governmental agencies, such as state corrections
departments.  Accordingly, the acquisition and continued use of our
products by these types of customers is generally subject to legislative
appropriation of funds which is subject to budgetary and political
considerations that change over time.  Adoption of our GPS tracking
system may represent a significant expenditure by these types of customers which
often face restrictive budgetary constraints.  In addition, contracts
with governmental agencies are generally subject to a competitive bid process
which is often time consuming and does not assure that we will be successful in
selling our products and services or that we will be able to do so at prices
that are economically beneficial for us.  In addition, our industry is
relatively new and many of our target customers are only now becoming aware of
our products and services and the possible advantages they may
provide.  As a result, there is often a long sales cycle involved with
sales of our products and services.  Due to these market factors, the
demand for GPS tracking systems is difficult to forecast and may develop slowly
or sporadically.  Accordingly, we may not be able to commercialize our
products on the scale necessary to achieve profitability.




8




We
face significant competition and this may make it difficult to achieve
profitability.




We
compete with a number of other companies that offer GPS solutions for offender
tracking.  In addition, many companies use GPS, electronic mapping and
Internet technologies to provide tracking and monitoring products and services
in other markets such as vehicle and rail car tracking, vehicle fleet
management, container tracking and emergency response
services.  Companies serving these other markets may enter the
offender tracking market in the future.  Some of the companies with
which we currently compete, or may compete against in the future, may have
access to greater financial, technical, marketing, distribution and procurement
resources than we have.  There can be no assurance that we will be
able to continue to successfully compete in our market.  Accordingly,
we may not be able to commercialize our products on the scale necessary to
achieve profitability.




Our
technology may become obsolete which could materially adversely affect our
ability to sell our products and services.




If our
technology, products and services become obsolete, our business operations would
be materially adversely affected.  The market in which we compete is
characterized by technological change, evolving industry standards,
introductions of new products, and changes in customer demands that can render
existing products obsolete and unmarketable.  We must continuously
improve our product as the market demands smaller, lighter and more versatile
PTUs.  Faster and more accurate mapping software may make the mapping
software currently used in our tracNET24 application obsolete.  Future
releases of Windows may also compel us to upgrade our application
software.  Our current application servers will require continuous
upgrading with newer and faster models or our technology will become
obsolete.  Our future success will depend upon our ability to address
the increasingly sophisticated needs of our customers by supporting existing and
emerging hardware, software, database, and networking platforms and by
developing and introducing enhancements to our existing products and new
products on a timely basis that keep pace with technological developments,
evolving industry standards, and changing customer
requirements.  Accordingly, we have and expect to continue to incur
significant research and development expenses in the future.




We
rely on third party vendors to manufacture our products and if these vendors are
unable to timely supply us with required components our business will be
materially adversely affected.




While we
acquire the components used in our products from various electronics
manufacturers, we currently rely on a single electronics manufacturer to
manufacture most of our PTUs.  We have not qualified or contracted
with other manufacturers for our PTUs.  Accordingly, if our vender
encounters difficulties with meeting our demand for PTUs, alternative components
may not be available quickly enough to avoid delaying production and shipment of
customer orders.  Any such delays may hamper our ability to service
existing customers or market our products and services to new
customers.  Also, if the agreement with our current manufacturer is
terminated or expires, our search for additional or replacement manufacturers
could result in significant delays, added expense and our inability to maintain
or expand our customer base.




We
face the risk of systems interruptions and capacity constraints, possibly
resulting in adverse publicity, revenue loss and erosion of customer
trust.




The
satisfactory performance, reliability and availability of our network
infrastructure are critical to our reputation and our ability to attract and
retain customers and to maintain adequate customer service levels.  We
may experience temporary service interruptions for a variety of reasons,
including telecommunications or power failures, fire, water damage, vandalism,
computer bugs or viruses or hardware failures.  We may not be able to
correct a problem in a timely manner.  Any service interruption that
results in the unavailability of our system or reduces its capacity could result
in real or perceived public safety issues that may affect customer confidence in
our services and result in negative publicity that could cause us to lose
customer accounts or fail to obtain new accounts.  Any inability to
scale our systems may cause unanticipated system disruptions, slower response
times, degradation in levels of customer service, or impaired quality and speed
of transaction processing.  We are not certain that we will be able to
project the rate or timing of increases, if any, in the use of our services to
permit us to upgrade and expand our systems effectively or to integrate smoothly
any newly developed or purchased modules with our existing systems.




9




If
we were denied access to GPS technology, our business will be materially
adversely affected.




Our
services rely on signals from GPS satellites built and maintained by the U.S.
Department of Defense.  GPS satellites and their ground support
systems are subject to electronic and mechanical failures and
sabotage.  If one or more satellites malfunction, there could be a
substantial delay before they are repaired or replaced, if at all, and our
services may cease and customer satisfaction would suffer.  In
addition, the U.S. government could decide not to continue to operate and
maintain Global Positioning System satellites over a long period of time or to
charge for the use of the Global Positioning System.  Furthermore,
because of increasing commercial applications of the Global Positioning System,
other U.S. government agencies may become involved in the administration or the
regulation of the use of Global Positioning System signals in the
future.  If the foregoing factors affect the availability and pricing
of Global Positioning System technology, our business will
suffer.  Global Positioning System technology is also dependent on the
use of radio frequency spectrum.  An international organization known
as the International Telecommunications Union controls the assignment of
spectrum.  If the International Telecommunications Union reallocates
radio frequency spectrum, our services may become less useful or less
reliable.  This would, in turn, harm our business.  In
addition, emissions from mobile satellites and other equipment using other
frequency bands may adversely affect the utility and reliability of our
services.




If
we are not able to protect our intellectual property rights, our business may be
materially adversely affected.




In order
to protect the technology and other intellectual property underlying our
products and services, we rely on a combination of patents, license agreements,
copyrights, trade secrets, and trademarks.  We also rely on
confidentiality procedures and contractual provisions to protect our
intellectual property rights.  There can be no assurance that any of
the measures we take to protect our intellectual property rights will be
adequate.  There is a risk that any patents issued to us may be
invalidated, circumvented, or challenged; that the rights granted thereunder
will not provide competitive advantages to us; or that none of our future patent
applications will be issued with the scope of protection sought by us, if at
all.  Furthermore, there is a risk that others may develop
technologies that are similar or superior to our technology or design around any
patents issued to us.  Despite our efforts to protect our intellectual
property rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as
proprietary.




The
protection of our intellectual property in foreign countries is
uncertain.




We have
not registered our patents with most foreign countries and may have no legal
recourse to proceed against entities in such countries that choose to copy its
hardware and/or software.  In addition, the laws of some foreign
countries do not protect proprietary information rights as fully as do the laws
of the United States.




We
depend on licensed technologies and may need to obtain additional licenses in
the future to remain competitive.




We have
been granted a nonexclusive software license from a technology company that has
designed GPS chip sets and software solutions that allow us to embed GPS
technology into our products.  This license has an indefinite term;
however, it may be terminated if the licensor loses any of its rights to the
software products encompassed therein or by either party upon thirty (30) days
written notice in the event of a material breach of the license by the other
party.  Termination of this license could have a material adverse
effect on our business.  In addition, we may need to obtain licenses
to additional technologies in the future in order to keep our products
competitive.  If we fail to license or otherwise acquire necessary
technologies, we may not be able to develop new products or services needed to
remain competitive.




Our
products could infringe on the intellectual property rights of
others.




There are
other U.S. patents and patent applications submitted for technologies in, or
related to, our principal area of business, and it is possible that foreign
patents are also in existence or have been applied for by others.  As
a result, any application or exploitation of our technology could infringe on
patents or proprietary rights of others and any licenses required as a result of
such infringement might not be available on commercially reasonable terms, if at
all.  This may lead others to assert patent infringement or other
intellectual property claims against us.




10




We
may not be able to effectively manage the growth of our company.




If our
business grows in the manner that we currently project, we must continue to
implement and improve our operational, financial and management information
systems and expand, train and manage our employees.  We may not have
made adequate allowances for the costs and risks associated with this expansion,
and our systems, procedures or controls may not be adequate to support the
growth of our operations.  Our failure to manage growth effectively
could cause us to incur substantial additional costs, lose opportunities to
generate sales or impair our ability to maintain our customers.




Risks
Relating to the Ownership of Our Common Stock




The
price for our common stock is volatile and may drop.




The
trading price for our common stock has fluctuated significantly over recent
years.  The volatility in the price of our stock is attributable to a
number of factors, not all of which relate to our operating results and
financial position.  Nevertheless, continued volatility in the market
price for our stock should be expected and we cannot assure you that the price
of our stock will increase in the future.  Fluctuations or further
declines in the price of our stock may affect our ability to sell shares of our
stock and to raise capital through future equity financing.




We
may issue a large number of shares to holders of preferred stock and warrants
and the issuance and sale of these shares may depress the market price of our
common stock.




We
currently have warrants outstanding which entitle the holders thereof to acquire
3,544,535 shares of common stock.   An additional 6,287,045
shares of our common stock are issuable upon exercise of warrants to be issued
upon exchange of our Preferred Stock.  In addition, the holder of our
Series C 8% Exchangeable Preferred Stock may convert this Preferred Stock
into 4,782,609 shares of common stock.  The issuance and sale of these
shares is likely to result in substantial dilution to the proportionate equity
interest and voting power of holders of our common stock.  The sale of
these shares also has potential to cause significant downward pressure on the
price of our common stock.  This is particularly the case if the
shares being placed into the market exceed the market's ability to absorb the
increased stock.  Such an event could place further downward pressure
on the price of our common stock.  This presents an opportunity for
short sellers to contribute to the further decline of our stock
price.  If there are significant short sales of our stock, the price
decline that would result from this activity will cause the share price to
decline more so, which, in turn, may cause long holders of the stock to sell
their shares thereby contributing to sales of stock in the market.




In
2005, we issued a significant number of shares of Preferred Stock as part of a
refinancing transaction and the holder of these shares has the ability to
acquire a majority position in our common stock and appoint a majority of our
Board.




On June
27, 2005, we issued 1,000,000 shares of our Series C 8% Cumulative Compounding
Exchangeable Preferred Stock plus warrants to acquire 3,234,248 shares of the
Company’s common stock, of which 3,052,898 are currently outstanding, at
exercise prices ranging from $2.30 to $16.50 per share.  The 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.  Upon conversion of the Preferred Stock into common stock, and
exercise of its warrants, the holder of the Preferred Stock will control a
majority of the shares of our common stock.  Prior to that time, the
holder of the Preferred Stock has the right to appoint a majority of our Board
of Directors.  In addition, each share of Preferred Stock will have 11
votes on all other matters submitted to the vote of the Company’s
stockholders.  Accordingly, the holder of our Preferred Stock holds a
majority of the voting power held by all stockholders of the
Company.  If the holder of the Preferred Stock exchanges its Preferred
Stock for shares of the Company’s common stock and exercises all of its
warrants, it would own approximately 55% of the issued and outstanding shares of
the Company’s common stock.




Our
common stock is deemed to be "penny stock," which may make it more difficult for
investors to sell their shares due to suitability requirements.




The
Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain
exceptions.  For any transaction involving a penny stock, unless
exempt, Rule 15g-9 requires:




11




·
            that
      a broker or dealer approve a person's account for transactions in penny
      stocks; and




·
            that
      the broker or dealer receives from the investor a written agreement to the
      transaction, setting forth the identity and quantity of the penny stock to
      be purchased.




In order
to approve a person's account for transactions in penny stocks, the broker or
dealer must:




·
            obtain
      financial information and investment experience objectives of the person;
      and




·
            make
      a reasonable determination that the transactions in penny stocks are
      suitable for that person and the person has sufficient knowledge and
      experience in financial matters to be capable of evaluating the risks of
      transactions in penny stocks.




The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:




·
            sets
      forth the basis on which the broker or dealer made the suitability
      determination; and




·
            that
      the broker or dealer received a signed, written agreement from the
      investor prior to the transaction.




Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules.  This may make it more difficult for investors to
dispose of our common stock and cause a decline in the market value of our
stock.




Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions.  Finally, monthly statements have
to be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.




Item
2.  Properties




The
Company leases approximately 11,477 square feet of office space located at 5078
South 111th Street, Omaha, Nebraska where most of the Company’s administrative,
service, and other business operations are conducted.  The lease was
amended on December 18, 2006 to extend the term of the lease to December 31,
2009.  The base rent for this property was $7,053 per month through
October 31, 2008 when it increased to $7,265 per month for the remaining term of
the lease.  In addition to base rent, the Company pays a pro rata
share of the operating expenses of the building.  The Company’s pro
rata share of operating expenses on the leased premises is $3,099 per
month.




The
Company also leases approximately 1,800 square feet of office space located at
11132 Q Street, Omaha, Nebraska where its monitoring center is
located.  The lease term commenced on January 1, 2007, and ends on
December 31, 2009.  The base rent for this property is $1,125 per
month.  In addition to base rent, the Company pays a pro rata share of
the operating expenses of the building.  The Company’s pro rata share
of operating expenses on the leased premises is $549 per month.




12




In the
opinion of management, each of the leased properties is adequate for the
Company’s current and reasonably foreseeable needs.  However, as a
result of the upcoming lease expirations management is evaluating our options
for renewing our existing leases or securing new space.  The Company
does not own any real property.




Item
3.  Legal Proceedings





The
Company is not currently involved in any material pending legal proceedings but
may, from time to time, be involved in ordinary routine litigation incidental to
the business.




Item
4.  Submission of Matters to a Vote of Security Holders




No
matters were submitted to a vote of the Company’s shareholders during the fourth
quarter of 2008.




PART
II




Item
5.  Market for Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities




Market
Information.iSECUREtrac’s common stock is listed on the OTC
Bulletin Board under the trading symbol “ISEC”.  The following table
sets forth the high and low sale prices for the Company’s common stock during
each calendar quarter of 2007 and 2008:




Year
                                      
                                      Quarter
                                      
                                      High
                                      
                                      
                                      Low1st
                                      
                                      $
                                      1.57
                                      
                                      
                                      $
                                      0.902007
                                      
                                      2nd
                                      
                                      $
                                      1.55
                                      
                                      
                                      $
                                      0.973rd
                                      
                                      $
                                      1.50
                                      
                                      
                                      $
                                      1.054th
                                      
                                      $
                                      1.28
                                      
                                      
                                      $
                                      0.621st
                                      
                                      $
                                      0.72
                                      
                                      
                                      $
                                      0.452008
                                      
                                      2nd
                                      
                                      $
                                      0.71
                                      
                                      
                                      $
                                      0.333rd
                                      
                                      $
                                      0.65
                                      
                                      
                                      $
                                      0.334th
                                      
                                      $
                                      0.55
                                      
                                      
                                      $
                                      0.19




The
source of the foregoing information is Bloomberg, LP Quotations and reflects
inter-dealer prices, without retail markup, markdown or commission and may not
represent actual transactions.




Holders.As of
December 31, 2008 there were approximately 367 stockholders of record for the
Company’s common stock.




Dividends.The
Company has not declared any dividends on shares of Common Stock and has no
plans to do so in the foreseeable future.




Recent Sales of Unregistered
Securities.  The Company issued 19,410, 6,226 and 3,582 shares
of common stock without registration under the Securities Act of 1933 during
2008, 2007 and 2006, respectively, to non-management directors as payment of
director fees.  The number of shares of common stock issued in each
case was based on the fair market value of the Company’s common stock as of the
date of the meetings to which such fees related.  All previously
unreported, unregistered issuances of common stock during 2008 are as
follows:




Date
                            
                            
                            
                            Amount
      of
                            
                            
                            
                            
                            
                            Cash
      toIssued
                            
                            Title
                            
                            Securities
      Issued
                            
                            Security
      Holder
                            
                            Description
      of Transaction
                            
                            Company02/25/08
                            
                            Common
      Stock
                            
                            
                            3,076
                            
                            Various
      Directors
                            
                            Shares
      issued for directors' fees
                            
                            
                            N/A05/05/08
                            
                            Common
      Stock
                            
                            
                            5,556
                            
                            Various
      Directors
                            
                            Shares
      issued for directors' fees
                            
                            
                            N/A08/11/08
                            
                            Common
      Stock
                            
                            
                            2,778
                            
                            Various
      Directors
                            
                            Shares
      issued for directors' fees
                            
                            
                            N/A11/03/08
                            
                            Common
      Stock
                            
                            
                            8,000
                            
                            Various
      Directors
                            
                            Shares
      issued for directors' fees
                            
                            
                            N/A




13




All of
the foregoing sales of common stock were exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) of such Act.  All such
shares are subject to restrictions on resale.




Company Purchases of its Equity
Securities.No purchases of the Company’s common stock were
made by the Company or any “affiliated purchaser” (as defined in Rule 10b-18
under the Securities Exchange Act of 1934) during 2008.




Item
6.  Selected Financial Data




Not
Required for Smaller Reporting Company




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





Highlights
of 2008 Operations





During
the year ended December 31, 2008, two significant objectives were
accomplished:





First,
the engineering and design issues related to the System 5000, which were
identified in the Annual Report on Form 10-KSB filed for the year ending
December 31, 2007, were resolved in the first six months of
2008.  Over the last six months of 2008, the System 5000 has performed
very well in competitive testing and its reputation as a highly reliable product
line has increased substantially over that period of time.





Second,
beginning in the first three months of 2008, the Company began the process of
evaluating its cost structure and initiated a cost reduction plan to reduce and
control expenditures, most particularly in the Selling General and
Administrative area.





The
Company began 2008 with 92 full-time employees and as a result of the cost
reduction plan reduced the number of full-time employees by almost 20% to 74 by
December 31, 2008.  In addition, the Company implemented a number of
other cost controls which contributed to the reduced overall expense levels in
2008.





The
reduction in headcount and cost controls has resulted in the Company reducing
its monthly operating expenses, excluding the provision for doubtful accounts,
from $875,000 per month during the three months ended December 31, 2007 to
$685,000 per month during the three months ended at December 31, 2008, a
reduction of approximately 22%.





Management
believes that the lowered cost structure of the Company, the growth in recurring
revenues in the three months ending December 31, 2008, combined with the
anticipated revenue growth from contracts signed subsequent to year-end, as
further described under Total Revenues below, as well as known and anticipated
growth in contracts in place at December 31, 2008 will allow the Company to
achieve cash flow positive operations during 2009.





14





Summary
of Financial Information


The
following table provides a comparison of selected financial highlights for the
years ended December 31, 2008 and 2007:




CONDENSED
CONSOLIDATED FINANCIAL HIGHLIGHTS
 Years
Ended December 31, 2008 and 2007
 (Rounded
to nearest thousand)
 
 2008
                                                
                                                
                                                2007
                                                
                                                
                                                ChangeTotal
      revenues
                                                
                                                $
                                                9,702,000
                                                
                                                
                                                $
                                                8,786,000
                                                
                                                
                                                $
                                                916,000Cost
      of revenues
                                                
                                                
                                                3,868,000
                                                
                                                
                                                
                                                3,640,000
                                                
                                                
                                                
                                                228,000Gross
      profit margin
                                                
                                                
                                                5,834,000
                                                
                                                
                                                
                                                5,146,000
                                                
                                                
                                                
                                                688,000Research
      and development expenses (R&D)
                                                
                                                
                                                1,240,000
                                                
                                                
                                                
                                                1,892,000
                                                
                                                
                                                
                                                (652,000
                                                )Sales,
      general and administrative expenses (SG&A):Litigation
      and settlement expenses
                                                
                                                
                                                -
                                                
                                                
                                                
                                                1,118,000
                                                
                                                
                                                
                                                (1,118,000
                                                )Management
      restructuring expenses
                                                
                                                
                                                -
                                                
                                                
                                                
                                                207,000
                                                
                                                
                                                
                                                (207,000
                                                )Consulting
      expenses - Sarbanes-Oxley
                                                
                                                
                                                -
                                                
                                                
                                                
                                                70,000
                                                
                                                
                                                
                                                (70,000
                                                )Other
      sales, general and administrative expenses
                                                
                                                
                                                8,117,000
                                                
                                                
                                                
                                                8,531,000
                                                
                                                
                                                
                                                (414,000
                                                )Total
      sales, general and administrative expenses
                                                
                                                
                                                8,117,000
                                                
                                                
                                                
                                                9,926,000
                                                
                                                
                                                
                                                (1,809,000
                                                )Total
      R&D and SG&A
                                                
                                                
                                                9,357,000
                                                
                                                
                                                
                                                11,818,000
                                                
                                                
                                                
                                                (2,461,000
                                                )Operating
      loss
                                                
                                                
                                                (3,523,000
                                                )
                                                
                                                
                                                (6,672,000
                                                )
                                                
                                                
                                                3,149,000Interest
      expense, net
                                                
                                                
                                                (1,078,000
                                                )
                                                
                                                
                                                (530,000
                                                )
                                                
                                                
                                                (548,000
                                                )Net
      loss
                                                
                                                $
                                                (4,601,000
                                                )
                                                
                                                $
                                                (7,202,000
                                                )
                                                
                                                $
                                                2,601,000Preferred
      stock dividends and accretion
                                                
                                                
                                                (1,224,000
                                                )
                                                
                                                
                                                (1,186,000
                                                )
                                                
                                                
                                                38,000Net
      loss available to common stockholders
                                                
                                                $
                                                (5,825,000
                                                )
                                                
                                                $
                                                (8,388,000
                                                )
                                                
                                                $
                                                2,563,000


15





Quarterly
Highlights


In
addition to the annual statements of operation presented above, the following
selected quarterly financial and non-financial data is important in
understanding the Company’s results of operation for the year ending December
31, 2008 and the operating trends going into 2009.




CONDENSED
CONSOLIDATED QUARTERLY  FINANCIAL HIGHLIGHTS
 Year
Ended December 31, 2008
 (Rounded
to nearest thousand)
 
 Three
      Months
                                
                                
                                Three
      Months
                                
                                
                                Three
      Months
                                
                                
                                Three
      Months
                                
                                
                                12
      MonthsEnding
                                
                                
                                Ending
                                
                                
                                Ending
                                
                                
                                Ending
                                
                                
                                EndingMarch
      31
                                
                                
                                June
      30
                                
                                
                                September
      30
                                
                                
                                December
      31
                                
                                
                                DecemberRecurring
      RevenueEquipment
      leasing
                                
                                
                                2,180,000
                                
                                
                                
                                2,239,000
                                
                                
                                
                                2,099,000
                                
                                
                                
                                2,254,000
                                
                                
                                
                                8,772,000Administrative
      field & support service revenues
                                
                                
                                74,000
                                
                                
                                
                                87,000
                                
                                
                                
                                71,000
                                
                                
                                
                                102,000
                                
                                
                                
                                334,0002,254,000
                                
                                
                                
                                2,326,000
                                
                                
                                
                                2,170,000
                                
                                
                                
                                2,356,000
                                
                                
                                
                                9,106,000Equip
      Sales/Leaseback
                                
                                
                                35,000
                                
                                
                                
                                24,000
                                
                                
                                
                                -
                                
                                
                                
                                58,000
                                
                                
                                
                                117,000Other
      Revenues
                                
                                
                                213,000
                                
                                
                                
                                6,000
                                
                                
                                
                                8,000
                                
                                
                                
                                252,000
                                
                                
                                
                                479,000Total
      Revenue
                                
                                
                                2,502,000
                                
                                
                                
                                2,356,000
                                
                                
                                
                                2,178,000
                                
                                
                                
                                2,666,000
                                
                                
                                
                                9,702,000Cost
      of Revenues
                                
                                
                                1,088,000
                                
                                
                                
                                948,000
                                
                                
                                
                                844,000
                                
                                
                                
                                988,000
                                
                                
                                
                                3,868,000Gross
      profit margin
                                
                                
                                1,414,000
                                
                                
                                
                                1,408,000
                                
                                
                                
                                1,334,000
                                
                                
                                
                                1,678,000
                                
                                
                                
                                5,834,000Research
      & Development (R&D)
                                
                                
                                340,000
                                
                                
                                
                                329,000
                                
                                
                                
                                275,000
                                
                                
                                
                                296,000
                                
                                
                                
                                1,240,000Selling
      General & Administrative (SG&A)
                                
                                
                                2,252,000
                                
                                
                                
                                2,047,000
                                
                                
                                
                                1,817,000
                                
                                
                                
                                2,001,000
                                
                                
                                
                                8,117,000Subtotal
      R&D and SG&A
                                
                                
                                2,592,000
                                
                                
                                
                                2,376,000
                                
                                
                                
                                2,092,000
                                
                                
                                
                                2,297,000
                                
                                
                                
                                9,357,000Operating
      Loss
                                
                                
                                (1,178,000
                                )
                                
                                
                                (968,000
                                )
                                
                                
                                (758,000
                                )
                                
                                
                                (619,000
                                )
                                
                                
                                (3,523,000
                                )Total
      Full-Time Employees at  Quarter End
                                
                                
                                91
                                
                                
                                
                                89
                                
                                
                                
                                80
                                
                                
                                
                                74





Total
Revenues


For the
year ended December 31, 2008, the Company had total revenue of $9,702,000, an
increase of 10.4% over the total revenue of $8,786,000 recorded for the year
ended December 31, 2007.  The Company’s principal sources of revenue
(daily leasing of electronic monitoring equipment and administrative, field and
support services) grew 8.6% over 2007. The increase in revenue is a result of an
increase in the number of units under lease (equipment leasing) and
the  number of units utilizing the Company’s monitoring center
services (administrative field & support service revenues).





On a
quarterly basis, the Company reported increasing record levels of recurring
revenue (record levels when the quarter was reported) in the three month periods
ending March 31, 2008, June 30, 2008 and December 31, 2008.  During
the three months ended September 30, 2008, the recurring revenue dipped as a
result of the mix of growth and declines in existing contacts during the quarter
as well as the timing of new contracts won and contracts lost.





Subsequent
to December 31, 2008, the Company has deployed additional units in connection
with the expansion of programs under contracts in existence at December 31, 2008
as well as new contracts signed subsequent to December 31, 2008.  The
incremental recurring revenue that is expected to be generated by these units
could result in the recurring revenue for the three months ending March 31, 2009
being higher than the three months ended March 31, 2008 by as much as 14% to
18%.




16




Cost
of Revenues


Cost of
Revenues represents all direct costs related to delivery of monitoring equipment
including amortization of the acquisition costs, repairs and maintenance of the
monitoring equipment, transportation costs, communication costs associated with
the equipment, as well as costs to upgrade existing units for advancements in
technology.  Certain increases were experienced in royalty expenses,
which began January 27, 2008 and are further described below, as well as
communication costs and amortization as a result of additional units under
lease.  However, these increases were offset by reductions in other
costs such as third party service costs and equipment upgrade and supply costs
most of which were associated with the 2000 series product line.  The
net result is an increase in total cost of revenues of $228,000 from the year
2007 to 2008.





On
November 27, 2007, the Company and Pro Tech Monitoring, Inc. (“Pro Tech”)
entered into a Confidential Settlement Agreement (“Settlement Agreement”),
pursuant to which the Company agreed to make a modification to its GPS tracking
equipment to eliminate or disable a component that allegedly infringed on a U.S.
patent held by Pro Tech.  On January 27, 2008, the Company became
subject to royalty payments, which escalate over time, on unmodified equipment
generating revenue.  Throughout the year ended December 31, 2008, the
Company actively brought GPS tracking units into compliance with the Settlement
Agreement, and will continue to do so as practical in 2009.  On
December 31, 2008, 13.5% of the Company’s GPS tracking equipment available to
generate revenue were subject to royalties.  For the year ended
December 31, 2008, the Company expensed $240,000 in settlement royalty
costs.





Gross
Profit Margin


As a
result of higher revenues, combined with the minimal increase in cost of
revenues, the Company’s gross profit margin for 2008 improved 13.4% to
$5,834,000 in 2008 from $5,146,000 in 2007, an increase of
$688,000.  Gross profit margin, as a percentage of total revenue,
improved from 58.6% for 2007 to 60.1% for 2008.





Looking
forward, management believes that a gross profit margin in excess of 60% is
sustainable.





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.





Research
and Development expenses for 2008 were $1,240,000, a decrease of $652,000 over
the $1,892,000 expensed in 2007.  Of the $652,000 decrease, $200,000
was attributable to the hiring and relocation of a new senior manager and
severance costs associated with the previous manager.  See comments below
in Sales, General and Administrative regarding management restructuring. 
The remainder of the decrease was the result of the final development and
testing involved in the production of our next generation product, the System
5000, which began commercial production in the fourth quarter of
2007.





The
Company is currently in the process of redesigning several major software
systems and, in accordance with Statement of Position (SOP) 98-1, has
capitalized certain payroll and related costs associated with the
development of the applications.  For the year ended December 31, 2008, the
capitalized expenses totaled approximately $114,000.  No costs
associated with this redesign were incurred prior to 2008.


17


On a
quarterly basis, R&D expenses increased slightly in the three months ending
December 31, 2008 as a result of an open position being filled by contract staff
as well as a reduction of costs capitalized in connection with the software
re-write noted above.





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
year ended December 31, 2008, SG&A expenses decreased $1,809,000 to
$8,117,000 from $9,926,000 incurred in 2007.  Significant components
of the decrease in SG&A expense from 2008 to 2007 are related to expenses
incurred in 2007 as highlighted below:




·
            Litigation
      and settlement expenses:  In 2007, we incurred $1,118,000
      in legal fees and settlement costs in connection with the lawsuit brought
      by Pro Tech described above. The Company did not incur similar
      expenses in 2008.




·
            Management
      restructuring expenses:  In 2007, we incurred
      compensation expenses of $207,000 relating to hiring and relocation of new
      executive officers and severance costs associated with the previous
      officers.  The actions referred to herein, and in “Research and
      Development Expenses” above, represent a transition of the Company’s
      entire executive and senior management team.  The Company did
      not incur similar expenses in 2008.




·
            Consulting
      expenses – Sarbanes-Oxley:  In 2007, we incurred
      consulting costs of $70,000 for assisting management in the initial design
      and evaluation of the Company’s internal controls and procedures over
      financial reporting and disclosure.  The Company did not incur
      similar expenses in 2008.




·
            Other
      sales, general and administrative expenses:  Other sales,
      general and administrative expenses decreased $414,000 from $8,531,000 in
      2007 to $8,117,000 in 2008.  The significant increases and
      decreases from 2007 to 2008 are as
follows:




o
            Personnel
      related expenses including salaries, benefits, recruiting, and travel
      decreased approximately $80,000 primarily due to the decrease in staffing
      levels related to sales and customer support and monitoring center
      services.




o
            Consulting
      fees decreased approximately $156,000 as the Company decreased its
      reliance on outside consultants and
lobbyists.




o
            Bad
      debt expense increased approximately $158,000 due to uncertainty regarding
      the payment of accounts receivable by two
  customers.




o
            Advertising
      expenses decreased approximately $71,000 due to the implemented cost
      control measures




o
            Office
      expenses decreased approximately $70,000 due to the implemented cost
      control measures and the reduction in the Company’s overall
      headcount.




o
            Decreases
      of $195,000 in various other expenses including Accounting & Legal,
      Liability Insurance, Other Business Development Expenses, and Other
      Expenses.




On a
quarterly basis, other sales, general and administrative expenses increased in
the fourth quarter of 2008 as a result of increasing the provision for bad
debts, in the amount of approximately $224,000, in connection with two customer
accounts for which collectability is uncertain.  Notwithstanding the
increased provision, the Company is actively pursuing
collection.


18




Looking
forward, management expects Operating Expenses which include SG&A and
R&D to continue at, or slightly above the same levels as incurred in the
second half of 2008, not including the increased bad debt provision recorded in
the quarter ended December 31, 2008.




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.  The net interest expense increased $548,000 from $530,000 in
2007 to $1,078,000 in 2008.  The increase is attributable to the
increase in equipment purchased under capital leases, as well as the additional
borrowings from Crestpark LP, Inc (“Crestpark”) in late 2007.





As a
result of the continued borrowings from Crestpark and the Company’s continuing
use of capital leases to finance its equipment purchases, until such time as the
Company is able to achieve cash flow operations, we expect to see net interest
expense continue to grow.





Net
Loss


The
Company’s net loss for 2008 was $4,601,000 a decrease of $2,601,000 from the
$7,202,000, reported in 2007 for the reasons described above.





The
Company expects to have a net loss in 2009.  However, in anticipation
of higher revenue, sustained gross profit margins and controlled growth in
Operating Expenses, as detailed above, the projected net loss is substantially
less than the $4,601,000 reported in 2008.





Preferred
Stock Dividends and Accretion


For the
year ended December 31, 2008, preferred stock dividends and accretion totaled
$1,224,000 as compared to $1,186,000 for 2007.  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
year ended December 31, 2008, the Company used $2,636,000 of cash in operating
activities, used another $2,433,000 in investing activities, and generated
$2,049,000 in cash from financing activities.  The total of all cash flow
activities resulted in a decrease of $3,019,000 in the balance of cash for the
year ended December 31, 2008.  During the year ended December 31, 2007, the
Company used $4,009,000 of cash in operating activities, used $2,308,000 in
investing activities and generated $5,419,000 in cash from financing
activities.  The total of all cash flow activities in 2007 resulted in a
decrease in the balance of cash of $899,000.





The
Company made principal payments on long-term debt and notes payable totaling
$1,151,000 and $959,000 during 2008 and 2007, respectively.  At December
31, 2008, the Company had $0 in short-term and $15,053,000 in long-term
debt.





On
December 18, 2007, the Company amended its Promissory Note and  Credit
and Security Agreement with Crestpark (the “Lender”) in order to increase the
amount loaned (the “Loan”) from the Lender to the Company by the amount of
$3,300,000.  As a result of these amendments, the principal amount
outstanding under the Loan increased from $8,492,000 to $11,877,000, consisting
of the $3,300,000 in additional borrowings plus accrued but unpaid interest on
the existing Loan.  The additional borrowings are to be used for
general working capital purposes.  Principal on the Loan 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
this Loan, plus all accrued but unpaid interest.  The Company may
prepay the Loan at any time without premium or penalty.  The terms of
the Amended and Restated Promissory Note evidencing the Loan (the “Note”)
provide, among other things, that $6,455,000 of the borrowings thereunder shall
bear interest at 7.0% per annum and that such interest will be due and payable
at maturity of the Note.  The remaining $5,422,000 of borrowings (the
“Floating Tranche”) under the Note (which includes the $3,300,000 of additional
borrowings) will bear interest at a floating rate equal to 2% over the prime
rate (the “Base Rate”).  The prime rate as of December 31, 2008 was
3.25%.  The portion of the interest on the Floating Tranche determined
by the Base Rate will be payable at maturity, but the remaining portion of the
interest representing the 2% premium over the Base Rate will be payable
monthly.


19





The
borrowings under the Note are secured by a first priority security interest in
all of the assets of the Company except that Lender’s security interest in
certain monitoring equipment is subordinate to the interest of AHK Leasing LLC
under its sale leaseback arrangements.  The Lender is an affiliate of
Mykonos 6420 LP (“Mykonos”).  As the sole holder of the Company’s
Series C Preferred Stock, Mykonos has the right to elect a majority of the
Company’s Board of Directors.  The terms of the Loan were approved by
a Special Committee of the Board of Directors consisting solely of disinterested
directors.




On
November 10, 2008, the Company entered into another loan agreement (the “Loan
Agreement”) with 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 are to be used for
working capital needs and are anticipated to be repaid from cash flow generated
by the operations of the Company.  The Revolving Credit Commitment has
a term ending on July 1, 2010, is unsecured and bears interest at a fixed
noncompounded rate of 12% per annum.  As of December 31, 2008, the
Company had $250,000 available under the Revolving Credit Commitment which were
drawn down subsequent to December 31, 2008.




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 fee of
0.25% per annum on the average daily unused amount of the Equipment Term
Loan.  As of December 31, 2008, the Company had $1,700,000 available
under the Equipment Term Loan.




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




AHK
Leasing, LLC (“AHK”), a company controlled by three stockholders, one of which
is a current director has indicated that they expect to continue to provide
lease financing for our monitoring equipment purchases during
2009.  Under these sale-leaseback arrangements, the Company sells the
inventory to AHK and then leases the equipment back.  All capital
leases are treated as financing transactions with two of the leases carrying an
interest rate of 10.00% per annum, one of them carrying an interest rate of
10.50%, one of them carrying an interest rate of 10.75%, one of them carrying an
interest rate of 11.15%, one of them carrying an interest rate of 11.25%, five
of them carrying interest rates of 12.00% per annum and one of them carrying an
interest rate of 12.50% per annum.  Maturity dates on these capital
leases run from June 2009 to December 2011.  As of December 31, 2008,
the aggregate balance on the capital leases totaled $2,625,000, of which
$1,223,000 is current and the balance of $1,403,000 is classified as long-term
debt.  To the extent that AHK is unable to provide lease financing,
the Company intends to utilize the Equipment Term Loan under the November 2008
loan agreement with Crestpark.


20





By the
end of 2008, the Company was incurring approximately $330,000 in recurring
monthly costs of revenues and $685,000 in recurring monthly operating expenses,
excluding the provision for doubtful accounts.  The majority of the
recurring monthly operating expenses consisted of salaries, wages, payroll
taxes, health insurance and other employee benefits.  In addition to these
recurring monthly operating expenses, the Company’s other principal uses of cash
are the payment of other recurring monthly operating expenses, the acquisition
of monitoring equipment and the financing of its receivables.  In
general, the Company meets its liquidity needs from its current revenues, from
cash and cash equivalents (including the proceeds of the additional borrowings
from Crestpark, as described above), and through capital leasing
arrangements.  As of December 31, 2008, the Company had $423,000 in
cash and cash equivalents.





The
Company believes that its current working capital, combined with the expected
amounts available for additional working capital through Crestpark and through
lease financing for its monitoring equipment through AHK and/or Crestpark are
sufficient to meet its liquidity needs through
2009.




Critical
Accounting Policies




The
Company prepares its consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America (“U.S.
GAAP”).  This requires management to make estimates and judgments that
affect reported amounts and related disclosures.  Actual amounts will
differ from those estimates.  The significant accounting policies are
described in Note 1 to the audited Consolidated Financial
Statements.  Of those policies, the following have been identified as
the most critical because they are the most important to the portrayal of the
Company’s results of operations and financial condition and they require
subjective or complex management judgments:




Revenue
recognition and deferred revenue


The
Company derives revenue primarily from the leasing of monitoring equipment, as
well as providing administrative, field and support services.  The
amounts charged by the Company for equipment leasing and administrative, field
and support services are calculated on a daily basis – (e.g. per day/per
individual being monitored) and billed monthly in arrears.  Revenues
are recognized as equipment and services are provided.  Any amounts
invoiced in advance of equipment and services being provided are recorded as
deferred revenue.  Royalty revenue is recognized on an accrual basis
as earned.





Stock–based
compensation


The
Company accounts for its stock-based compensation in accordance with FASB
Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS#
123(R)”). FAS# 123(R), which it adopted as of January 1,
2006,  requires that the compensation cost relating to share-based
payment transactions, including grants of employee stock options, be recognized
in financial statements based on the fair value of the equity or liability
instruments issued.  FAS# 123(R) covers a wide range of share-based
compensation arrangements including stock options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase
plans.  Under FAS# 123(R), the Company is required to measure the cost
of its employee services received in exchange for stock options based on the
grant-date fair value of the award, and to recognize the cost over the period
the employee is required to provide services for the award.





The
Company adopted FAS# 123(R) using the modified prospective transition method for
valuing stock options.  Under this method, stock based compensation
expense is recognized using the fair-value based accounting method for all
employee awards granted, modified, or settled during a period.  See
Note 1 of the financial statements for critical assumptions related to stock
based compensation.


21





Research
and Development Expenses


The
Company expenses research and development expenses as incurred.  For
the year ended December 31, 2008, the Company incurred $1,240,000 in research
and development expenses, net of $114,000 capitalized in connection with the
redesign of major software systems in accordance with SOP 98-1.





Impairment
of Long-Lived Assets


The
Company evaluates goodwill for impairment on an annual basis.  The
Company assesses the recoverability of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.  These computations utilize judgments and assumptions
inherent in management’s estimate of future undiscounted and discounted cash
flows to determine recoverability of these assets.  If management’s
assumptions about these assets were to change as a result of events or
circumstances, the Company may be required to record an impairment
loss.  The Company recorded no impairment charges for the years ended
December 31, 2008 and December 31, 2007.





Off-Balance
Sheet Arrangements




The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or future material effect on its financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.




Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk




Not
Required for Smaller Reporting Company




Item
8.  Financial Statements.


iSECUREtrac
Corp. and Subsidiaries


Consolidated
Financial Report





Table of
Contents





Report
      of Independent Registered Public Accounting Firm
                23Consolidated
      Financial Statements:Consolidated
      Balance Sheets
                24Consolidated
      Statements of Operations
                25Consolidated
      Statements of Stockholders' Deficit
                26Consolidated
      Statements of Cash Flows
                27Notes
      to Consolidated Financial Statements
                28




22


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors


iSECUREtrac
Corp.


Omaha,
Nebraska





We have
audited the accompanying consolidated balance sheets of iSECUREtrac Corp. and
Subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ deficit, and cash flows for the years
then ended.  These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of iSECUREtrac Corp. and
Subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for the years ended December 31, 2008 and 2007,
in conformity with U.S. generally accepted accounting principles.





We were
not engaged to examine management’s assessment of the effectiveness of
iSECUREtrac Corp.’s internal control over financial reporting as of December 31,
2008 included in the Annual Report on Form 10-K and, accordingly, we do not
express an opinion thereon.





As
described in Note 1 to the financial statements, on January 1, 2007 the Company
changed its method of accounting for income taxes, as required by Financial
Accounting Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income
Taxes.





/s/
McGladrey & Pullen LLP


Kansas
City, Missouri


March 24,
2009


23


iSECUREtrac
      Corp. and SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSDecember
      31, 2008 and 20072008
                                                                                                                  
                                                                                                                  
                                                                                                                  2007ASSETSCurrent
      AssetsCash
      and cash equivalents (Note 11)
                                                                                                                  
                                                                                                                  $
                                                                                                                  423,361
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  3,442,712Accounts
      receivable, net of allowance for doubtful accounts of
    $462,553in
      2008 and $292,669 in 2007 (Note 11)
                                                                                                                  
                                                                                                                  
                                                                                                                  2,445,505
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  1,941,902Inventories
                                                                                                                  
                                                                                                                  
                                                                                                                  193,820
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  135,376Prepaid
      expenses and other
                                                                                                                  
                                                                                                                  
                                                                                                                  84,224
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  92,750Total
      current assets
                                                                                                                  
                                                                                                                  
                                                                                                                  3,146,910
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  5,612,740Leasehold
      improvements and equipment, net of accumulated depreciation of
      $9,125,376in
      2008 and $7,041,272 in 2007 (Note 2, 4 & 8)
                                                                                                                  
                                                                                                                  
                                                                                                                  4,229,319
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,875,728Intangibles,
      net of accumulated amortization of $892,127in
      2008 and $850,166 in 2007 (Note 3)
                                                                                                                  
                                                                                                                  
                                                                                                                  19,394
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  61,356Goodwill
      (Note 3)
                                                                                                                  
                                                                                                                  
                                                                                                                  2,302,179
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  2,302,179Other
      assets
                                                                                                                  
                                                                                                                  
                                                                                                                  83,386
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  88,425Total
      assets
                                                                                                                  
                                                                                                                  $
                                                                                                                  9,781,188
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  11,940,428LIABILITIES
      AND STOCKHOLDERS' (DEFICIT)Current
      LiabilitiesAccounts
      payable
                                                                                                                  
                                                                                                                  $
                                                                                                                  403,399
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  1,069,577Accrued
      expenses
                                                                                                                  
                                                                                                                  
                                                                                                                  524,339
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  609,083Current
      maturities of long-term debt (Note 4, 8, & 10)
                                                                                                                  
                                                                                                                  
                                                                                                                  1,772,508
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  622,340Deferred
      revenues & gain on related party sale-leaseback transactions (Note 8
      & 10)
                                                                                                                  
                                                                                                                  
                                                                                                                  299,548
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  314,090Accrued
      interest payable (Note 4)
                                                                                                                  
                                                                                                                  
                                                                                                                  776,011
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  30,513Total
      current liabilities
                                                                                                                  
                                                                                                                  
                                                                                                                  3,775,805
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  2,645,603Long-term
      debt, less current maturities (Note 4, 8 & 10)
                                                                                                                  
                                                                                                                  
                                                                                                                  13,280,368
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  12,381,598Redeemable
      convertible Series C preferred stock, 5,000,000 shares designated
      at
                                                                                                                    $0.01
      par value; 1,000,000 issued and outstanding (Note 7)
                                                                                                                  
                                                                                                                  
                                                                                                                  13,106,407
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  11,882,545Commitments
      and contingency (Note 8 & 12)Stockholders'  (deficit)Common
      stock, 75,000,000 shares authorized at $0.001 par value;
                                                                                                                    10,799,090
      issued and outstanding in 2008; 10,779,680 issued and outstanding
      in
                                                                                                                    2007
                                                                                                                  
                                                                                                                  
                                                                                                                  10,799
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  10,779Additional
      paid-in capital
                                                                                                                  
                                                                                                                  
                                                                                                                  55,369,880
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  55,109,333Accumulated
      deficit
                                                                                                                  
                                                                                                                  
                                                                                                                  (75,762,071
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (70,089,430
                                                                                                                  )Total
      stockholders' (deficit)
                                                                                                                  
                                                                                                                  
                                                                                                                  (20,381,392
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (14,969,318
                                                                                                                  )Total
      liabilities and stockholders' (deficit)
                                                                                                                  
                                                                                                                  $
                                                                                                                  9,781,188
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  11,940,428
  See Notes
to Consolidated Financial Statements.  24
 iSECUREtrac
      Corp. and SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONSYears
      Ended December 31, 2008 and 20072008
                                                                                      
                                                                                      
                                                                                      2007Revenues:Equipment
      leasing & hosting (Note 11)
                                                                                      
                                                                                      $
                                                                                      8,771,198
                                                                                      
                                                                                      
                                                                                      $
                                                                                      8,306,999Administrative,
      field & support service revenues
                                                                                      
                                                                                      
                                                                                      334,579
                                                                                      
                                                                                      
                                                                                      
                                                                                      80,487Equipment
      sales
                                                                                      
                                                                                      
                                                                                      104,014
                                                                                      
                                                                                      
                                                                                      
                                                                                      94,613Other
      revenues
                                                                                      
                                                                                      
                                                                                      479,433
                                                                                      
                                                                                      
                                                                                      
                                                                                      154,318Gain
      on related party sale-leaseback transactions (Notes 8 &
      10)
                                                                                      
                                                                                      
                                                                                      13,191
                                                                                      
                                                                                      
                                                                                      
                                                                                      149,295Total
      revenues
                                                                                      
                                                                                      
                                                                                      9,702,415
                                                                                      
                                                                                      
                                                                                      
                                                                                      8,785,712Operating
      expenses:Cost
      of revenues
                                                                                      
                                                                                      
                                                                                      3,867,895
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,640,219Research
      and development
                                                                                      
                                                                                      
                                                                                      1,240,382
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,891,820Sales,
      general and administrative
                                                                                      
                                                                                      
                                                                                      8,116,974
                                                                                      
                                                                                      
                                                                                      
                                                                                      9,925,442Total
      operating expenses
                                                                                      
                                                                                      
                                                                                      13,225,251
                                                                                      
                                                                                      
                                                                                      
                                                                                      15,457,481Operating
      loss
                                                                                      
                                                                                      
                                                                                      (3,522,836
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (6,671,769
                                                                                      )Other
      income (expense):Interest
      income
                                                                                      
                                                                                      
                                                                                      27,130
                                                                                      
                                                                                      
                                                                                      
                                                                                      121,926Interest
      expense (Note 4 & 10)
                                                                                      
                                                                                      
                                                                                      (1,105,530
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (651,884
                                                                                      )Total
      other income (expense)
                                                                                      
                                                                                      
                                                                                      (1,078,400
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (529,958
                                                                                      )Loss
      before provision for income taxes
                                                                                      
                                                                                      
                                                                                      (4,601,236
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (7,201,727
                                                                                      )Provision
      for income taxes (Note 5)
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Net
      loss
                                                                                      
                                                                                      $
                                                                                      (4,601,236
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (7,201,727
                                                                                      )Preferred
      stock dividends and accretion (Note 7)
                                                                                      
                                                                                      
                                                                                      (1,223,862
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (1,185,848
                                                                                      )Net
      loss available to common stockholders
                                                                                      
                                                                                      $
                                                                                      (5,825,098
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (8,387,575
                                                                                      )Basic
      and diluted loss per common share
                                                                                      
                                                                                      $
                                                                                      (0.54
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (0.78
                                                                                      )Weighted
      average shares of common stock outstanding
                                                                                      
                                                                                      
                                                                                      10,788,089
                                                                                      
                                                                                      
                                                                                      
                                                                                      10,776,240
 
 See Notes
to Consolidated Financial Statements.
  25
 
 iSECUREtrac
Corp. AND SUBSIDIARIES
 STATEMENT
OF STOCKHOLDERS' (DEFICIT)
 Years
Ended December 31, 2008 and 2007
 
 AdditionalCommon Stock
                                          
                                          
                                          Paid
      -in
                                          
                                          
                                          AccumulatedShares
                                          
                                          
                                          Amount
                                          
                                          
                                          Capital
                                          
                                          
                                          Deficit
                                          
                                          
                                          TotalBalance,
      December 31, 2006
                                          
                                          
                                          10,773,454
                                          
                                          
                                          $
                                          10,773
                                          
                                          
                                          $
                                          54,950,315
                                          
                                          
                                          $
                                          (61,898,373
                                          )
                                          
                                          $
                                          (6,937,285
                                          )Shares
      issued for director's fees
                                          
                                          
                                          6,226
                                          
                                          
                                          
                                          6
                                          
                                          
                                          
                                          7,994
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          8,000Stock-based
      compensation
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          347,542
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          347,542Series
      C preferred stock dividends
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (989,330
                                          )
                                          
                                          
                                          (989,330
                                          )Accretion
      to redemption value of preferred stock
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (196,518
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (196,518
                                          )Net
      loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (7,201,727
                                          )
                                          
                                          
                                          (7,201,727
                                          )Balance,
      December 31, 2007
                                          
                                          
                                          10,779,680
                                          
                                          
                                          $
                                          10,779
                                          
                                          
                                          $
                                          55,109,333
                                          
                                          
                                          $
                                          (70,089,430
                                          )
                                          
                                          $
                                          (14,969,318
                                          )Shares
      issued for director's fees
                                          
                                          
                                          19,410
                                          
                                          
                                          
                                          20
                                          
                                          
                                          
                                          6,980
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          7,000Stock-based
      compensation
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          406,024
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          406,024Series
      C preferred stock dividends
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,071,405
                                          )
                                          
                                          
                                          (1,071,405
                                          )Accretion
      to redemption value of preferred stock
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (152,457
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (152,457
                                          )Net
      loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (4,601,236
                                          )
                                          
                                          
                                          (4,601,236
                                          )Balance,
      December 31, 2008
                                          
                                          
                                          10,799,090
                                          
                                          
                                          $
                                          10,799
                                          
                                          
                                          $
                                          55,369,880
                                          
                                          
                                          $
                                          (75,762,071
                                          )
                                          
                                          $
                                          (20,381,392
                                          )
  See Notes
to Consolidated Financial Statements.
  26
 
 iSECUREtrac
CORP. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Years
Ended December 31, 2008 and 2007
  2008
                                          
                                          
                                          2007Cash
      Flows From Operating ActivitiesNet
      loss
                                          
                                          $
                                          (4,601,236
                                          )
                                          
                                          $
                                          (7,201,727
                                          )Depreciation
      and amortization
                                          
                                          
                                          2,126,066
                                          
                                          
                                          
                                          1,872,701Stock
      based compensation
                                          
                                          
                                          413,024
                                          
                                          
                                          
                                          355,542(Increase)
      Decrease in accounts receivable
                                          
                                          
                                          (847,364
                                          )
                                          
                                          
                                          169,022Increase
      in allowance for doubtful accounts
                                          
                                          
                                          343,761
                                          
                                          
                                          
                                          173,253(Increase)
      in inventories
                                          
                                          
                                          (58,444
                                          )
                                          
                                          
                                          (74,355
                                          )(Increase)
      Decrease in prepaid expenses
                                          
                                          
                                          8,526
                                          
                                          
                                          
                                          (18,142
                                          )(Decrease)
      Increase in accounts payable
                                          
                                          
                                          (666,178
                                          )
                                          
                                          
                                          612,096(Decrease)
      Increase in accrued expenses
                                          
                                          
                                          (84,744
                                          )
                                          
                                          
                                          218,799(Decrease)
      in deferred revenues and gain on sale - leaseback
    transactions
                                          
                                          
                                          (14,542
                                          )
                                          
                                          
                                          (109,259
                                          )Increase
      (Decrease) in accrued interest payable
                                          
                                          
                                          745,498
                                          
                                          
                                          
                                          (7,325
                                          )Net
      cash (used in) operating activities
                                          
                                          
                                          (2,635,633
                                          )
                                          
                                          
                                          (4,009,395
                                          )Cash
      Flows From Investing ActivitiesPurchases
      of leasehold improvements and equipment
                                          
                                          
                                          (2,437,696
                                          )
                                          
                                          
                                          (2,285,964
                                          )Decrease
      (Increase) in other assets
                                          
                                          
                                          5,039
                                          
                                          
                                          
                                          (22,380
                                          )Net
      cash (used in) investing activities
                                          
                                          
                                          (2,432,657
                                          )
                                          
                                          
                                          (2,308,344
                                          )Cash
      Flows From Financing ActivitiesPrincipal
      proceeds from long-term debt
                                          
                                          
                                          3,200,000
                                          
                                          
                                          
                                          6,377,475Principal
      payments on long-term debt
                                          
                                          
                                          (1,151,061
                                          )
                                          
                                          
                                          (958,709
                                          )Net
      cash provided by financing activities
                                          
                                          
                                          2,048,939
                                          
                                          
                                          
                                          5,418,766(Decrease)
      in cash
                                          
                                          
                                          (3,019,351
                                          )
                                          
                                          
                                          (898,973
                                          )Cash
      at beginning of period
                                          
                                          
                                          3,442,712
                                          
                                          
                                          
                                          4,341,685Cash
      at end of period
                                          
                                          $
                                          423,361
                                          
                                          
                                          $
                                          3,442,712Supplemental
      Disclosure of Cash Payments forInterest
                                          
                                          
                                          360,033
                                          
                                          
                                          
                                          659,210
 
 See Notes
to Consolidated Financial Statements.
  27




iSECUREtrac
CORP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Note 1.  Nature
of Business and Significant Accounting Policies





Nature
of Business





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 suite of services  (e.g. Global
Positioning System (“GPS”)  tracking systems, house arrest, visual
breath alcohol monitoring and supplemental monitoring services) are designed to
offer an alternative to incarceration thereby reducing  the overall cost
associated with individuals under correctional or community
supervision.





Significant
Accounting Policies





Principles of
consolidation:  The consolidated financial statements include
the accounts of iSECUREtrac and its wholly-owned subsidiaries, iSt Services,
Inc., formed September 25, 2002, and Tracking Systems Corporation (“TSC”),
acquired on August 28, 2003.  On October 16, 2007, the Company
dissolved TSC.  All material intercompany balances and transactions
have been eliminated in consolidation.




Accounting estimates and
assumptions:  The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.




Cash and cash
equivalents:For financial statement purposes, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.  The carrying value of
these investments approximates fair value due to the nature of the maturity
period.




Trade accounts
receivable:Trade accounts receivable are carried at original
invoice amount less an estimate made for doubtful receivables based on a review
of all outstanding amounts on a monthly basis.  Management determines
the allowance for doubtful receivables by regularly evaluating individual
customer receivables and considering a customer’s financial condition, credit
history and current economic conditions.  Trade accounts receivable
are written off when deemed uncollectible.  Recoveries of trade
accounts receivable previously written off are recorded when
received.  The Company offers credit terms to select customers of up
to 45 days.  Additionally, the Company reserves the right to assess
finance charges on delinquent accounts where such charges are
permitted.  Accounts are considered delinquent after 45
days.  There was $343,761 of bad debt expenses for 2008 and $185,565
for 2007.




Inventories:Inventories
consist of repair parts or components that will be used in the production of new
revenue producing equipment.




Leasehold improvement
and  equipment:  Leasehold improvements and equipment
are recorded at cost.  Equipment, including monitoring equipment, is
depreciated on the straight-line method over the estimated useful lives of the
related assets ranging from 3 to 7 years.  The cost of leasehold
improvements is amortized over the lesser of the estimated lives of the assets
or the lease term.  Amortization of assets acquired under capital
leases is included with depreciation expense on the owned
assets.  These assets are reviewed for impairment under Statement of
Financial Accounting Standard (SFAS) No. 144 when events indicate the carrying
amount may not be recoverable.


28




The
Company assesses the recoverability of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.  These computations utilize judgments and assumptions
inherent in management’s estimate of future undiscounted and discounted cash
flows to determine recoverability of these assets.  If management’s
assumptions about these assets were to change as a result of events or
circumstances, the Company may be required to record an impairment
loss.  With respect to the Company’s long lived assets, the Company
recorded no impairment charges for the years ended December 31, 2008 and
December 31, 2007.




Product
development:  The Company capitalized software and hardware
development costs in accordance with the SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise
Marketed.   Capitalization begins when a product's
technological feasibility has been established and ends when the product is
available for general release to customers.  All software and hardware
development costs are amortized on a straight-line basis over 36
months.   As of December 31, 2008, the Company had capitalized
development costs of $241,298 related to the System 5000 and $113,802 related to
the improvements in the functionality of our web-based software and
interfaces.  Of these amounts, $173,198 and $0, respectively, had been
amortized through December 31, 2008.  The net value of these
capitalized software and hardware development costs are included in the
Leasehold improvements and equipment line of the Consolidated Balance
Sheets.




Research and development
expenses:Research and development cost of $1,240,382 and
$1,891,820 were charged to operations for the years ended December 31, 2008 and
2007, respectively.




Goodwill:  Goodwill
represents the excess of purchase price paid over the net identifiable assets of
the acquired business.  It is subject to annual tests for
impairment.  The Company has recorded no impairment charges related to
goodwill for the years ended December 31, 2008 and 2007.




Intangibles, subject to
amortization:  Amortizable intangibles represent the value
assigned to the future net income stream attributable to customer monitoring
contracts assumed by the Company in a prior acquisition based on their capacity
to generate such income.  The intangible asset is being amortized over
seven years, which is the estimated life of the monitoring contracts to which
they relate.  Amortization is based on the ratio of projected annual
revenue streams to total projected revenue per existing customer monitoring
contracts.




Earnings (loss) per
share:  Basic Earnings (Loss) Per Common Share is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding during the period.  Diluted
Earnings (Loss) Per Common Share shall be computed by including contingently
issuable shares with the weighted average shares outstanding during the
period.  When inclusion of the contingently issuable shares would have
an antidilutive effect upon earnings per share, no diluted earnings (loss) per
share shall be presented.  The following potentially dilutive shares
were not included in diluted earnings (loss) per common share as they would have
an antidilutive effect upon earnings (loss) per share:




December 31, 2008
              
              
              December 31, 2007Shares
      issuable upon conversion of Series C Exchangeable Preferred
      Stock
              
              
              4,782,609
              
              
              
              4,782,609Common
      stock options outstanding
              
              
              2,734,376
              
              
              
              1,817,580Common
      stock warrants outstanding
              
              
              3,544,535
              
              
              
              3,922,925




Revenue recognition and deferred
revenue:   The Company derives revenue primarily from the
leasing of monitoring equipment as well as providing administrative, field and
support services.  The amounts charged by the Company for equipment
leasing and administrative, field and support services are calculated on a daily
basis – (e.g. per day/per individual being monitored) and billed monthly in
arrears.  Revenues are recognized as equipment and services are
provided.  The majority of the Company’s customers are invoiced in
arrears.  Any amounts invoiced in advance of equipment and services
being provided are recorded as deferred revenue and recognized as equipment and
services are provided.  Royalty revenue is recognized on an accrual
basis as earned.


29




Income
taxes:  Deferred taxes are provided for by the liability method
wherein deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences.  Temporary differences
are the differences between the reported amounts of assets and liabilities and
their tax bases.  Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.  Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.




Stock–based
compensation:The Company accounts for its stock-based
compensation in accordance with FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS#
123(R)”). FAS# 123(R), which was adopted on January 1, 2006,  requires
that the compensation cost relating to share-based payment transactions,
including grants of employee stock options, be recognized in the financial
statements based on the fair value of the equity or liability instruments
issued.  FAS# 123(R) covers a wide range of share-based compensation
arrangements including stock options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase
plans.  Under FAS# 123(R), the Company is required to measure the cost
of its employee services received in exchange for stock options based on the
grant-date fair value of the award, and to recognize the cost over the period
the employee is required to provide services for the award.




The
Company adopted FAS# 123(R) using the modified prospective transition method for
valuing stock options.  Under this method, stock based compensation
expense is recognized using the fair-value based accounting method for all
employee awards granted, modified, or settled during a period.




The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:  The significant assumptions used in the Black Scholes
model to estimate compensation expense are as follows:




2008
                  
                  
                  2007Risk
      free interest rate
                  
                  
                  3.79
                  %
                  
                  
                  4.65
                  %Expected
      volatility factor
                  
                  
                  82.84
                  %
                  
                  
                  86.59
                  %Expected
      option term in years
                  
                  3.5 to 6.5
                  
                  
                  3.5 to 6.5Dividends
                  
                  $
                  0.00
                  
                  
                  $
                  0.00Forfeitures
      for senior executives
                  
                  
                  23
                  %
                  
                  
                  19
                  %Forfeitures
      for non-senior
                  
                  
                  24
                  %
                  
                  
                  20
                  %




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# 123(R), the Company is required to estimate forfeitures. The forfeiture
rate is the rate at which options are expected to be forfeited prior to full
vesting.  The forfeiture rate is determined based on actual forfeiture
rate experience as follows:  For each historical year of option
issuance, the total options issued for the year is compared to the options
forfeited prior to having vested.  For option years in which the two
year vesting period has not passed, past experience is used to project future
forfeitures.  The total of pro forma forfeitures is then compared to
total options awarded and the resultant percentage is used as the forfeiture
rate.  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.


30




The
annual rate of quarterly dividends is 0% since iSECUREtrac has historically not
paid dividends on its common stock and does not anticipate paying dividends on
its common stock in the future.




The
Company recorded pre-tax compensation expense for stock options issued to its
employees of $406,024 and $347,542 for the years ended December 31, 2008 and
2007, respectively.  The Company has recorded a full valuation
allowance on deferred tax assets and, therefore, no tax benefit is
recognized.




The fair
value of stock warrants issued to non-employees is also accounted for using FAS
# 123(R).  Related compensation expense is charged to income when
incurred.





Advertising
costs:  Advertising costs are expensed as
incurred.  Advertising expense for the years ended December 31, 2008
and 2007, was $35,310 and $97,922, respectively.





Uncertain Tax
Positions.  In June 2006, the Financial Accounting Standards
Board (“FASB”) issued Interpretation ("FIN") No.48, Employers' Accounting for
Uncertainty in Income Taxes.  This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes
(SFAS 109). This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return.  This
Interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. The
Company adopted FIN No. 48 as of January 1, 2007.





The
Company recognizes interest and penalties related to uncertain tax positions in
general and administrative expense.  As of December 31, 2008, the
Company has not recorded any provisions for accrued interest and penalties
related to uncertain tax positions.





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 is currently assessing the potential
effect of the adoption of the remaining provisions of SFAS No. 157 on its
financial position, results of operations and cash flows. The adoption of the
remaining provisions of SFAS No. 157 is not expected to have a 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. Currently the Company does not anticipate that this statement will
have an impact on its financial statements.


31





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
guidance will become effective for the fiscal year beginning after December 15,
2008. SFAS No. 141 (Revised) will have an impact on any future
acquisitions.




Note 2.  Leasehold
Improvements and Equipment




The cost
and accumulated depreciation of our leasehold improvements and equipment for the
years ended December 31, 2008 and 2007, are as follows:




2008
                
                
                2007Cost
                
                
                Accumulated
                  Depreciation
                
                
                Net Book
                  Value
                
                
                Cost
                
                
                Accumulated
                  Depreciation
                
                
                Net Book
                  ValueEquipment
                
                $
                969,624
                
                
                $
                592,072
                
                
                $
                377,552
                
                
                $
                844,307
                
                
                $
                446,991
                
                
                $
                397,316Leasehold
      improvements
                
                
                239,341
                
                
                
                113,924
                
                
                
                125,417
                
                
                
                227,229
                
                
                
                54,047
                
                
                
                173,182Monitoring
      equipment
                
                
                12,145,730
                
                
                
                8,419,380
                
                
                
                3,726,350
                
                
                
                9,845,464
                
                
                
                6,540,234
                
                
                
                3,305,230Total
      leasehold improvements and equipment
                
                $
                13,354,695
                
                
                $
                9,125,376
                
                
                $
                4,229,319
                
                
                $
                10,917,000
                
                
                $
                7,041,272
                
                
                $
                3,875,728




The
company incurred depreciation expense of $2,084,104 and $1,790,133 for the years
ended December 31, 2008 and 2007, respectively.




Note
3.  Goodwill and Intangibles, Subject to Amortization




Goodwill
is the excess of the cash paid over the net fair value of 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.  The Company has
determined that there is 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 December 31, 2008, such intangible assets
consisted solely of customer monitoring contracts assumed 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 was $41,961 in 2008 and $82,569 in 2007.  These
intangible assets are also tested for impairment on an annual basis, but the
Company determined that there was no impairment of these intangible assets as of
December 31, 2008.


32




The
composition of goodwill and intangible assets at December 31, 2008 and 2007, is
as follows:




2008
                                              
                                              
                                              2007Intangibles, subject
                                              
                                              
                                              
                                              
                                              
                                              Intangibles, subjectGoodwill
                                              
                                              
                                              to Amortization
                                              
                                              
                                              Goodwill
                                              
                                              
                                              to AmortizationGross
      Carrying Amount
                                              
                                              $
                                              2,302,179
                                              
                                              
                                              $
                                              911,522
                                              
                                              
                                              $
                                              2,302,179
                                              
                                              
                                              $
                                              911,522Accumulated
      Amortization
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (892,127
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (850,166
                                              )Balance
                                              
                                              $
                                              2,302,179
                                              
                                              
                                              $
                                              19,394
                                              
                                              
                                              $
                                              2,302,179
                                              
                                              
                                              $
                                              61,356
 
 The
estimated aggregate amortization expense of the intangibles is as
follows:
 
 2009
                  
                  
                  19,394




Note 4.  Long
Term Debt




The
Company had the following long-term debt at December 31, 2008 and
2007:




2008
            
            
            2007Long
      Term DebtOne
      secured note payable maturing on July 1, 2010, with an interest rate of 7%
      for $6,455,250 of the borrowings and 2% over prime for $5,422,225 of the
      borrowings, collaterallized by the assets of the Company.
            
            $
            11,877,475
            
            
            $
            11,877,475Proceeds
      from the unsecured Revolving Credit Commitment term ending on July 1, 2010
      with an interest rate of 12%
            
            
            500,000
            
            
            
            -Proceeds
      from the secured Equipment Term Loan term ending on July 1, 2010 with an
      interest rate of 12%.
            
            
            50,000
            
            
            
            -Twelve
      separate capital leases with related parties that are carrying interest
      rates at 10.00% to 12.50% and maturing June 2009 to December 2011 (see
      Note 8).
            
            
            2,625,401
            
            
            
            1,126,463Total
      long term debt
            
            
            15,052,876
            
            
            
            13,003,938Less
      current maturities
            
            
            (1,772,508
            )
            
            
            (622,340
            )Total
      long term debt less current maturities
            
            $
            13,280,368
            
            
            $
            12,381,598




Accrued
interest on the secured note payable at December 31, 2008 equaled $772,545 and
was included in interest expense during the year.  Accrued interest on
the proceeds from the unsecured Revolving Credit Commitment at December 31, 2008
equaled $2,682 and was included in interest expense during the
year.  Accrued interest on the proceeds from the secured Equipment
Term Loan at December 31, 2008 equaled $784 and was included in interest expense
during the year.  Total interest expense for the years ended December
31, 2008 and 2007 was $1,105,530 and $651,884, respectively.  Of that
amount, $1,082,426 and $633,152 was expensed to related parties for the years
ended December 31, 2008 and 2007, respectively.




The
carrying value of the secured note payable and the capital leases approximates
their fair value in each case due to the short-term nature of the borrowings
and, in the case of the capital leases, a guarantee from a
stockholder.


33




The
following is a schedule of aggregate maturities required on long-term debt due
in future years as of December 31, 2008:




2009
            
            $
            1,772,5082010
            
            
            12,915,2992011
            
            
            365,069Total
            
            $
            15,052,876




Note 5.  Income
Taxes




Net
deferred tax asset includes the following components as of December 31,
2008 and 2007:




2008
            
            
            2007Deferred
      tax assets (liabilities):Net
      operating loss carry forward
            
            $
            28,926,000
            
            
            $
            27,221,000Allowance
      for doubtful accounts
            
            
            185,000
            
            
            
            100,000Leasehold
      improvements and equipment
            
            
            -
            
            
            
            (87,000
            )Intangible
      assets
            
            
            -
            
            
            
            (37,000
            )Other,
      net
            
            
            -
            
            
            
            11,000Subtotal
      deferred tax assets (liabilities)
            
            
            29,111,000
            
            
            
            27,208,000Valuation
      allowance
            
            
            (29,111,000
            )
            
            
            (27,208,000
            )$
            -
            
            
            $
            -




The
income tax provision differs from the amount of income tax determined by
applying the statutory federal income tax rate to pretax loss for the years
ended December 31, 2008, and 2007 due to the following:




2008
            
            
            2007Computed
      "expected" tax benefit
            
            $
            (1,564,000
            )
            
            $
            (2,448,000
            )Increase
      (decrease) in income taxes (benefits) resulting from:Benefit
      from state taxes
            
            
            (276,000
            )
            
            
            (432,000
            )Nondeductible
      expenses and other
            
            
            50,000
            
            
            
            (37,000
            )Other
      timing differences
            
            
            (113,000
            )
            
            
            (189,000
            )Increase
      in valuation allowance
            
            
            1,903,000
            
            
            
            3,106,000Total
      provision for income taxes
            
            $
            -
            
            
            $
            -




As of
December 31, 2007, the Company had federal net operating loss carryforwards of
approximately $73,000,000 for future tax purposes that expire from 2010 to
2027.  The Company believes that Section 382 of the Internal Revenue
Code and the associated U.S. Treasury regulations will significantly limit the
amount of net operating loss carryforward that the Company will be able to
utilize in any tax year.  All losses incurred prior to the Company’s
change of ownership event on June 27, 2005 totaled approximately
$53,835,000.  The utilization of these losses is limited (by Internal
Revenue Code Section 382) to approximately $950,000 per year through
2025.




A
valuation allowance was established due to the uncertainty relating to the
future utilization of net operating loss carryforwards.  As a result
of that uncertainty, the valuation allowance was further increased by $1,903,000
and $3,106,000 for 2008 and 2007, respectively.  The amount of the
deferred tax assets considered realizable could be adjusted in the future based
upon changes in circumstances that result in a change in our assessment of our
ability to realize those deferred tax assets through the generation of taxable
income or other tax events.


34




On
January 1, 2007, the Company adopted the provisions of FASB Interpretation
No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, Accounting for Income
Taxes”.  FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.  It requires
that we recognize in our consolidated financial statements, only those tax
positions that are “more-likely-than-not” of being sustained as of the adoption
date, based on the technical merits of the position.  As a result of
the implementation of FIN 48, we performed a comprehensive review of our
material tax positions in accordance with recognition and measurement standards
established by FIN 48.




As a
result of the adoption, there were no unrecognized tax benefits in the financial
statements as of January 1, 2007.   There was no significant
change in the amount of unrecognized benefits during the year ended December 31,
2008  nor do we expect that there will be any significant change
within the next 12 months.





The
Company files income tax returns in the U.S. federal jurisdiction and various
state and local jurisdictions. As the Company has a federal Net Operating Loss
carryforward from the year ended December 31, 1995 forward, all tax years
from 1995 forward are subject to examination. As states have varying
carryforward periods, and the Company has recently entered into additional
states, the states are generally subject to examination for the previous 15
years or less.





The
Company recognizes interest accrued, net of tax and penalties, related to
unrecognized tax benefits as components of income tax provision as applicable.
As of December 31, 2008, the Company did not have any accrued interest or
penalties.




Note 6.  Common
Stock, Stock Options, Warrants and Benefit Plan




Common
Stock




In 2008
and 2007, the Company issued 19,410 and 6,226 shares of common stock,
respectively, to non-management directors in lieu of director
fees.  The number of shares of common stock issued in each case was
based on the fair market value of the Company’s common stock as of the date of
the meetings to which such fees related.  Expense related to these
director’s fees totaled $7,000 and $8,000 for each of the years ended December
31, 2008, and 2007, respectively.




Stock
Options




The
Company has issued options to acquire shares of its common stock under two
equity incentive plans and pursuant to certain employment agreement with current
and former executive officers.  The terms of these equity incentive
plans and non-plan option grants are described below.




2001
Omnibus Equity Incentive Plan




In June
2001, the stockholders of iSECUREtrac approved the 2001 Omnibus Equity Incentive
Plan (the “2001 Plan”).  As of May 31, 2006, the Company’s 2001 Plan
expired.  The 2001 Plan provided for the granting of stock options and
other equity incentives for up to 100,000 shares of the Company’s Common Stock
to the Company’s officers, directors, and consultants who provided services to
the Company and key employees at an exercise price 85% of the average daily
closing price of the Company’s common stock for the week prior to when the
options were granted.  The options are to vest on a monthly basis over
a one month to a 36-month period of time from the date of grant.  As
of January 1 of each year, commencing with the year 2002, the aggregate number
of options that were awarded under the 2001 Plan was automatically increased by
a number equal to the lesser of 1% of the total number of Common Shares then
outstanding or 20,000.  During the year ended December 31, 2007,
(i) grants of options for 0 shares of Common Stock under the 2001 Plan were
made, (ii) options were exercised under the 2001 Plan for 0 shares of
common stock and (iii) options for 50,217 shares were forfeited.  No
options were granted under the 2001 Plan during the year ended December 31, 2008
nor were there any exercises of options previously granted.  However,
a total of 28,250 2001 Plan options were forfeited during 2008.  At
December 31, 2008 and 2007, there were 72,525 and 100,775 outstanding options,
respectively, in conjunction with the 2001 Plan.  No further options
may be issued under this plan.


35




2006
Omnibus Equity Incentive Plan




On May 4,
2006, at the Company’s annual meeting of stockholders, the stockholders approved
the adoption of the Company’s newly created 2006 Omnibus Equity Incentive Plan
(the “2006 Plan”).  The 2006 Plan became effective on May 31,
2006.  The 2006 Plan provides for the granting of stock options and
other equity incentives to the Company’s officers, employees, directors and
consultants who provide services to the Company.  The 2006 Plan has a
term of ten years unless terminated by the board of directors.  Stock
options are granted with an exercise price not less than fair market value of
the common stock on the date of the grant.  Vesting schedules and
expiration dates for the grants issued under this plan are specified at the time
of grant. During the years ended 2008 and 2007, grants for 1,126,050 and 142,475
shares of Common Stock were made, respectively, under the 2006
Plan.  No options were exercised under the 2006 Plan during the years
ended December 31, 2008 or 2007.  Options forfeited under the 2006
Plan during the years ended December 31, 2008 and 2007, were 125,212 and 39,419,
respectively.  At December 31, 2008 and 2007, there were 1,760,583 and
759,745 outstanding options, respectively, in conjunction with the 2006
Plan.




Non-Plan
Stock Options




The
Company has granted options to purchase common stock outside of the 2001 Plan
and 2006 Plan to various executive officers pursuant to the terms of their
employment agreements.  These options have exercise prices ranging
from $2.01 to $4.90 per share and have terms expiring through April 30,
2014.  These options vest on a monthly basis over two year periods
from their grant date.  During the years ended 2008 and 2007, grants
for 0 and 0 shares of Common Stock were made, respectively, outside the 2001
Plan and 2006 Plan.  None of these options have been exercised, but a
total of 55,792 and 204,375, respectively, of these options were forfeited
during the years ended December 31, 2008 and 2007 as a result of the
terminations of certain of these executive officers before the options had fully
vested.  As of December 31, 2008 and 2007, a total of 901,268 and
957,060, respectively, of these non-plan options remained outstanding, all of
which have vested.




A summary
of employee stock option activity during the years ended December 31, 2008, and
2007, is as follows:




FortheYearEndedDecember31,2008
                
                
                FortheYearEndedDecember31,2007Weighted Average
                
                
                
                
                
                Weighted AverageOptions
                
                Shares
                
                
                Exercise Price
                
                
                Shares
                
                
                Exercise PriceOutstanding
      at beginning of year
                
                
                1,817,580
                
                
                $
                2.30
                
                
                
                1,969,116
                
                
                $
                2.35Granted
                
                
                1,126,050
                
                
                
                0.45
                
                
                
                142,475
                
                
                
                1.15Exercised
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Forfeited
                
                
                (209,254
                )
                
                
                1.72
                
                
                
                (294,011
                )
                
                
                2.06Outstanding
      at end of year
                
                
                2,734,376
                
                
                $
                1.59
                
                
                
                1,817,580
                
                
                $
                2.30Exercisable
      at end of year
                
                
                1,772,246
                
                
                $
                2.11
                
                
                
                1,390,808
                
                
                $
                2.43Weighted-average
      fair value for options granted during the year
                
                
                1,126,050
                
                
                $
                0.30
                
                
                
                142,475
                
                
                $
                0.77




36




Additional
information regarding options outstanding at December 31, 2008, is as
follows:




OptionsOutstanding
                
                
                OptionsExercisableNumber
                
                Weighted Average
                
                Weighted Average
                
                
                Number
                
                
                Weighted AverageRange of Exercise Prices
                
                Outstanding
                
                Remaining Life
                
                Exercise Price
                
                
                Exercisable
                
                
                Exercise Price$0.50 to 2.00
                
                
                1,301,177
                
                7.9
      years
                
                $
                0.58
                
                
                
                434,794
                
                
                $
                0.88$2.01 to 3.00
                
                
                1,287,531
                
                3.0
      years
                
                
                2.41
                
                
                
                1,191,785
                
                
                
                2.41$3.01 to 4.00
                
                
                125,418
                
                3.6
      years
                
                
                3.09
                
                
                
                125,417
                
                
                
                3.09$4.01 to 5.00
                
                
                20,250
                
                0.2
      years
                
                
                4.70
                
                
                
                20,250
                
                
                
                4.70$5.01 to 10.00
                
                
                -
                
                
                
                
                -
                
                
                
                -
                
                
                
                -Totals
                
                
                2,734,376
                
                6.3
      years
                
                $
                1.59
                
                
                
                1,772,246
                
                
                $
                2.11




No stock
options were exercised during 2008.




As of
December 31, 2008, there was approximately $388,237 of total unrecognized
compensation costs related to non-vested share based compensation agreements
granted to the Company’s executives and employees.   The weighted
average period in which the unrecognized compensation costs will be recognized
into income is 1.1 years.




Common
Stock Warrants




Prior to
2006, iSECUREtrac issued warrants to purchase 184,837 shares of common stock to
stockholders and non-employees in connection with various services these
individuals provided the Company.  No such warrants were issued during
2008 or 2007.  During 2008 and 2007, none of these warrants were
exercised, but 0 and 100,000, respectively, of these warrants expired
unexercised.  At December 31, 2008, 78,588 of these warrants remained
outstanding.




Prior to
2006, iSECUREtrac issued detachable warrants to purchase 413,049 shares of
common stock in connection with obtaining convertible debt.  No such
warrants were issued during 2008 or 2007.  During 2008 and 2007, none
of these warrants were exercised and none of these warrants
expired.  At December 31, 2008, 413,049 of these warrants remained
outstanding.




Prior to
2006, iSECUREtrac issued warrants to purchase a total of 1,173,021 shares of
common stock in connection with various equity financing transactions, as well
as warrants to purchase 3,234,248 shares of common stock that were issued by the
Company in 2005 to Mykonos 6420, LP in conjunction with issuance of 1,000,000
shares of Series C Exchangeable Preferred Stock to Mykonos.  No such
warrants were issued during 2008 or 2007.  During 2008 and 2007, none
of these warrants were exercised, but 378,390 and 719,461, respectively, of
these warrants expired unexercised.  At December 31, 2008, 3,052,898
of these warrants remained outstanding.


37






A summary
of the status of all the warrants outstanding at December 31, 2008, and
2007 and changes during the years ended on those dates is as
follows:




For the Year Ended December
      31,2008
                            
                            
                            For the Year Ended December
      31,2007Weighted
      Average
                            
                            
                            
                            
                            
                            Weighted
      AverageWarrants
                            
                            Shares
                            
                            
                            Exercise
      Price
                            
                            
                            Shares
                            
                            
                            Exercise
      PriceOutstanding
      at beginning of year
                            
                            
                            3,922,925
                            
                            
                            $
                            3.65
                            
                            
                            
                            4,742,386
                            
                            
                            $
                            3.62Granted
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Exercised
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Forfeited
                            
                            
                            (378,390
                            )
                            
                            
                            3.70
                            
                            
                            
                            (819,461
                            )
                            
                            
                            3.49Outstanding
      at end of year
                            
                            
                            3,544,535
                            
                            
                            
                            3.65
                            
                            
                            
                            3,922,925
                            
                            
                            
                            3.65Exercisable
      at end of year
                            
                            
                            3,544,535
                            
                            
                            $
                            3.65
                            
                            
                            
                            3,922,925
                            
                            
                            $
                            3.65




No
warrants were issued in 2008 or 2007.




A further
summary about warrants outstanding at December 31, 2008, is as
follows:




Number Outstanding
                              
                              Weighted Average
                              
                              Weighted AverageRange of Exercise Prices
                              
                              and Exercisable
                              
                              Remaining Life
                              
                              Exercise Price$1.00 to 2.50
                              
                              
                              780,676
                              
                              2.1 years
                              
                              $
                              2.30$2.51 to 5.00
                              
                              
                              2,738,859
                              
                              0.9 years
                              
                              
                              4.01$5.01 to 7.50
                              
                              
                              25,000
                              
                              0.6 years
                              
                              
                              5.36Total
                              
                              
                              3,544,535
                              
                              1.5 years
                              
                              $
                              3.65




Benefit
Plan





The
“iSECUREtrac Corporation Retirement Plan” offers all regular full-time
employees, 21 years of age and older, to participate in a 401k savings
plan.  The plan offers either a pre-tax contribution option or the Roth,
after-tax contribution option.   iSECUREtrac provides a match of 25%
up to 10% of the employee’s contribution, with a maximum match of $2,500. 
The employer contribution vests over a 4-year graded schedule.  The
total expense related to the plan was $38,589 and $36,780 for the years ended
December 31, 2008 and 2007, respectively.




Note 7.  Convertible
Preferred Stock





The
Company is authorized to issue up to 5,000,000 shares of preferred stock from
time to time with such rights and privileges as the Board of Directors may
determine.  The Company has issued the following shares of preferred
stock:





Series C Exchangeable 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 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.




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.





38





The
Preferred Stock is redeemable on the tenth anniversary of the original issue
date.  The redemption price per share of the Preferred Stock will
equal the per share original issue price ($11 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 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 is charged to Additional Paid-In
Capital.





As of
December 31, 2008, the Company had accrued Series C Preferred Stock dividends
totaling $3,427,366 and accretion to redemption value of the Series C Preferred
Stock totaling $659,960.  Of these amounts, $1,071,405 and $152,456,
respectively, were the amounts accrued and accreted in 2008.





Upon any
liquidation of the Company, no distribution shall 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
shall 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 stock are outstanding, the Series C holders have the
ability to appoint a majority of the Company’s directors.




Note 8.  Lease
Obligations




In 2008
and 2007, the Company financed the acquisition of approximately $2,650,000 and
$500,000 of monitoring equipment, respectively, through sale-leaseback
agreements with a related party. Under these sale-leaseback arrangements, the
Company purchases the monitoring equipment from the manufacturer, sells it to
the leasing company at a gain or at cost and then leases the equipment
back.  If the monitoring equipment is sold to the leasing company at a
gain, this gain is recorded as a liability and amortized into income over the
life of the lease (typically 2-3 years).  The gain on related party
sale-leaseback transactions consists of amortization of this deferred
gain.  The Company’s capital leases in conjunction with these
transactions expire from June 2009 to December 2011.  The assets and
the related liabilities under the leases have been recorded at the present value
of the future minimum lease payments using discount rates of 10.00% to
12.50%.




The
Company also has two noncancelable operating leases for its facilities in Omaha,
NE and an operating lease for office equipment.  Future minimum lease
payments, by year and in aggregate, under the capital leases and noncancelable
operating leases, with initial terms of one year or more, are due as
follows:




Capital
      Leases
                                
                                
                                OperatingRelated
      Party
                                
                                
                                Lease2009
                                
                                $
                                1,453,807
                                
                                
                                $
                                100,6802010
                                
                                
                                1,140,837
                                
                                
                                
                                -2011
                                
                                
                                377,293
                                
                                
                                
                                -Total
      approximate minimum lease payments
                                
                                $
                                2,971,937
                                
                                
                                $
                                100,680Less
      the amount representing interest
                                
                                
                                (346,536
                                )
                                
                                
                                -Approximate
      present value of minimum lease payments
                                
                                $
                                2,625,401
                                
                                
                                $
                                100,680





39




The cost
and accumulated depreciation of assets acquired under capital leases is as
follows:




2008
                        
                        
                        2007Equipment
                        
                        $
                        5,029,183
                        
                        
                        $
                        2,143,867Less
      accumulated depreciation
                        
                        
                        (2,267,556
                        )
                        
                        
                        (1,056,184
                        )Total
                        
                        $
                        2,761,627
                        
                        
                        $
                        1,087,683




The total
rent expense under the operating leases was $104,195 and $103,206 for the years
ended December 31, 2008 and 2007, respectively.




Note
9.  Common Shares Issued for Cash




No common
shares were issued for cash during 2007 or 2008.




Note
10.  Related Party Transactions





AHK
Leasing, LLC, a company controlled by three stockholders, one of which is a
current director, lent the Company money during 2008 and 2007.  These
loans were in the form of capital leases with 36 month terms and bearing
interest at a rate of 10.00% to 12.50% per annum.  The Company has
capital leases which expire from June 2009 to December 2011.  As of
December 31, 2008 and 2007, the aggregate balance on these capital leases
totaled $2,625,401 and $1,126,463, respectively.  The interest expense to
AHK Leasing in 2008 and 2007 was $226,978 and $152,835, respectively. See Notes
4 and 8.





During
the fourth quarter of 2006, the Company received two unsecured loans totaling
$6,000,000 from a private investment company that is an affiliate of the Mykonos
6420 LP (“Mykonos”), the sole holder of the Company’s Series C Preferred Stock
(the “2006 Notes”).  Interest on the 2006 Notes accrued at a rate of
7% per annum.  Principal and interest on the loans was due at the
earlier of (i) July 1, 2009 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 $6,000,000.  The interest expense to the
private investment company in 2008 and 2007 was $0 and $354,026,
respectively.  Borrowings under these unsecured loans were refinanced
in 2007 as described below.





On
October 29, 2007, the Company refinanced the 2006 Notes and borrowed an
additional $2,100,000 under the terms of a Credit and Security Agreement with
Crestpark LP, Inc. (“Lender”), another affiliate of
Mykonos.  Borrowings from the Lender are evidenced by a promissory
note (the “Crestpark Note”) in the principal amount of $8,491,864 which is equal
to the aggregate principal and accrued interest on the 2006 Notes as of October
29, 2007 plus an additional $2,100,000.  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 amount lent to the
Company by Crestpark.





On
December 18, 2007, the Company amended its Promissory Note and  Credit
and Security Agreement with the Lender in order to increase the amount loaned
(the “Loan”) from the Lender to the Company by the amount of
$3,300,000.  As a result of these amendments, the principal amount
outstanding under the Loan increased from $8,491,864 to $11,877,475, consisting
of the $3,300,000 in additional borrowings plus accrued but unpaid interest on
the existing Loan.  The additional borrowings are to be used for
general working capital purposes.  Interest expense to the Lender in
2008 and 2007 was $725,022 and $126,291, respectively.





40





Principal
on the Amended and Restated Promissory Note (the “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
this Loan, plus all accrued but unpaid interest.  The Company may
prepay the Loan at any time without premium or penalty.  The Note
provides, among other things, that $6,455,250 of the borrowings thereunder shall
bear interest at 7.0% per annum and that such interest will be due and payable
at maturity of the Note.  The remaining $5,422,225 of borrowings (the
“Floating Tranche”) under the Note (which includes the $3,300,000 of additional
borrowings) will bear interest at a floating rate equal to 2% over the prime
rate (the “Base Rate”).  The portion of the interest on the
Floating Tranche determined by the Base Rate will be payable at maturity, but
the remaining portion of the interest representing the 2% premium over the Base
Rate will be payable monthly.





The
borrowings under the Note are secured by a first priority security interest in
all of the assets of the Company except that Lender’s security interest in
certain monitoring equipment is subordinate to the interest of AHK Leasing under
its sale leaseback arrangements.  The Lender is an affiliate of
Mykonos 6420 LP (“Mykonos”).  As the sole holder of the Company’s
Series C Preferred Stock, Mykonos has the right to elect a majority of the
Company's Board of Directors.  The terms of the Loan were approved by
a Special Committee of the Board of Directors consisting solely of disinterested
directors.




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 are to be used for
working capital needs and are anticipated to be repaid from cash flow generated
by the operations of the Company.  The Revolving Credit Commitment has
a term ending on 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 fee of 0.25% per annum on the average daily unused
amount of the Revolving Credit Commitment.  Interest expense to the
lender in 2008 and 2007 was $2,682 and $0, respectively.  As of
December 31, 2008, the Company had $250,000 in proceeds still 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 fee of
0.25% per annum on the average daily unused amount of the Equipment Term
Loan.  Interest expense to the lender in 2008 and 2007 was $784 and
$0, respectively.  As of December 31, 2008, the Company had $1,700,000
in proceeds still available under the Equipment Term Loan.




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





41





Note
11.  Concentrations





The
Company maintains cash in excess of the Federal Deposit Insurance Corporation
limit of $250,000.  The Company has not experienced and does not
anticipate such losses in these accounts.




For the
year ended December 31, 2007, the Company had one customer which accounted for
10.71% of its total revenues for the year.  The receivable balance for this
customer at December 31, 2007 was $133,417.  The company had no customers
which accounted for more that 10% of total revenues for the year ended December
31, 2008.


Note
12.  Legal Proceedings





On
November 27, 2007, the Company and Pro Tech Monitoring, Inc. (“Pro Tech”)
entered into a Confidential Settlement Agreement (the “Settlement Agreement”),
pursuant to which the parties agreed to compromise and settle all claims and
disputes related to a lawsuit filed by Pro Tech against the Company in the
United States District Court for the Middle District of Florida in which Pro
Tech alleged that the Company had infringed on a U.S. patent held by Pro Tech
relating to GPS tracking and monitoring apparatus and systems.  Pro
Tech was seeking an injunction and substantial monetary damages from the
Company.





Pursuant
to the Settlement Agreement, Pro Tech has caused the dismissal of its lawsuit
against the Company.  In consideration, the Company paid Pro Tech
$800,000 in cash upon execution of the Settlement Agreement and agreed to, and
did purchase $600,000 worth of sobriety monitoring equipment from Pro Tech prior
to December 31, 2007.  The $800,000 is included in sales, general and
administrative expenses for the year ended December 31,
2007.   In addition, the Company has agreed to make a
modification to its GPS tracking equipment to eliminate or disable a component
that allegedly infringed on Pro Tech’s patent.





Throughout
the year ended December 31, 2008 the Company has actively  brought GPS
tracking units into compliance with this agreement,   and will
continue to do so as practical in 2009. On January 27, 2008, the Company became
subject to royalty payments, which escalate over time, on activated, unmodified
equipment generating revenue.   At December 31, 2008, 13.5% of
the Company’s units available to generate revenue were subject to
royalties.   For the year ended December 31, 2008, the Company
has expensed $239,531 in settlement royalty costs, which is included in cost of
revenues.  The Company entered into the Settlement Agreement without
admission of liability and solely to avoid the expense and uncertainty of
litigation.





Note
13.  Fair Value of Financial Instruments





The
following methods and assumptions were used to estimate fair value of each class
of financial instruments for which it is practicable to estimate that
value:





Accounts
receivable:  The carrying amount approximates fair value.





Long-term
debt:  Based on the borrowing rates available to the Company for bank
loans with similar terms and maturities, the carrying value approximates fair
value due to the short 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 $18,100,000 at December 31, 2008
using a discount rate of 5%.




Item
9.  Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.




None.





42




Item
9A(T).  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 chief executive officer and chief 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 upon
that evaluation, the chief executive officer and the chief financial officer
concluded that, as of the Evaluation Date, the Company's disclosure, controls
and procedures are effective, providing them with information relating to the
Company as required to be disclosed in the reports the Company files or submits
under the Exchange Act on a timely basis.





Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting.  Internal control over financial
reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act as a process designed by, or under the supervision of, the Company’s
principal executive and principal financial officers and effected by the
Company’s Board, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with Accounting
Principles Generally Accepted in the U.S. and includes those policies and
procedures that:





·
              pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;


·
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with GAAP, and that
      receipts and expenditures of the Company are being made only in accordance
      with authorizations of management and Directors of the
      Company; and


·
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.


Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.


The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008.  In
making this assessment, the Company’s management used criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.  Based on its assessment, the Company’s management
believes that, as of December 31, 2008, the Company’s internal control over
financial reporting was effective based on that criteria.


This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.




There
have not been any significant 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.





43


Item
9B.  Other Information.
  None
   PART
III
  Item
10.  Directors, Executive Officers and Corporate
Governance
  The
discussion under the headings “Election of Directors”, “Certain Relationships
and Related Transactions”, “The Board of Directors and its Committees” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement
are incorporated herein by reference.
  Item
11.  Executive Compensation.
  The
discussion under the headings “Executive Compensation” and “Director
Compensation” in the Proxy Statement are incorporated herein by
reference.
  Item
12.  Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
  The
discussion under the heading “Security Ownership of Certain Beneficial Owners
and Management” in the Proxy Statement is incorporated herein by
reference.
  Equity Compensation Plan
Information.Information regarding shares of the Company’s
common stock under equity compensation plans and executive employment agreements
maintained by the Company as of December 31, 2008 is set forth in the
following table:
  Plan
      category
                    Number
      of securities to be issued upon exercise of  outstanding
      options, warrants and rights
                    Weighted
      average exercise price of outstanding  options, warrants and
      rights
                    Number
      of securities remaining available  for future issuance under
      equity compensation plans *(a)
                    (b)
                    (c)Equity
      compensation plans  approved by security holders
                    1,833,108
                    $1.10
                    1,239,417Equity
      compensation plans not approved by security holders
                    901,268
                    $2.58
                    0Total
                    2,734,376
                    $1.59
                    1,239,417
  *Excludes
securities reflected in column (a).
  Equity
compensation plans approved by security holders consist of our 2006 Omnibus
Equity Incentive Plan and 2001 Omnibus Equity Incentive Plan.  The
exercise prices for options issued under these plans range from $0.20 to $2.95
per share.  Equity compensation plans not approved by security holders
consist of options issued to employees per their employment agreements or
performance bonuses.  Exercise prices for these options range from
$2.01 to $4.90 per share.
  Item
13.  Certain Relationships, Related Transactions and Director
Independence.
  The
discussion under the heading “Certain Relationships and Related Transactions”
and “The Board of Directors and its Committees” in the Proxy Statement is
incorporated herein by reference.


44




Item
14.  Principal Accounting Fees and Services




The
discussion under the heading “Principal Accounting Fees and Services” in the
Proxy Statement is incorporated herein by reference.




Item
15.  Exhibits and Financial Statement Schedules


(a)
                                                                            The
      following documents are filed as part of this report:1.
                                                                            Financial
      Statements of the Company.2.
                                                                            Exhibits.3.01
                                                                            
                                                                            Amended
      and Restated Certificate of Incorporation of the Company, as amended
      (13)3.02
                                                                            
                                                                            Restated
      Bylaws of the Company (1)3.03
                                                                            
                                                                            Certificate
      of Designations, Preferences and Rights of Series A Convertible Preferred
      Stock of the Company (3)3.04
                                                                            
                                                                            Certificate
      of Designations, Preferences and Rights of Series B Convertible Preferred
      Stock of the Company (9)3.05
                                                                            
                                                                            Certificate
      of Designations, Preferences and Rights of Series C Exchangeable Preferred
      Stock of the Company (12)4.01
                                                                            
                                                                            Form
      of Common Stock Certificate (1)10.01
                                                                            
                                                                            License
      Agreement with SiRF Technology, Inc. (1)10.02
                                                                            
                                                                            ADT
      Distribution Agreement (3)10.03
                                                                            
                                                                            ADT
      Hosting Agreement (3)10.04
                                                                            
                                                                            Preferred
      Distributor Agreement with Premier Geografix LTD. (7)10.05
                                                                            
                                                                            Employment
      Agreement between the Company and David G. Vana (5)10.06
                                                                            
                                                                            Employment
      Agreement between the Company and Edward J. Sempek (5)10.07
                                                                            
                                                                            Employment
      Agreement between the Company and David G. Sempek (5)10.08
                                                                            
                                                                            Employment
      Agreement between the Company and Peter A. Michel (17)10.09
                                                                            
                                                                            Agreement
      Among Noteholders (10)10.10
                                                                            
                                                                            Debt
      Conversion between the Company and Roger Kanne (11)10.11
                                                                            
                                                                            Debt
      Conversion between the Company and Martin Halbur (11)10.12
                                                                            
                                                                            Debt
      Conversion between the Company and Kenneth Macke (11)10.13
                                                                            
                                                                            Debt
      Conversion between the Company and Buckshot Capital, LLC
    (11)10.14
                                                                            
                                                                            Business
      Office Lease (11)10.15
                                                                            
                                                                            Business
      Office Lease Amendment (20)10.16
                                                                            
                                                                            Securities
      Purchase Agreement (14)10.17
                                                                            
                                                                            Registration
      Rights Agreement (15)10.18
                                                                            
                                                                            Warrant
      Agreement (16)10.19
                                                                            
                                                                            2001
      Omnibus Equity Incentive Plan (4)10.20
                                                                            
                                                                            2006
      Omnibus Equity Incentive Plan
(18)
  45
 
 10.21
                                                                          
                                                                          Indemnification
      Agreement in favor of AHK Leasing, LLC (19)10.22
                                                                          
                                                                          Credit
      and Security Agreement in favor of Crestpark LP, Inc.
  (21)10.23
                                                                          
                                                                          First
      Amendment to Credit and Security Agreement in favor of Crestpark LP, Inc.
      (22)10.24
                                                                          
                                                                          Amended
      and Restated Promissory Note in favor of Crestpark LP, Inc.
      (22)10.25
                                                                          
                                                                          Employment
      Agreement between the Company and Lincoln Zehr10.26
                                                                          
                                                                          Employment
      Agreement between the Company and Robert Bierman10.27
                                                                          
                                                                          Confidential
      Settlement Agreement (24)21.01
                                                                          
                                                                          Subsidiaries
      of the Company23
                                                                          
                                                                          Consent
      of McGladrey & Pullen, LLP, Independent Registered Public Accounting
      Firm24
                                                                          
                                                                          Powers
      of Attorney31.1
                                                                          
                                                                          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
                                                                          
                                                                          Certifications
      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 under Form
      10-SB, filed on June 22, 1999 (Commission File No.
    0-26455).(2)
                                                                          
                                                                          Not
      Used(3)
                                                                          
                                                                          Incorporated
      by reference from the registrant’s registration statement under Form SB-2
      filed on November 30, 2001 (Commission File No.
  333-74762).(4)
                                                                          
                                                                          Incorporated
      by reference from the Notice of Annual Meeting of Stockholders and Proxy
      Statement contained in Registrant’s Definitive Proxy Statement under
      Schedule 14A, filed with the SEC on May 14, 2001 (Commission File No.
      0-26455).(5)
                                                                          
                                                                          Incorporated
      by reference from the registrant’s registration statement under Form S-8
      filed on May 22, 2002 (Commission File No. 333-88798).(6)
                                                                          
                                                                          Incorporated
      by reference from the registrant’s registration statement under Form S-8
      filed on April 16, 2004 (Commission File No.
  333-114513).(7)
                                                                          
                                                                          Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      March 18, 2003 (Commission File No. 0-26455).(8)
                                                                          
                                                                          Not
      Used(9)
                                                                          
                                                                          Incorporated
      by reference from the registrant’s registration statement under Form SB-2
      filed on August 11, 2004 (Commission File No.
  333-118135).(10)
                                                                          
                                                                          Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      February 10, 2005 (Commission File No. 0-26455)(11)
                                                                          
                                                                          Incorporated
      by reference from the registrant’s annual report under Form 10-KSB filed
      on March 31, 2005 (Commission File No. 0-26455).(12)
                                                                          
                                                                          Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      June 23, 2005. (Commission File No. 0-26455).(13)
                                                                          
                                                                          Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      December 14, 2006. (Commission File No.
  0-26455).
  46
 
 (14)
                                                
                                                Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      June 23, 2005. (Commission File No. 0-26455).(15)
                                                
                                                Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      June 29, 2005. (Commission File No. 0-26455).(16)
                                                
                                                Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      June 29, 2005. (Commission File No. 0-26455).(17)
                                                
                                                Incorporated
      by reference from the registrant’s current report under Form 8-K filed
      August 8, 2006 (Commission File No. 0-26455).(18)
                                                
                                                Incorporated
      by reference from the registrant’s quarterly report under Form 10-QSB
      filed on August 11, 2006. (Commission File No.
0-26455).(19)
                                                
                                                Incorporated
      by reference from the registrant’s current report under Form 8-K filed
      February 22, 2007 (Commission File No. 0-26455).(20)
                                                
                                                Incorporated
      by reference from the registrant’s annual report under Form 10-KSB filed
      on March 12, 2006 (Commission File No. 0-26455).(21)
                                                
                                                Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      November 2, 2007 (Commission File No. 0-26455).(22)
                                                
                                                Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      December 20, 2007 (Commission File No. 0-26455).(23)
                                                
                                                Incorporated
      by reference from the registrant’s current report under Form 8-K filed on
      November 12, 2008 (Commission File No. 0-26455).(24)
                                                
                                                Incorporated
      by reference from the registrant’s annual report under Form 10-KSB filed
      on March 19, 2008 (Commission File No.
0-26455).
  47
 
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) 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. MichelChief
      Executive OfficerDated:
      March 24, 2009
 
 Pursuant
to the requirements of the Securities Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
  Signature
                    
                    Title
                    
                    Date/s/
      Roger J. Kanne  *
                    
                    Chairman
      of the Board of Directors,
                    
                    March
      24, 2009Roger
      J. Kanne
                    
                    Director/s/
      Peter A. Michel
                    
                    President,
      Chief Executive Officer, Director
                    
                    March
      24, 2009Peter
      A. Michel
                    
                    (Principal
      Executive Officer)/s/
      Lincoln Zehr
                    
                    Chief
      Financial Officer
                    
                    March
      24, 2009Lincoln
      Zehr
                    
                    (Principal
      Financial and Accounting Officer)/s/
      Joseph A. Ethridge  *
                    
                    Director
                    
                    March
      24, 2009Joseph
      A. Ethridge/s/
      Robert W. Korba  *
                    
                    Director
                    
                    March
      24, 2009Robert
      W. Korba/s/
      Ravi Nath  *
                    
                    Director
                    
                    March
      24, 2009Ravi
      Nath
 
 *  Peter
A. Michel, by signing his name hereto, signs this annual report on behalf of
each person indicated.  A Power-of-Attorney authorizing Peter A.
Michel to sign this annual report on Form 10-K on behalf of each of the
indicated Directors of iSECUREtrac Corp. has been filed herein as Exhibit
24.
 
 By:/s/ Peter A. MichelPeter
      A. MichelAttorney-In-Fact
  48