As
        filed
        with the Securities and Exchange Commission on March 12, 2007.





UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549









**FORM
      10-KSB**


(Mark
      One)


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


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      fiscal year ended December 31, 2006




OR




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


SECURITIES
      EXCHANGE ACT OF 1934


For
      the
      transition period from _____________ to _____________.




Commission
      file number: 000-26455




**iSecureTrac
      Corp.**


(Name
      of
      small business issuer in its charter)





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





5078
      South 111 th Street


Omaha,
      Nebraska 68137


(Address
      of principal executive offices)(Zip Code)


Issuer’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





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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 o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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-KSB or any
      amendment to this Form 10-KSB. o





Indicate
      by checkmark whether the registrant is a shell company (as defined in Rule
      12b-2
      of the Exchange Act).


Yes o
      No x





State
      issuer's revenues for its most recent fiscal year: $8,063,843.





The
      aggregate market value of the common stock of the registrant held by
      non-affiliates, all of which is voting, was approximately $13,177,686, based
      on
      the closing sale price reported on March 6, 2007.





As
      of
      March 6, 2007, there were 10,773,454 shares of the registrant’s common stock
      outstanding.




DOCUMENTS
      INCORPORATED BY REFERENCE




Portions
      of the definitive Proxy Statement for the Registrant’s 2006 Annual Meeting of
      Stockholders to be filed within 120 days of the fiscal year ended December
      31,
      2006, are incorporated by reference in Items 9, 10, 11, 12 and 14 of Part III
      of
      this Annual Report on Form 10-KSB.




Transitional
      Small Business Disclosure format (check one): YES o NO x















**PART
      I.**




**Regarding
      Forward-Looking Statements**




This
      Form
      10-KSB 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-KSB, 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-KSB
      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 1
      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. Description of Business**




**Overview**




The
      Company is a Delaware corporation that is the successor in interest to a
      Colorado corporation that was initially incorporated in 1983. The Company has
      been engaged in its current business of providing GPS-based products and
      services for the tracking of criminal offenders since late 1997.




On
      August
      28, 2003, the Company acquired all of the outstanding capital stock of Tracking
      Systems Corporation (“TSC”), a Pennsylvania corporation headquartered in
      Harrisburg, Pennsylvania, in exchange for 4,423,077 shares of iSECUREtrac’s
      common stock and the assumption of $4,294,933 of TSC debt. The acquisition
      of
      TSC allowed the Company to expand its customer base and its product line (see
      “Products” below), including the MEMS breath alcohol monitoring technology. TSC
      is now a wholly-owned subsidiary of the Company and the results of its
      operations from August 29, 2003, are included in the Company’s consolidated
      financial statements.




**Business**




The
      Company develops, markets, and distributes electronic monitoring products
      including those that employ global positioning satellite (“GPS”) technology and
      related services to criminal justice and social service agencies, both in the
      United States and internationally, for use in community supervision programs.
      The Company’s three principal sources of revenues are: (i) selling and
      leasing of monitoring units, (ii) providing access to the corresponding
      web-based monitoring software and (iii) providing administrative, field and
      support services.




The
      Company’s main source of revenue, Equipment Leasing & Hosting, experienced a
      53% increase from 2005 to 2006. Equipment Leasing & Hosting revenue is
      derived from the fees charged to customers for the use of the Company’s offender
      monitoring software including tracNET24, hosting offender data, the rental
      of
      offender monitoring equipment, and ancillary charges directly related to the
      monitoring of offenders. For the years ended December 31, 2006, and December
      31,
      2005, Equipment Leasing & Hosting revenues were $7,380,526 and $4,821,632,
      respectively.




By
      using
      the Company’s products and services, these agencies can realize a substantial
      cost savings over the cost of incarceration, increase offender compliance,
      modify dysfunctional behavior and reduce recidivism. The Company’s products and
      services offer the overburdened criminal justice system a more secure solution
      to the problems of rapidly growing criminal populations, and overcrowded
      correctional facilities by creating sentencing alternatives for juveniles and
      low risk offenders. Electronic monitoring offers three distinct advantages
      over
      incarceration: (1) it reduces the public's tax burden by allowing the offender
      to work and, subsequently, to meet their financial obligations; (2) it reduces
      prison and jail overcrowding by providing a viable alternative to incarceration
      and; (3) it helps to reduce the rate of recidivism (re-offense) when combined
      with regular rehabilitation/reintegration sessions.




2




According
      to the U.S. Bureau of Justice Statistics latest report, 7.0 million adults were
      under some form of correctional supervision at December 31, 2004. The number
      of
      prisoners under the jurisdiction of federal or state correctional authorities
      on
      that date reached a record high of 2.1 million. Moreover, 4.9 million
      adults were under parole or probation supervision and approximately two out
      of
      every three people released from prison are rearrested within three years of
      their release. The total adult correctional population has increased 46.8%
      from
      1992 to 2004. This growth in the adult correction population has resulted in
      stresses on the correctional system in terms of both management and costs.
      This
      has led to increased use of probation and parole as alternatives to
      incarceration. Electronic monitoring enables an agency to monitor, at a greater
      level of supervision, the activities of a growing number of probationers and
      parolees without having to proportionately 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.




Although
      the criminal justice market is its primary market, the Company continues to
      explore opportunities for marketing its tracking technology to users in other
      markets. The Company also maintains the capability to undertake special projects
      to help customers to meet their unique needs.




**Our
      Products and Services**




iSECUREtrac
      offers law enforcement and corrections agencies solutions for electronically
      monitoring persons that are released to community supervision programs. This
      may
      include persons released on probation, parole, pretrial, or any number of
      community supervision programs. Agencies utilizing electronic monitoring systems
      have shown substantial success in effectively monitoring offenders, reducing
      re-offense, and enhancing the results of offender re-entry programs. iSECUREtrac
      has a full line of electronic monitoring and services as described below.




***GPS
      Tracking***




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 sees 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.




We
      offer
      both active and passive (landline) GPS tracking capabilities to our customers
      which continuously monitor movement and compliance to time/location parameters
      anywhere in the world. Our GPS unit tracks an individual by logging their
      location along with time and speed data. Our active GPS device has the ability
      to use wireless networks to send data to a central data center, enabling a
      corrections or law enforcement officer to receive updated information and
      violations on a continuous basis. All data processing and parameter comparison
      takes place in the tracking unit itself. If the individual is in violation,
      the
      GPS unit communicates with our data center which notifies the agency, updates
      our website, and stores offender information for the long term. The
      corresponding officer can then use any PC or other Internet-ready device to
      see
      where the offender has been and when he was there. Our website provides agencies
      with updated offender information in easy-to-understand formats and does not
      require any additional software. Information includes maps, violation reports,
      equipment tampering reports and more.




Our
      Passive GPS Personal Tracking Unit (“PTU”) also monitors an offender’s movement
      and compliance data anywhere in the world, but reports the information only
      when
      the PTU is returned to a base unit. The corresponding officer can then connect
      to our proprietary web-based software and access offender tracking, violation,
      and compliance information.




3




***House
      Arrest***




House
      Arrest is a system that enables law enforcement agencies to verify an offender’s
      presence in a particular location (house, residence, work release facility,
      etc.). 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. **** Our
      house
      arrest system consists of two components: a House Arrest Unit (HAU) and a
      wireless cuff transmitter. The HAU stores offender information with time/date
      stamps and relays data to our data center on a regular basis. **** If
      the
      offender takes off the transmitter or tampers with it, the transmitter sends
      out
      a unique signal alerting the HAU of the violation. The HAU then communicates
      with the host system which, in turn, automatically alerts the appropriate
      authorities.




***Visual
      Breath Alcohol Testing***




Our
      breath alcohol monitoring system enables offenders’ breath alcohol levels to be
      tested remotely. 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 2000VB 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.




***Web-Based
      System Interface***




Our
      web-based system interface is provided to end-user agencies through the
      Internet. A probation or corrections officer with a secure log-in can access
      the
      system and know where his or her clients, wearing a PTU, have been over any
      given time period. 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
      PTU” which causes the scheduling and zone information to be downloaded to the
      PTU.




***Outsourced
      Monitoring Center Services***




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




·
            **Direct
                Monitoring Center Intervention**in
                which iSECUREtrac will attempt to resolve common non-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 De-Install**frees agents from the task of fitting their clients and retrieving
                the
                equipment at the end of the
                program.




·
            **On-Site
                Inventory Management**,
                as its name implies, 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
                Training**includes
                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 EM
                reports.




4




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




·
            **Financial
                Services and Administration**provides
                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 Services**includes
                the provision by iSECUREtrac of a reporting center and staff to
                effectively supervise release compliance by those individuals under
                community supervision.




**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 involved with curbing juvenile delinquency and domestic
      violence/abuse. Other sources of revenue include large service providers with
      significant regional relationships who integrate iSECUREtrac systems with their
      own localized offender management services.




**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 and service
      providers.




**Competition**




We
      compete with a number of other companies that offer offender electronic
      monitoring (“EM”) products, including GPS-based products.  The following
      are companies considered by the Company to be its main competitors:




**ProTech
      Monitoring, Inc.** -
      Founded in 1995, Pro Tech is believed to have the largest market share for
      GPS
      offender monitoring.  It offers both active and passive GPS monitoring
      products and services. The company was purchased in January, 2007 by Dmatek,
      parent company of ElmoTech, an EM competitor that enjoys a much larger market
      share in Europe than in the United States.




**BI
      Incorporated** - BI is
      believed to have the largest installed base of house arrest electronic
      monitoring devices in the United States.  BI has a passive GPS product and
      has recently introduced an active GPS product.




**Sentinel
      Monitoring Services** -
      Sentinel has a large base of EM units as well.  Its GPS monitoring device
      is a consumer cell phone which has been modified to include RF
      capabilities.




**G4S
      Securicor** - G4S is
      a reseller of GPS monitoring devices.




**STOP
      LLC** - STOP
      offers active GPS monitoring products and services.




iSECUREtrac
      competes favorably by offering a reliable, feature-rich, and intuitive GPS
      tracking and monitoring system coupled with customer service and support. 
In addition, we are the only vendor that offers Active GPS, Passive GPS, and
      traditional House Arrest on a single web application.




There
      are
      currently 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 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.  We compete by providing state-of-the-art equipment, a
      proprietary web-based software solution, and customer support that we believe
      offers the highest value to our customers.




5




**Principal
      Suppliers**




The
      Company’s GPS and RF hardware products are manufactured 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.




We
      have
      been issued patent rights in Australia, patent No. 2000235013, issued November
      17, 2005.




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 and the word "iSecureTrack”, Reg. No. 2520981 are registered
      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. Our Series 2150 and Series 2250 PTUs have 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.




The
      use
      of tracking devices as an aid to, or substitute for, physical surveillance
      by
      law enforcement personnel is subject to federal, state and local law. Generally,
      tracking devices may be attached to or installed upon the monitored person
      or
      object without court order as long as the person or object remains in public
      view. All persons presently monitored by our GPS tracking system are subject
      to
      a court order requiring such monitoring as a condition to their release from
      incarceration.




**Research
      and Development**




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 current research and development efforts
      are
      focused on additional functionality in our PTU products for the criminal justice
      industry. We have also focused on improving the functionality of our tracNET24
      software. During 2006 and 2005, our research and development expenses totaled
      $1,325,076 and $929,835, respectively.




6




**Employees**




As
      of
      December 31, 2006, the Company had 82 full-time employees on staff. Of the
      82
      full-time employees, four are executives, seven are administrative personnel,
      13
      are in sales, 13 are in customer support, 16 operate the monitoring center,
      two
      are in technology services, 14 are in operations and 13 are in engineering
      and
      development.




**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-KSB, quarterly
      reports on Form 10-QSB, 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 website is not part of this Report
      on Form 10-KSB.




**Risks
      Relating to Our Business**




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:




***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 $5,451,636 for the year ending December 31, 2006 and $3,873,908 for
      the year ended December 31, 2005. As a result, on December 31, 2006,
      we had an accumulated deficit of $61,898,373. We do not expect our revenues
      to
      be sufficient to cover operating costs until later in 2007, and there is no
      assurance that we will achieve profitability at that time or that we will ever
      be profitable.




***We
      will not have enough cash to repay a $6,000,000 loan unless we are able to
      refinance it.***




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 holder
      of all shares of our Series C Preferred Stock. Both loans bear interest at
      a
      rate of 7% per annum. These loans mature on the earlier of (i) July 1, 2008
      or
      (ii) the first date on which the Company 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. All principal and accrued interest on the loans are anticipated
      to
      be repaid from proceeds of a subsequent debt or equity financing. However,
      there
      is no assurance that we will be able to refinance these loans, and if we cannot,
      we will not be able to repay these loans as due.




***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 and 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.




7




***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
      use
      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.




8




***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. During
      2006, we were a party to a lawsuit filed by Satellite Tracking of People, LLC
      (“STOP”) which challenged the validity of certain of our patents. The Company
      denied all material allegations made by STOP and filed a counter-claim against
      STOP for patent infringement, seeking an injunction and damages. In May 2006,
      the Company entered into a settlement agreement with STOP. As a result of the
      settlement, this litigation has been dismissed. There is no assurance that
      similar claims will not be made in the future by other parties. Accordingly,
      we
      may be obligated to defend the validity of our patents at potentially
      significant cost to us.




***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.




9




***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.




***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
      4,742,386 shares of common stock. 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 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 57% of the issued and outstanding
      shares of the Company’s common stock.




10




***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 require:




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




·
            that
                the broker or dealer receive 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.




11




**Item
      2. Description of Property**




The
      Company leases approximately 11,477 square feet of office space located at
      5078
      South 111th Street, Omaha, Nebraska. 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 is recorded on a straight line basis at $6,652 per month, and the
      Company’s pro rata share of operating expenses on the leased premises is $3,275
      per month. Most of the Company’s administrative, service, and other business
      operations are conducted at this location.




The
      Company also leases approximately 1,800 square feet of office space located
      at
      11132 Q Street, Omaha, Nebraska. The lease term commenced on January 1, 2007,
      and ends on December 31, 2009. The base rent for this property is recorded
      on a
      straight line basis at $1,125 per month. The Company plans to re-locate its
      monitoring center to this location.




In
      the
      opinion of management, the properties under lease are adequate for the Companies
      current and reasonably foreseeable needs.




**Item
      3. Legal Proceedings**




On
        March
        8, 2007, a lawsuit was filed by Pro Tech Monitoring, Inc. (“Pro Tech") against
        the Company in United States District Court for the Middle District of Florida.
        Pro Tech alleges that the Company has infringed and continues to infringe
        on a
        U.S. patent held by Pro Tech relating to GPS tracking and monitoring apparatus
        and systems. The action filed by Pro Tech seeks an injunction and monetary
        damages. The Company denies all material allegations made by Pro Tech and
        intends to vigorously defend itself against this lawsuit. The Company is
        unable
        to predict the outcome of this lawsuit at this time.




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




On
      December 13, 2006, the stockholders of the Company took action by written
      consent in lieu of a meeting to amend our Certificate of Incorporation in order
      to increase the number of shares of preferred stock the Company is authorized
      to
      issue from 1,000,000 to 5,000,000.




**PART
      II**




**Item
      5. Market for Common Equity and Related Stockholder
      Matters**




iSECUREtrac’s
      common stock is listed on the OTC Bulletin Board under the trading symbol
“ISEC”. Until September 19, 2005, the effective date of our recent one-for-ten
      reverse stock split, our common stock was quoted on the OTC Bulletin Board
      under
      the symbol “ISRE”. All prices have been adjusted to reflect the one-for-ten
      reverse stock split that occurred on September 19, 2005. The following table
      sets forth the high and low sale prices for the Company’s common stock during
      each calendar quarter of 2005 and 2006:




Year
              
              Quarter
              
              High
              
              Low1st
              
              $3.70
              
              $2.102005
              
              2nd
              
              $2.70
              
              $1.603rd
              
              $2.90
              
              $1.504th
              
              $2.90
              
              $1.601st
              
              $2.77
              
              $1.752006
              
              2nd
              
              $3.10
              
              $2.013rd
              
              $2.59
              
              $2.054th
              
              $2.25
              
              $0.85




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.




As
      of
      February 9, 2007 there were approximately 377 stockholders of record for the
      Company’s common stock. The Company has not declared any dividends on shares of
      Common Stock and has no plans to do so in the foreseeable future.




No
      stock
      repurchases were made by the Company during the  fourth
      quarter of 2006.




12




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,
      2006 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(a)
              
              (b)
              
              (c)Equity
                  compensation plans approved by security holders
              
              
              807,681
              
              $
              2.11
              
              
              2,343,311Equity
                  compensation plans not approved by security holders
              
              
              1,161,435
              
              $
              2.52
              
              
              0Total
              
              
              1,969,116
              
              $
              2.35
              
              
              2,343,311




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 $0.90 to $2.95 per share.
      Equity compensation plans not approved by security holders consist of options
      issued to employees per their employment agreements or per performance bonuses.
      Exercise prices for these options range from $1.445 to $4.90 per
      share.




All
      previously unreported, unregistered sales of common stock during 2006 are as
      follows:




**Date****Issued**
              
              **Title**
              
              **Amount
                    of****Securities
                  Sold**
              
              **Security
                  Holder**
              
              **Description
                  of Transaction**
              
              **Cash
                    to****Company**03/27/06
              
              Common
                  Stock
              
              996
              
              Various
                  Directors
              
              Shares
                  issued for directors' fees
              
              N/A05/16/06
              
              Common
                  Stock
              
              700
              
              Various
                  Directors
              
              Shares
                  issued for directors' fees
              
              N/A08/09/06
              
              Common
                  Stock
              
              834
              
              Various
                  Directors
              
              Shares
                  issued for directors' fees
              
              N/A12/01/06
              
              Common
                  Stock
              
              1,052
              
              Various
                  Directors
              
              Shares
                  issued for directors' fees
              
              N/A




The
      shares of common stock issued in the above table were exempt from registration
      under the Securities Act of 1933 pursuant to Section 4(2) of such Act. The
      shares of common stock were issued solely to our nonemployee directors as
      partial payment of director’s fees. All such shares are subject to restrictions
      on resale.




13




**Item
      6. Management's Discussion and Analysis or Plan of
      Operation**




The
      following table provides a breakdown of selected results of operations for
      the
      years ended December 31, 2006 and 2005 and is the basis for the following
      discussion of the results of operations:


***iSECUREtrac
        Corp. and SUBSIDIARIES***
 ***CONSOLIDATED
        STATEMENTS OF OPERATIONS***
 ***Years
        Ended December 31, 2006 and 2005***
  2006
              
              2005
              
              Change**Revenues:**Equipment
                  leasing & hosting
              
              $
              7,380,526
              
              $
              4,821,632
              
              $
              2,558,894Equipment
                  sales
              
              
              325,153
              
              
              38,605
              
              
              286,548Gain
                  on sale-leaseback transactions-related party
              
              
              273,388
              
              
              671,687
              
              
              (398,299
              )Service
              
              
              84,776
              
              
              57,859
              
              
              26,917Total
                  revenues
              
              
              8,063,843
              
              
              5,589,783
              
              
              2,474,060**Operating
                  expenses:**Cost
                  of revenues
              
              
              3,574,126
              
              
              2,876,779
              
              
              697,347Research
                  and development
              
              
              1,325,076
              
              
              929,835
              
              
              395,241Sales,
                  general and administrative
              
              
              8,457,883
              
              
              5,160,282
              
              
              3,297,601Total
                  operating expenses
              
              
              13,357,085
              
              
              8,966,896
              
              
              4,390,189Operating
                  loss
              
              
              (5,293,242
              )
              
              (3,377,113
              )
              
              (1,916,129
              )**Other
                  income (expense):**Interest
                  income
              
              
              87,428
              
              
              100,927
              
              
              (13,499
              )Interest
                  expense
              
              
              (245,822
              )
              
              (629,559
              )
              
              383,737Other,
                  net
              
              
              -
              
              
              31,837
              
              
              (31,837
              )Total
                  other income (expense)
              
              
              (158,394
              )
              
              (496,795
              )
              
              338,401Loss
                  before provision for income taxes
              
              
              (5,451,636
              )
              
              (3,873,908
              )
              
              (1,577,728
              )Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -**Net
                  loss**
              
              $
              (5,451,636
              )
              $
              (3,873,908
              )
              $
              (1,577,728
              )Preferred
                  stock dividends and accretion
              
              
              (1,112,299
              )
              
              (549,108
              )
              
              (563,191
              )**Net
                  loss available to common stockholders**
              
              $
              (6,563,935
              )
              $
              (4,423,016
              )
              $
              (2,140,919
              )**Basic
                  and diluted loss per common share**
              
              $
              (0.61
              )
              $
              (0.45
              )**Weighted
                  average shares of common stock outstanding**
              
              
              10,753,487
              
              
              9,910,337


See
        Notes
        to Consolidated Financial Statements.


**Equipment
      Leasing and Hosting Revenue**




Equipment
      Leasing and Hosting Revenue is derived from the fees charged to customers for
      the use of the Company’s offender monitoring software including tracNET24,
      hosting offender data, the rental of offender monitoring equipment, and
      ancillary charges directly related to the monitoring of offenders. For the
      year
      ended December 31, 2006, Equipment Leasing and Hosting Revenues were $7,380,526
      compared to $4,821,632 during 2005. This increase is attributable to the
      increase in the number of units under lease. Leasing, hosting, and service
      revenues are recognized upon performance of the respective service. Leasing
      and
      hosting contracts with customers are typically for twelve months.




14




**Equipment
      Sales Revenue**




Equipment
      Sales Revenue is derived from the sale of offender monitoring equipment. For
      the
      year ended December 31, 2006, Equipment Sales Revenues were $325,153 compared
      to
      $38,605 during the same period in 2005. Approximately $214,000 of the increase
      was attributable to the sale in 2006 of hosting equipment to a customer that
      implemented its own GPS host monitoring system. Without this non-recurring
      sale,
      revenues from the sale of monitoring equipment increased by $72,728 in 2006
      compared to 2005 due to increased sales of units to customers to replace lost
      and damaged units. In general, our business plan is to lease monitoring
      equipment rather than to sell it to customers. Accordingly, we do not expect
      significant increases in revenues from equipment sales. Revenues from monitoring
      equipment sold in conjunction with a hosting agreement for tracking and
      monitoring services on tracNet24 are recognized ratably over the initial term
      of
      the hosting agreement which is typically for one year. Revenues from monitoring
      equipment sold without a hosting agreement and from hosting equipment are
      recognized when goods are received by the customer.




**Gain
      on Sale-leaseback Transactions**




The
      Company finances much of its monitoring equipment through sale-leaseback
      agreements, primarily with a leasing company owned by a related party. Under
      these agreements, the Company purchases the monitoring equipment from the
      manufacturer, sells it to the leasing company at a gain or at cost, and then
      leases it back from the leasing company. 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 Sale-leaseback Transactions consists of amortization of this deferred gain.
      For the year ended December 31, 2006, the Gain on Sale-leaseback Transactions
      with related parties was $273,388 compared to $671,687 during 2005. This
      decrease is attributable to the maturity of three of the capital leases
      associated with these transactions. As of December 31, 2006, the Company had
      nine capital leases in conjunction with these transactions. Five of the nine
      capital leases consisted of equipment being sold at cost. As of December 31,
      2005, the Company had seven capital leases in conjunction with these
      transactions.




**Service
      Revenue**




Service
      Revenue consists of sales of non-core services including licensing fees, server
      maintenance agreements and monitoring equipment repairs. For the year ended
      December 31, 2006, Service Revenue was $84,776 compared to $57,859 for 2005.
      This increase is attributable to the increase in equipment repairs of deployed
      monitoring units.




**Cost
      of Revenues**




Cost
      of
      Revenues represents all direct costs associated with the generation of equipment
      and hosting revenue, including cost of goods for equipment that is sold and
      leased, the direct variable communications and hardware equipment expenses
      associated with the webcentric hosting services, the costs of distribution
      of
      software and equipment, and the maintenance expenses on equipment repaired
      under
      service agreements. Costs of revenues are recorded as products are delivered
      or
      services are performed. A portion of the cost of revenues consists of the
      amortization of product development costs, which began in March 2002. For the
      year ended December 31, 2006, Cost of Revenues was $3,574,126, compared to
      $2,876,779 during 2005. This increase is primarily due to increased
      amortization, increased communication costs and third party service and
      monitoring costs of supporting additional units in the field.




15




**Research
      and Development**




Research
      and Development expenses are the direct costs associated with iSECUREtrac’s
      development of its proprietary products. Expenses in this category include
      the
      cost of outside contracted engineering and design, staffing expenses for the
      Company’s own engineers and software developers, and the actual costs of
      components, prototypes, and testing equipment and services used in the product
      development functions. The Research and Development expenses were $1,325,076
      for
      the year ended December 31, 2006, compared to $929,835 for 2005. This increase
      in research and development expenses was the result of additional testing and
      configuration expenses and increased costs related to the development of our
      next generation product.




**Sales,
      General and Administrative**




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 executive, sales, administrative and accounting staff
      payroll, taxes and benefits, rent on property, travel, communications, office
      leases and supplies, marketing, advertising, attendance at trade shows,
      production of marketing and related collateral material, as well as recruiting
      and training expenses. For the year ended December 31, 2006, SG&A expenses
      increased to $8,457,883 from $5,160,282 of SG&A expenses incurred during
      2005.




The
      increase in SG&A expenses was largely due to the increases in compensation
      expense, bad debt expense, travel expense, consulting fees and liability
      insurance premiums. Compensation expenses increased from $2,485,297 in 2005
      to
      $3,987,138 in 2006 primarily due to the hiring of additional non-Research and
      Development employees during the year who were primarily hired to provide
      customer support and monitoring to our expanding customer base. Compensation
      expense also included $395,279 of stock based compensation expense during 2006
      resulting from the adoption of FAS# 123(R) by the Company on January 1, 2006.
      Stock based compensation expense is recognized using the fair-value based
      accounting method for all employee awards granted during the year. FAS# 123(R)
      is a replacement of FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      and
      supersedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and its
      related interpretive guidance. For the year ended December 31, 2005, stock-based
      compensation expense was $13,680. Bad debt expense increased from $161,000
      in
      2005 to $658,000 in 2006 due to our decision to write off delinquent accounts
      from several service provider customers. The Company has changed its service
      provider business model to better manage those types of accounts. Travel expense
      increased from $576,522 in 2005 to $802,144 in 2006 due to an increase in the
      number of employees and increased efforts with respect to bidding on service
      contracts with governmental agencies. Consulting fees increased from $76,804
      in
      2005 to $279,786 in 2006 as we relied more heavily on outside consultants and
      lobbyists to respond to an increasing number of requests for proposals.
      Liability insurance premiums increased from $244,208 in 2005 to $434,368 in
      2006
      due to the increase in the Company’s revenues over the same period.




**Operating
      Loss**




For
      the
      twelve months ended December 31, 2006, operating loss was $5,293,242, compared
      to $3,377,113 for the same period in 2005. The increase is primarily
      attributable to increases in Cost of Revenues and SG&A expenses as described
      above which more than offset higher revenues generated during the
      year.




**Interest
      Income**




For
      the
      year ended December 31, 2006, interest income was $87,428, compared to interest
      income of $100,927 in the comparable period of 2005. The Company received a
      cash
      investment from the sale of Preferred Stock and warrants in June 2005, and
      the
      proceeds from this investment that were not needed for immediate working capital
      needs or debt repayment were invested in government securities and certificates
      of deposits with the Company’s primary bank. As these funds were needed for
      working capital purposes, they were not reinvested in such securities as they
      matured and, as a result, interest earnings declined in the twelve months ended
      December 31, 2006, compared to the same period of 2005.




16




**Interest
      Expense**




For
      the
      year ended December 31, 2006, interest expense totaled $245,822, compared to
      interest expense of $629,559 during 2005. This decrease was due to a significant
      reduction in the Company’s debt in 2005 pursuant to the Company’s
      recapitalization plan.




**Net
      Loss**




For
      the
      year ended December 31, 2006, the Company had a net loss of $5,451,636 compared
      to a net loss of $3,873,908 in 2005, for the reasons described
      above.




**Preferred
      Stock Dividends and Accretion**




For
      the
      year ended December 31, 2006, preferred stock dividends and accretion totaled
      $1,112,299, as compared to $549,108 for 2005. This increase was due to the
      Series C Exchangeable Preferred Stock being outstanding for the entire twelve
      month period in 2006 compared to being outstanding for approximately six months
      in 2005. The Series C Exchangeable Preferred Stock accrues interest at a
      cumulative compounded rate of 8.0% per annum.




**Net
      Loss Available to Common Stockholders**




For
      the
      year ended December 31, 2006, there was a net loss available to common
      stockholders of $6,563,935 compared to $4,423,016 in 2005. The reasons for
      these
      changes are described above.




**Liquidity
      and Capital Resources**




For
      the
      year ended December 31, 2006, the Company used $3,599,456 of cash in operating
      activities, generated $1,293,626 in investing activities, and generated
      $5,904,889 in cash from financing activities.  The total of all cash flow
      activities resulted in an increase of $3,599,059 in the balance of cash for
      the
      year ended December 31, 2006.  During the year ended December 31, 2005, the
      Company used $4,021,753 of cash in operating activities and another $4,785,399
      in investing activities.  The Company generated $9,504,781 from financing
      activities, which included the sale of $11 million of Preferred Stock and
      Warrants.  The total of all cash flow activities in 2005 resulted in an
      increase in the balance of cash of $697,629.




The
      Company converted $189,420 and $3,944,050 of its long-term debt, notes payable
      and accrued interest into common stock during 2006 and 2005, respectively. 
The Company made principal payments on long-term debt and notes payable totaling
      $1,348,200 and $3,338,007 during 2006 and 2005, respectively.  At December
      31, 2006, the Company had $0 in short-term and $6,000,000 in long-term debt.




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 holder
      of all shares of our Series C Preferred Stock. Both loans bear interest at
      a
      rate of 7% per annum. These loans mature on the earlier of (i) July 1, 2008
      or
      (ii) the first date on which the Company 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
      lender of the $6,000,000 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 two
      notes
      were approved by a Special Committee of the Board of Directors consisting solely
      of disinterested directors.




The
      proceeds of the loans will be used to meet the Company’s working capital needs
      and are anticipated to be repaid from proceeds of a subsequent debt or equity
      financing. The Special Committee of the Board of Directors is currently
      evaluating alternative financing transactions which may include, but are not
      limited to, issuances of common or preferred stock or mezzanine level debt.
      It
      is possible that one or more affiliates of Mykonos may provide some or all
      of
      this longer term financing for the Company, but no commitment has been received
      from any affiliate of Mykonos to provide such financing.




17




During
      2006, the Company closed on a $2,250,000 asset-based credit facility from a
      related party for the purchase of its monitoring equipment. The advances against
      this line are secured by the Company’s revenue generating monitoring equipment.
      As of December 31, 2006, the Company had taken a total of $1,250,000 against
      the
      $2,250,000 available under this facility which were structured as capital lease
      agreements leaving $1,000,000 available for future financing transactions.
      In
      total, as of December 31, 2006, the Company had nine capital lease facilities
      in
      place which were used to finance offender monitoring equipment. All nine of
      these capital leases were sale-leaseback transactions with a related party.
      Under these sale-leaseback arrangements, the Company sells the inventory to
      the
      credit facility provider and then leases the equipment back. All capital leases
      are treated as financing transactions with four of the leases carrying interest
      rates of 9.50% per annum and five of them carrying interest rates of 12.00%
      per
      annum. Maturity dates on these capital leases run from September 2007 to October
      2009. As of December 31, 2006, the aggregate balance on these nine capital
      leases totaled $1,585,172, of which $891,070 is current and the balance of
      $694,102 is classified as long-term debt.




By
      the
      end of 2006, the Company was incurring approximately $300,000 in recurring
      monthly costs of revenues and $750,000 in recurring monthly operating
      expenses.  Approximately 62% 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 $6,000,000 loan from an affiliate of Mykonos), and through
      capital leasing arrangements. As of December 31, 2006, the Company had
      $4,341,685 in cash and cash equivalents.




The
      Company’s financial statements have been presented on the basis that it is able
      to continue as a going concern, which contemplates the realization of assets
      and
      the satisfaction of liabilities in the normal course of business. The
      Company believes that its current working capital, combined with the remaining
      available amount from the above mentioned credit facility, are sufficient to
      meet its liquidity needs through the end of 2007.  At that time, the
      Company may need to close on an additional equity investment transaction or
      debt
      financing to have sufficient capital to satisfy liquidity needs through 2008
      and
      beyond. However, if the Company is unable to obtain additional capital, it
      will
      need to take other steps, including imposition of significant cost reductions,
      in order to maintain operations.




**Reverse
      Stock Split**




On
      September 19, 2005, the Company effected a 1 for 10 reverse stock split of
      the
      Company’s common stock.  Each outstanding ten (10) shares of our common
      stock, par value $.001 per share, was automatically combined and converted
      into
      one (1) share of our common stock, par value $.001.  There was no decrease
      in the total number of shares of authorized capital stock as a result of the
      Reverse Stock Split and no fractional shares resulted from the Reverse Stock
      Split, rather any holder of shares not evenly divisible by ten (10) received
      one
      additional whole share of common stock for such fractional share resulting
      from
      the combination and such additional share duly issued, fully paid and
      nonassessable.  All share and per share amounts have been retro-actively
      restated to reflect the reverse stock split.




**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***




Revenue
      is recognized related to the sale and leasing of PTUs and for services provided
      through tracNET24. A daily service fee is charged for each PTU which the
      customer desires to have tracked from time to time. The customer initiates
      tracking by entering an activation command on an appropriate tracNET24 screen
      and, similarly, stops the tracking by entering a deactivation command. The
      daily
      fee for tracNET24 is only charged from the time of activation to the time of
      deactivation for each PTU. These services are billed in arrears on a monthly
      basis as the service is rendered to the customer. Revenue related to the daily
      service fee for leasing and hosting our PTU’s was $7,380,526 and $4,821,632 for
      the years ended December 31, 2006 and 2005, respectively. For PTUs that are
      sold, the customer is billed and revenue is recognized over the life of the
      related contract. For PTUs that are leased, the customer is billed in arrears
      on
      a monthly basis for all units under lease, and revenue is recognized monthly
      over the lease term.




18




***Stock-based
      compensation***




** In
      December 2004, the Financial Accounting Standards Board (“FASB”) published FASB
      Statement No. 123 (revised 2004), “ *Share-Based
      Payment* ”
(“FAS#
      123(R)” or the “Statement”). FAS# 123(R) requires that the compensation cost
      relating to share-based payment transactions, including grants of employee
      stock
      options, be recognized in financial statements. That cost will be measured
      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. FAS# 123(R) is a replacement of
      FASB
      Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      and
      supersedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and its
      related interpretive guidance (APB 25).




The
      Company adopted FAS# 123(R) as of January 1, 2006, 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 effect of the Statement is to require the Company 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
      is not restating any of the prior period stock based compensation
      disclosures.




Compensation
      expense related to the unvested portion of awards outstanding as of January
      1,
      2006, were based on the grant-date fair value of those awards as calculated
      under the original provisions of Statement No. 123. Accordingly, the Company
      did
      not re-measure the grant-date fair value estimate of the unvested portion of
      awards granted prior to January 1, 2006. The Company determined the fair value
      of these awards using the Black-Scholes option pricing model.




As
      of May
      31, 2006, the Company’s stock-based compensation plan titled the 2001 Omnibus
      Equity Incentive Plan expired. 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 which became effective on May 31,
      2006. Prior to May 31, 2006, the Company also granted stock-based compensation
      under executive employment agreements. Prior to January 1, 2006, the Company
      accounted for stock-based compensation under the recognition and measurement
      principles of APB Opinion No. 25, *Accounting
      for Stock Issued to Employees,* and
      related interpretations, which measures compensation as the difference between
      the fair market value of the stock at the date of award and the amount required
      to be paid for the stock (intrinsic value method). The Company accounted for
      modifications of previously issued fixed stock option awards under the
      accounting consequences of modifications to a fixed stock option or award of
      APB
      Opinion No. 25 and related interpretations. Accordingly, the options were
      accounted for as variable from the date of the modification to the date the
      option is exercised, forfeited, or expires unexercised.




19




***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, 2006 and December 31, 2005




**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
      7. Financial Statements.**




See
“Item
      13 Exhibits” for the Consolidated Financial Statement and the notes thereto
      filed as part of this report.




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




None.




**Item
      8A. 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.




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




**Item
      8B. Other Information.**




Not
      applicable




**PART
      III**




Incorporated
      by reference in Items 9 to 12, and 14 below are certain sections of the
      definitive proxy statement, to be filed pursuant to Regulation 14A with the
      SEC
      within 120 days after December 31, 2006 (the “Proxy Statement”).




20




**Item
      9. Directors and Executive Officers of the Registrant.**




The
      information about directors required to be furnished pursuant to this Item
      9 is
      incorporated by reference to the Proxy Statement under the heading “ELECTION OF
      DIRECTORS”. Information regarding non-director executive officers of the Company
      is set forth below.




**David
      G. Vana,** age 45,
      was appointed Chief Financial Officer in August 2003. From November, 2001 to
      August, 2003, Mr. Vana served as Senior Vice President of Product Development
      where he led the development of the Company’s offender monitoring products. Mr.
      Vana was with Telemarket Resources International (TRI), an Omaha, Nebraska
      company that provides message broadcasting and direct marketing products to
      the
      telecommunications industry, from May 2000 until October 2001 where he served
      as
      a Board Member and CFO. Prior to that, he was with Ernst & Young's
      Management Consulting Practice in Kansas City, Missouri. Mr. Vana previously
      was
      the CFO for Pyramid Computing Solutions, Director of Financial Systems for
      MFS
      Communications and Accounting Manager for America First Companies. He has
      extensive experience in strategic planning, project management, accounting
      and
      finance. Mr. Vana has a BSBA and an MBA from the University of Nebraska at
      Omaha.




**Edward
      J. Sempek,** age 45,
      was appointed Senior Vice President, Operations & Business Development in
      August 2003. From November, 2001 to August, 2003, Mr. Sempek served as Senior
      Vice President of Sales & Marketing. Mr. Sempek served as Executive Vice
      President at Telemarket Resources International (TRI) from January 2000 to
      October 2001. Mr. Sempek is an entrepreneur, having owned a number of successful
      businesses over the past two decades including Pyramid Computing Solutions,
      Inc., which was acquired by TRI. Mr. Sempek was previously employed with Sprint,
      a large global communications company, from 1989 to 1995. He served as Major
      Account Manager, National Account Manager, Area Sales Manager and Regional
      Data
      Sales Manager with Sprint. In 1994 he was the number two Area Sales Manager
      in
      the country.




**David
      G. Sempek** ,
      age 44,
      was appointed Chief Technology Officer in November 2001. Mr. Sempek served
      as
      Chief Technical Officer at Telemarket Resources International (TRI) from January
      1999 to October 2001. Mr. Sempek also served as Vice President of Information
      Services at Pyramid Computing Solutions Inc. from January 1993 to December
      1999.
      Mr. Sempek has a Bachelor of Electrical Engineering with distinction from the
      University of Minnesota. He specializes in computer science and programming
      and
      has written thesis material on the "Implementation of Algorithms for VLSI
      Layout."




**Item
      10. Executive Compensation.**




The
      discussion under the heading “Executive Compensation” in the Proxy Statement is
      incorporated herein by reference.




**Item
      11. 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.




**Item
      12. Certain Relationships and Related Transactions.**




The
      discussion under the heading “Certain Relationships and Related Transactions” in
      the Proxy Statement is incorporated herein by reference.




**Item
      13. Exhibits.**




(a)  The
      following documents are filed as part of this report:




1.
            Financial
                Statements of the Company. Reference is made to the Index to Financial
                Statements on Page F-0.




21




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
            Share
                Exchange Agreement with Tracking Systems Corporation
                (8)




10.06
            Employment
                Agreement between the Company and Thomas E. Wharton, Jr.
                (6)




10.07
            Employment
                Agreement between the Company and David G. Vana
                (5)




10.08
            Employment
                Agreement between the Company and Edward J. Sempek
                (5)




10.09
            Employment
                Agreement between the Company and David G. Sempek
                (5)




10.10
            Employment
                Agreement between the Company and Peter A. Michel
                (17)




10.11
            Agreement
                Among Noteholders (10)




10.12
            Debt
                Conversion between the Company and Roger Kanne
                (11)




10.13
            Debt
                Conversion between the Company and Martin Halbur
                (11)




10.14
            Debt
                Conversion between the Company and Kenneth Macke
                (11)




10.15
            Debt
                Conversion between the Company and Buckshot Capital, LLC
                (11)




10.16
            Business
                Office Lease (11)




10.17
            Business
                Office Lease Amendment




10.18
            Securities
                Purchase Agreement (14)




10.19
            Registration
                Rights Agreement (15)




10.20
            Warrant
                Agreement (16)




10.21
            2001
                Omnibus Equity Incentive Plan (4)




10.22
            2006
                Omnibus Equity Incentive Plan (18)




10.23
            Indemnification
                Agreement in favor of AHK Leasing, LLC
                (19)




21.01
            Subsidiaries
                of the Company




23
              Consent
                  of McGladrey & Pullen, LLP, Independent Registered Public Accounting
                  Firm




24
            Powers
                of Attorney




31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.




22




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 current report under Form S-8 filed on
                May 22, 2002 (Commission File No.
                333-88798).*




*(6)*
            *Incorporated
                by reference from the registrant’s current report 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)*
            *Incorporated
                by reference from the registrant’s current report under Form 8-K filed on
                November 12, 2003 (Commission File No.
                0-26455).*




*(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 current 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).*




*(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 current 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).*




23




**Item
      14. Principal Accountant Fees and Services**




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




24





**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      the
      registrant caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized.


ISecureTrac
                Corp.By:
            /s/
              Peter A. MichelPeter
                A. Michel
              *Chief
                Executive Officer*




By:
              /s/
                David G. VanaDavid
                    G. Vana
                  *Chief
                    Financial Officer*Dated:
                  March 12, 2007




In
      accordance with the 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.





25




**Signature**
            
            **Title**
            
            **Date**/s/
                Roger J. Kanne *
            
            Chairman
                of the Board of Directors,
            
            March
                12, 2007Roger
                J. Kanne
            
            Director/s/
                Peter A. Michel
            
            President,
                Chief Executive Officer, Director
            
            March
                12, 2007Peter
                A. Michel/s/
                David G. Vana
            
            Chief
                Financial Officer
            
            March
                12, 2007David
                G. Vana/s/
                Joseph A. Ethridge *
            
            Director
            
            March
                12, 2007Joseph
                A. Ethridge/s/
                Robet W. Korba *
            
            Director
            
            March
                12, 2007Robert
                W. Korba/s/
                Bruce Leadbetter *
            
            Director
            
            March
                12, 2007Bruce
                Leadbetter/s/
                Ravi Nath *
            
            Director
            
            March
                12, 2007Ravi
                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-KSB on behalf of each of the indicated Directors of iSECUREtrac Corp.
        has been
        filed herein as Exhibit 24.
  By:
              /s/
                  Peter A. MichelPeter
                  A. Michel
                  Attorney-In-Fact
  26
 **iSECUREtrac
          Corp. and Subsidiaries**
 **Consolidated
          Financial Report**
 
 Table
          of
          Contents
 Report
                      of Independent Registered Public Accounting Firm
                  F-1Consolidated
                      Financial Statements:Balance
                      Sheet
                  F-2Statements
                      of Operations
                  F-3Statements
                      of Stockholders' Deficit
                  F-4Statements
                      of Cash Flows
                  F-5Notes
                      to Consolidated Financial Statements
                  F-6
  
 **REPORT
              OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
  To
              the
              Board of Directors
 iSECUREtrac
              Corp.
 Omaha,
              Nebraska
 
 We
              have
              audited the accompanying Consolidated Balance Sheet of iSECUREtrac
              Corp. and
              subsidiaries as of December 31, 2006, and the related Consolidated
              Statements of Operations, Stockholders' Deficit and Cash Flows for
              the years
              ended December 31, 2006, and 2005. 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, 2006, and the results of their operations
              and their cash flows for the years ended December 31, 2006, and 2005, in
              conformity with U.S. generally accepted accounting principles.
 
 As
              described in Note 7 to the financial statements, on January 1, 2006
              the Company
              changed its method of accounting for stock-based compensation as required
              by
              Statements of Financial Accounting Standards No. 123 (revised), “Share-Based
              Payment”.
 
 
 /s/
              McGladrey & Pullen, LLP
 Kansas
              City, Missouri
 March
              12,
              2007
  *F-1*
  ***iSECUREtrac
                Corp. and SUBSIDIARIES***
 ***CONSOLIDATED
                BALANCE SHEET***
 ***December
                31, 2006***
  **ASSETS**Current
                          AssetsCash
                          and cash equivalents (Note 13)
                      
                      $
                      4,341,685Accounts
                          receivable, net of allowance for doubtful accounts of $171,409
                          in 2006
                          (Note 13)
                      
                      
                      2,284,177Inventories
                      
                      
                      61,021Prepaid
                          expenses and other
                      
                      
                      74,608Total
                          current assets
                      
                      
                      6,761,491Equipment,
                          net of accumulated depreciation of $336,721
                      
                      
                      382,072Leasehold
                          improvements, net of accumulated depreciation of $9,535
                      
                      
                      67,396Monitoring
                          equipment, net of accumulated depreciation of $4,904,883
                          (Notes 3, 5 &
                          10)
                      
                      
                      2,930,429Intangibles,
                          net of accumulated amortization of $767,598 (Note 4)
                      
                      
                      143,924Goodwill
                          (Note 4)
                      
                      
                      2,302,179Other
                          assets
                      
                      
                      66,045Total
                          assets
                      
                      $
                      12,653,536**LIABILITIES
                          AND STOCKHOLDERS' (DEFICIT)**Current
                          LiabilitiesCurrent
                          maturities of long term debt (Notes 5, 10 & 12)
                      
                      $
                      891,070Accounts
                          payable and accrued expenses
                      
                      
                      847,765Deferred
                          revenues & gain on sale-leaseback transaction (Note
                          10)
                      
                      
                      423,349Accrued
                          interest payable (Note 5)
                      
                      
                      37,838Total
                          current liabilities
                      
                      
                      2,200,022Long-term
                          debt, less current maturities (Notes 5, 10 & 12)
                      
                      
                      6,694,102Redeemable
                          convertible Series C preferred stock, 5,000,000 shares
                          designated
                          at$0.01
                          par value; 1,000,000 issued and outstanding (Note 8)
                      
                      
                      10,696,697Commitments
                          and contingency (Note 10)Stockholders'
                          (Deficit) (Notes 7 & 8)Common
                          stock, 75,000,000 share authorized at $0.001 par value;10,773,454
                          issued and outstanding
                      
                      
                      10,773Additional
                          paid-in capital
                      
                      
                      54,950,315Accumulated
                          deficit
                      
                      
                      (61,898,373
                      )Total
                          stockholders' (deficit)
                      
                      
                      (6,937,285
                      )Total
                          liabilities and stockholders' (deficit)
                      
                      $
                      12,653,536
 See
                Notes to Consolidated Financial Statements.
  *F-2*
  ***iSECUREtrac
                Corp. and SUBSIDIARIES***
 ***CONSOLIDATED
                STATEMENTS OF OPERATIONS***
 ***Years
                Ended December 31, 2006 and 2005***
  2006
                      
                      2005**Revenues:**Equipment
                          leasing & hosting (Note 13)
                      
                      $
                      7,380,526
                      
                      $
                      4,821,632Equipment
                          sales
                      
                      
                      325,153
                      
                      
                      38,605Gain
                          on sale-leaseback transactions - related party (Notes 10
&
                          12)
                      
                      
                      273,388
                      
                      
                      671,687Service
                      
                      
                      84,776
                      
                      
                      57,859Total
                          revenues
                      
                      
                      8,063,843
                      
                      
                      5,589,783**Operating
                          expenses:**Cost
                          of revenues
                      
                      
                      3,574,126
                      
                      
                      2,876,779Research
                          and development
                      
                      
                      1,325,076
                      
                      
                      929,835Sales,
                          general and administrative
                      
                      
                      8,457,883
                      
                      
                      5,160,282Total
                          operating expenses
                      
                      
                      13,357,085
                      
                      
                      8,966,896Operating
                          loss
                      
                      
                      (5,293,242
                      )
                      
                      (3,377,113
                      )**Other
                          income (expense):**Interest
                          income
                      
                      
                      87,428
                      
                      
                      100,927Interest
                          expense (Note 5)
                      
                      
                      (245,822
                      )
                      
                      (629,559
                      )Other,
                          net
                      
                      
                      -
                      
                      
                      31,837Total
                          other income (expense)
                      
                      
                      (158,394
                      )
                      
                      (496,795
                      )Loss
                          before provision for income taxes
                      
                      
                      (5,451,636
                      )
                      
                      (3,873,908
                      )Provision
                          for income taxes (Note 6)
                      
                      
                      -
                      
                      
                      -**Net
                          loss**
                      
                      $
                      (5,451,636
                      )
                      $
                      (3,873,908
                      )Preferred
                          stock dividends and accretion (Note 8)
                      
                      
                      (1,112,299
                      )
                      
                      (549,108
                      )**Net
                          loss available to common stockholders**
                      
                      $
                      (6,563,935
                      )
                      $
                      (4,423,016
                      )**Basic
                          and diluted loss per common share**
                      
                      $
                      (0.61
                      )
                      $
                      (0.45
                      )**Weighted
                          average shares of common stock outstanding**
                      
                      
                      10,753,487
                      
                      
                      9,910,337
 See
                Notes to Consolidated Financial Statements.
  *F-3*
  ***iSECUREtrac
              Corp. AND SUBSIDIARIES***
 ***STATEMENT
              OF STOCKHOLDERS' (DEFICIT)***
 ***Years
              Ended December 31, 2006 and 2005***
  **Series
                        B****Convertible**
                    
                    
                    
                    
                    
                    **Additional****Preferred
                        Stock**
                    
                    **Common
                        Stock**
                    
                    **Paid
                        -in**
                    
                    **Accumulated****Shares**
                    
                    **Amount**
                    
                    **Shares**
                    
                    **Amount**
                    
                    **Capital**
                    
                    **Deficit**
                    
                    **Total****Balance,
                        December 31, 2004**
                    
                    
                    300
                    
                    
                    295,000
                    
                    
                    8,865,156
                    
                    
                    8,866
                    
                    
                    48,673,982
                    
                    
                    (51,206,198
                    )
                    
                    (2,228,350
                    )Issuance
                        of warrants, net of offering costs
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,543,396
                    
                    
                    -
                    
                    
                    1,543,396Shares
                        issued upon conversion of notes
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,679,254
                    
                    
                    1,679
                    
                    
                    3,942,371
                    
                    
                    -
                    
                    
                    3,944,050Shares
                        issued upon exercise of options
                    
                    
                    -
                    
                    
                    -
                    
                    
                    6,100
                    
                    
                    6
                    
                    
                    17,169
                    
                    
                    -
                    
                    
                    17,175Shares
                        issued upon exercise of warrants
                    
                    
                    -
                    
                    
                    -
                    
                    
                    76,087
                    
                    
                    76
                    
                    
                    174,924
                    
                    
                    -
                    
                    
                    175,000Shares
                        issued for director's fees
                    
                    
                    -
                    
                    
                    -
                    
                    
                    7,599
                    
                    
                    8
                    
                    
                    16,992
                    
                    
                    -
                    
                    
                    17,000Compensation
                        related to stock options issued
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    13,680
                    
                    
                    -
                    
                    
                    13,680Registration
                        offering costs
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (28,073
                    )
                    
                    -
                    
                    
                    (28,073
                    )Shares
                        issued upon conversion of Series B preferred stock
                    
                    
                    (300
                    )
                    
                    (295,000
                    )
                    
                    50,010
                    
                    
                    50
                    
                    
                    294,950
                    
                    
                    -
                    
                    
                    -Shares
                        issued in lieu of partial shares pursuant to reverse
                        split
                    
                    
                    -
                    
                    
                    -
                    
                    
                    323
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Series
                        C preferred stock dividends
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (450,850
                    )
                    
                    (450,850
                    )Accretion
                        to redemption value of preferred stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (98,258
                    )
                    
                    -
                    
                    
                    (98,258
                    )Net
                        loss
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (3,873,908
                    )
                    
                    (3,873,908
                    )**Balance,
                        December 31, 2005**
                    
                    
                    -
                    
                    $
                    -
                    
                    
                    10,684,529
                    
                    $
                    10,685
                    
                    $
                    54,551,133
                    
                    $
                    (55,530,956
                    )
                    $
                    (969,138
                    )Shares
                        issued upon conversion of notes
                    
                    
                    -
                    
                    
                    -
                    
                    
                    83,958
                    
                    
                    83
                    
                    
                    189,337
                    
                    
                    -
                    
                    
                    189,420Shares
                        issued upon exercise of options
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,385
                    
                    
                    1
                    
                    
                    3,088
                    
                    
                    -
                    
                    
                    3,089Shares
                        issued for director's fees
                    
                    
                    -
                    
                    
                    -
                    
                    
                    3,582
                    
                    
                    4
                    
                    
                    7,996
                    
                    
                    -
                    
                    
                    8,000Compensation
                        related to stock options issued
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    395,279
                    
                    
                    -
                    
                    
                    395,279Series
                        C preferred stock dividends
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (915,781
                    )
                    
                    (915,781
                    )Accretion
                        to redemption value of preferred stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (196,518
                    )
                    
                    -
                    
                    
                    (196,518
                    )Net
                        loss
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (5,451,636
                    )
                    
                    (5,451,636
                    )**Balance,
                        December 31, 2006**
                    
                    
                    -
                    
                    $
                    -
                    
                    
                    10,773,454
                    
                    $
                    10,773
                    
                    $
                    54,950,315
                    
                    $
                    (61,898,373
                    )
                    $
                    (6,937,285
                    )
  See
              Notes to Consolidated Financial Statements.
  *F-4*
 
  ***iSECUREtrac
                  CORP. AND SUBSIDIARIES***
 ***CONSOLIDATED
                  STATEMENTS OF CASH FLOWS***
 ***Years
                  Ended December 31, 2006 and 2005***
  **2006**
                        
                        **2005****Cash
                            Flows From Operating Activities**Net
                            loss
                        
                        $
                        (5,451,636
                        )
                        $
                        (3,873,908
                        )Depreciation
                            and amortization
                        
                        
                        1,719,549
                        
                        
                        1,822,629Expenses
                            paid by issuance of stock, warrants, and options in lieu
                            of
                            cash
                        
                        
                        403,279
                        
                        
                        30,680Accretion
                            of investment discount
                        
                        
                        -
                        
                        
                        (53,940
                        )Gain
                            on sale - leaseback transactions
                        
                        
                        (273,388
                        )
                        
                        (671,687
                        )Increase
                            in deferred revenue
                        
                        
                        260,897
                        
                        
                        -(Increase)
                            in accounts receivable
                        
                        
                        (665,704
                        )
                        
                        (568,819
                        )(Increase)
                            decrease in interest receivable
                        
                        
                        3,555
                        
                        
                        (3,555
                        )Decrease
                            in inventories
                        
                        
                        61,718
                        
                        
                        18,199(Increase)
                            decrease in prepaid expenses
                        
                        
                        8,752
                        
                        
                        (7,626
                        )Increase
                            (decrease) in accounts payable and accrued expenses
                        
                        
                        308,422
                        
                        
                        (584,058
                        )Increase
                            (decrease) in accrued interest payable
                        
                        
                        25,100
                        
                        
                        (129,668
                        )**Net
                            cash used in operating activities**
                        
                        
                        (3,599,456
                        )
                        
                        (4,021,753
                        )**Cash
                            Flows From Investing Activities**Purchases
                            of leasehold improvements and equipment
                        
                        
                        (295,901
                        )
                        
                        (81,914
                        )Purchases
                            of monitoring equipment
                        
                        
                        (1,908,464
                        )
                        
                        (1,367,040
                        )Proceeds
                            from maturity of investments
                        
                        
                        6,350,000
                        
                        
                        -Purchase
                            of investments
                        
                        
                        (2,904,224
                        )
                        
                        (3,391,836
                        )Decrease
                            in other assets
                        
                        
                        52,215
                        
                        
                        55,391**Net
                            cash provided by (used in) investing activities**
                        
                        
                        1,293,626
                        
                        
                        (4,785,399
                        )**Cash
                            Flows From Financing Activities**Principal
                            proceeds from notes
                        
                        
                        -
                        
                        
                        1,700,000Principal
                            payments on notes
                        
                        
                        -
                        
                        
                        (1,915,654
                        )Principal
                            proceeds from long-term debt
                        
                        
                        7,250,000
                        
                        
                        400,000Principal
                            payments on long-term debt
                        
                        
                        (1,348,200
                        )
                        
                        (1,422,353
                        )Proceeds
                            from the exercise of options and warrants
                        
                        
                        3,089
                        
                        
                        192,175Registration
                            offering costs
                        
                        
                        -
                        
                        
                        (28,073
                        )Proceeds
                            from issuance of Series C preferred stock, net of offering
                            costs
                        
                        
                        -
                        
                        
                        10,578,686**Net
                            cash provided by financing activities**
                        
                        
                        5,904,889
                        
                        
                        9,504,781**Increase
                            in cash**
                        
                        
                        3,599,059
                        
                        
                        697,629**Cash
                            at beginning of period**
                        
                        
                        742,626
                        
                        
                        44,997**Cash
                            at end of period**
                        
                        $
                        4,341,685
                        
                        $
                        742,626**Supplemental
                            Disclosure of Cash Payments for**Interest
                        
                        
                        220,721
                        
                        
                        759,227**Supplement
                            Disclosure Of Noncash Investing and Financing
                            Activities**Issuance
                            of Common and Preferred Stock in lieu of payment onlong-term
                            debt, notes payable and accrued interest payable
                        
                        
                        189,420
                        
                        
                        3,944,050Issuance
                            of Common Stock upon Conversion of Series B Preferred
                            Stock
                        
                        
                        -
                        
                        
                        294,500Preferred
                            stock dividends and accretion
                        
                        
                        1,112,299
                        
                        
                        549,108Increase
                            (decrease) in restricted cash and stockholders' escrow
                            liability
                        
                        
                        -
                        
                        
                        (700,000
                        )Deferred
                            gain on sales-leaseback recorded on sale of monitoring
                            equipment
                        
                        
                        -
                        
                        
                        237,144
  See
              Notes to Consolidated Financial Statements.
  *F-5*
  **iSECUREtrac
              CORP AND SUBSIDIARIES**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
  **Note 1.
              Nature of Business and Significant Accounting Policies**
  *Nature
              of Business*
  iSECUREtrac
              Corp. and subsidiaries (“iSECUREtrac” or the “Company”) design, develop,
              produce, sell, lease and support wireless products and services relating
              to the
              tracking, monitoring, and reporting of individuals and objects. The
              Company’s
              products are designed to enhance productivity, reduce costs, and improve
              overall
              response using on-line access to information previously maintained
              on a variety
              of media. Today, the Company primarily markets to the criminal justice
              industry
              for continuous electronic monitoring of criminal offenders.
  *Reverse
              Stock Split*
  On
              September 19, 2005, the Company effected a 1 for 10 reverse stock split
              of the
              Company’s common stock. Each outstanding ten (10) shares of our common stock,
              par value $.001 per share, was automatically combined and converted
              into one (1)
              share of our common stock, par value $.001. There was no decrease in
              the total
              number of shares of authorized capital stock as a result of the Reverse
              Stock
              Split and no fractional shares resulted from the Reverse Stock Split,
              rather any
              holder of shares not evenly divisible by ten (10) received one (1)
              additional
              whole share of common stock for such fractional share resulting from
              the
              combination and such additional share was duly issued, fully paid and
              nonassessable. All share and per share amounts have been retro-actively
              restated
              to reflect the reverse stock split.
  *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, acquired on August 28, 2003. 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.
  *Investments:* The
              Company’s investments are stated at amortized cost which approximates fair
              value.
  *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 $658,073 of bad debt expenses for
              2006 and
              $161,131 for 2005.
  *F-6*
  *Notes
                to Consolidated Financial Statements*
 
  *Inventories:* Inventories
              consist of Personal Tracking Units (PTUs) and parts and are recorded
              at the
              lower of cost (first in - first out method) or market.
  *Leasehold
              improvements, equipment, and monitoring equipment:* Leasehold improvements, equipment, and monitoring equipment are recorded
              at
              cost. Equipment and monitoring equipment are 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.
  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
              monitoring equipment, the Company recorded no impairment charges for
              the years
              ended December 31, 2006 and December 31, 2005
  *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. The Company began amortizing these costs in 2002 on a straight-line
              basis over an estimated economic useful life of three years. The costs
              were
              fully amortized at December 31, 2005, with amortization expense of
              $52,477
              recorded in that year.
  *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, 2006, and 2005.
  *Intangibles,
              subject to amortization:* Amortizable intangibles represent the value assigned to the future
              net income
              stream attributable to acquired customer monitoring contracts 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
              contingently
              issuable shares were not included in diluted earnings (loss) per common
              share as
              they would have an antidilutive effect upon earnings (loss) per
              share:
  *F-7*
 *Notes
                to Consolidated Financial Statements*
 
  December
                          31, 2006
                      
                      December
                          31, 2005Shares
                          issuable upon conversion of Series C Exchangeable Preferred
                          Stock
                      
                      
                      4,782,609
                      
                      
                      4,782,609Shares
                          issuable upon conversion of Other Convertible Notes
                      
                      
                      -
                      
                      
                      273,579Common
                          stock options outstanding
                      
                      
                      1,969,116
                      
                      
                      1,121,412Common
                          stock warrants outstanding
                      
                      
                      4,742,386
                      
                      
                      5,005,155
  *Revenue
              recognition and deferred revenue:* Revenues
              from equipment sold in conjunction with a hosting agreement are recognized
              ratably over the initial term of the hosting agreement. Revenues from
              equipment
              sold irrespective of a hosting agreement are recognized when goods
              are received
              by the customer. Equipment is shipped FOB destination. Leasing, hosting,
              and
              service revenues are recognized upon performance of the respective
              service.
              Gains on sale-leaseback transactions are recorded as a liability and
              recognized
              as income ratably over the term of the respective equipment lease (typically
              2-3
              years). Costs of revenues are recorded as products are delivered or
              services are
              performed. Leasing and hosting contracts with customers are typically
              for twelve
              months. The Company records deferred revenue which is recognized ratably
              over
              the duration of the agreement.
  *Income
              taxes:* Deferred
              taxes are provided for by a 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:* In
              December 2004, the Financial Accounting Standards Board (“FASB”) published FASB
              Statement No. 123 (revised 2004), “ *Share-Based
              Payment* ”
(“FAS#
              123(R)” or the “Statement”). FAS# 123(R) requires that the compensation cost
              relating to share-based payment transactions, including grants of employee
              stock
              options, be recognized in financial statements. That cost will be measured
              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. FAS# 123(R) is a replacement
              of FASB
              Statement No. 123, *Accounting
              for Stock-Based Compensation* ,
              and
              supersedes APB Opinion No. 25, *Accounting
              for Stock Issued to Employees* ,
              and its
              related interpretive guidance (APB 25).
  The
              Company adopted FAS# 123(R) as of January 1, 2006, 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 effect of the Statement is to require the Company 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
              is not restating any of the prior period stock based compensation
              disclosures.
  Compensation
              expense related to the unvested portion of awards outstanding as of
              January 1,
              2006, were based on the grant-date fair value of those awards as calculated
              under the original provisions of Statement No. 123. Accordingly, the
              Company did
              not re-measure the grant-date fair value estimate of the unvested portion
              of
              awards granted prior to January 1, 2006. The Company determined the
              fair value
              of these awards using the Black-Scholes option pricing model.
  *F-8*
 *Notes
                to Consolidated Financial Statements*
 
  As
              of May
              31, 2006, the Company’s stock-based compensation plan titled the 2001 Omnibus
              Equity Incentive Plan that was approved by stockholders in June, 2001,
              expired.
              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 which became effective on May 31, 2006. Prior
              to May 31,
              2006, the Company also granted stock-based compensation under executive
              employment agreements. Prior to January 1, 2006, iSECUREtrac accounted
              for
              stock-based compensation under the recognition and measurement principles
              of APB
              Opinion No. 25, *Accounting
              for Stock Issued to Employees,* and
              related interpretations, which measures compensation as the difference
              between
              the fair market value of the stock at the date of award and the amount
              required
              to be paid for the stock (intrinsic value method).
  Stock-based
              compensation of $13,680 was reflected in net loss for the year ending
              December
              31, 2005. The Company accounted for modifications of previously issued
              fixed
              stock option awards under the accounting consequences of modifications
              to a
              fixed stock option or award of APB Opinion No. 25 and related interpretations.
              Accordingly, the options were accounted for as variable from the date
              of the
              modification to the date the option is exercised, forfeited, or expires
              unexercised. ($34,008) of the stock-based compensation for the year
              ended
              December 31, 2005, was attributable to variable accounting for stock
              options for
              which the exercise price had been reduced.
  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
              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 ten years.
  Expected
              volatilities are based upon looking back at historical stock prices
              over the two
              years prior to the stock option award. Twelve observations per year
              are used in
              the calculation with the 15 th of the
              month stock price. The Company does a 2-year look back for the following
              reasons: (i) 2 years is the option vesting period; (ii) the stock price
              prior to
              two years ago is not reflective of Company’s expected future stock price; and
              (iii) the change in stock price prior to two years ago is considered
              abnormal
              with respect to the Company’s current state.
  Prior
              to
              adopting FAS# 123(R), the cancellation of stock options was accounted
              for based
              on the actual cancellations during the reporting period. 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. For options
              issued to senior executives, the Company uses an assumed forfeiture
              rate of 0%.
              For all other options, 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 non-senior executive option grants is 21%. This
              rate is
              recalculated on an annual basis.
  The
              annual rate of quarterly dividends is 0% since iSECUREtrac has historically
              not
              paid dividends on its common stock.
  The
              following table illustrates the effect on net loss for the twelve months
              ending
              December 31, 2005, as if the Company had applied the fair value recognition
              provisions of SFAS No. 123, *Accounting
              for Stock-Based Compensation* ,
              to
              stock-based compensation.
  *F-9*
 *Notes
                to Consolidated Financial Statements*
 
  **Year
                          Ended****December
                          31, 2005**Net
                          loss, as reported
                      
                      $
                      (3,873,908
                      )Add:
                          Stock-based employee compensation expense included in reported
                          net
                          loss
                      
                      
                      13,680Deduct:
                          Total stock-based employee compensation expense determined
                          under fair
                          value based method for all awards
                      
                      
                      (130,792
                      )Pro
                          forma net loss
                      
                      
                      (3,991,020
                      )Preferred
                          dividends and accretion
                      
                      
                      (549,108
                      )Pro
                          forma net loss available to common stockholders
                      
                      $
                      (4,540,128
                      )Basic
                          and diluted loss per share:As
                          reported
                      
                      $
                      (0.45
                      )Pro
                          forma
                      
                      $
                      (0.46
                      )
  In
              determining the pro forma amounts above during 2005, the value of each
              grant is
              estimated at the grant date using the fair value method prescribed
              in SFAS
              No. 123 with the following assumptions: no dividends, risk free interest
              rate of 5%; expected life of 3.5 years and; expected price volatility
              of
              106.62%.
  The
              fair
              value of stock warrants issued to non-employees is being accounted
              for using
              SFAS No. 123. Related compensation expense is charged to income when
              incurred.
  *Segments
              of business:* The
              Company is currently operated as a single business segment.
  *Advertising
              costs* :
              Advertising costs are expensed as incurred. Advertising expense for
              the years
              ended December 31, 2006, and 2005 was $50,581 and $14,793,
              respectively.
  *Recent
              Accounting Pronouncements* :
              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. It is effective
              for
              fiscal years beginning after December 15, 2006. The Company does not
              believe
              that this pronouncement will have a significant effect on its financial
              statements.
 
 In
              September 2006, the SEC staff issued Staff Accounting Bulletin (SAB)
              Topic 1N
              (SAB 108), " *Financial
              Statements - Considering the Effects of Prior Year Misstatements when
              Quantifying Misstatements in Current Year Financial Statements* ,"
              which
              is effective for calendar year companies as of December 31, 2006. SAB
              108
              provides guidance on how prior year misstatements should be taken into
              consideration when quantifying misstatements in current year financial
              statements for purposes of determining whether the financial statements
              are
              materially misstated. Under this guidance, companies should take into
              account
              both the effect of a misstatement on the current year balance sheet
              as well as
              the impact upon the current year income statement in assessing the
              materiality
              of a current year misstatement. Once a current year misstatement has
              been
              quantified, the guidance in SAB Topic 1M, " *Financial
              Statements - Materiality* ,"
              (SAB
              99) should be applied to determine whether the misstatement is material.
              The
              implementation of SAB 108 is not expected to have a material impact
              on the
              Company's financial statements.
  *F-10*
  *Notes
                to Consolidated Financial Statements*
 In
              September 2006, the FASB issued SFAS No. 157, *Fair
              Value Measurements* (“SFAS
              No. 157”). SFAS No. 157 defines fair value, establishes a framework for
              measuring fair value under generally accepted accounting principles
              and expands
              disclosure about fair value measurements. SFAS No. 157 emphasizes that
              fair
              value is a market-based measurement, not an entity-specific measurement.
              Therefore, a fair value measurement should be determined based on the
              assumptions that market participants would use in pricing the asset
              or
              liability. This statement clarifies that market participant assumptions
              include
              assumptions about risk. A fair value measurement should include an
              adjustment
              for risk if market participants would include one in pricing the related
              asset
              or liability, even if the adjustment is difficult to determine. This
              statement
              also clarifies that market participant assumptions should also include
              assumptions about the effect of a restriction on the sale or use of
              an asset.
              This statement clarifies that fair value measurement for a liability
              should
              reflect nonperformance risk (the risk that the obligation will not
              be
              fulfilled). This statement expands disclosures about the use of fair
              value to
              measure assets and liabilities in interim and annual periods subsequent
              to
              initial recognition. The disclosures focus on the inputs used to measure
              fair
              value and for recurring fair value measurements using significant unobservable
              inputs and the effect of the measurements on earnings (or changes in
              net assets)
              for the period. SFAS No. 157 is effective for financial statements
              issued for
              fiscal years beginning after November 15, 2007. We are evaluating the
              impact
              that SFAS No. 157 may have on our consolidated financial
              statements.
  **Note
              2. Investments**
  Securities
              are classified as held-to-maturity and are recorded at cost based on
              management’s intent and ability to hold them to maturity.
  To
              the
              extent management determines a decline in value in an investment
              held-to-maturity to be other than temporary, the Company will adjust
              the
              carrying value and include such expense in the consolidated statements
              of
              income. In estimating other-than-temporary impairment losses, management
              considers: (1) the length of time and the extent to which the fair
              value has
              been less than cost, (2) the financial condition and near-term prospects
              of the
              issuer, and (3) the intent and ability of the Company to retain its
              investment
              in the issuer for a period of time sufficient to allow for any anticipated
              recovery in fair value.
  Investments
              at December 31, 2005, consisted of United States agency obligations
              of
              $3,245,776 and Certificates of Deposit totaling $200,000. The total
              amortized
              cost and estimated fair value of the Company’s investments at December 31, 2005,
              was $3,445,776. All investments matured in 2006. The Company had no
              realized
              gains or losses on investments in 2006 or 2005.
  **Note 3.
              Monitoring Equipment**
  Monitoring
              equipment at December 31, 2006, is as follows:
 Active
                          GPS
                      
                      Passive
                          GPS
                      
                      Breath
                          Alcohol
                      
                      Other
                      
                      TotalMonitoring
                          Equipment
                      
                      $
                      2,936,306
                      
                      $
                      3,295,539
                      
                      $
                      964,897
                      
                      $
                      638,570
                      
                      $
                      7,835,312Less
                          accumulated depreciation
                      
                      
                      (1,320,889
                      )
                      
                      (2,560,245
                      )
                      
                      (713,806
                      )
                      
                      (309,943
                      )
                      
                      (4,904,883
                      )Monitoring
                          Equipment, net
                      
                      $
                      1,615,417
                      
                      $
                      735,294
                      
                      $
                      251,091
                      
                      $
                      328,627
                      
                      $
                      2,930,429
  **Note
              4.  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.  The Company has determined that there is no impairment
              of goodwill as of December 31, 2006.
  *F-11*
  *Notes
                to Consolidated Financial Statements*
 
  Intangible
              assets are those that can be separately identified and assigned a value. 
Intangible assets consist of customer monitoring contracts. The Company
              is
              amortizing the intangible assets based on the revenue stream of the
              existing
              contracts. Amortization expense is included in sales, general and administrative
              expenses in the consolidated statements of operations and was $92,706
              in 2006
              and $126,252 in 2005.
  The
              composition of goodwill and intangible assets at December 31, 2006,
              is as
              follows:
 **Intangibles,
                          subject****Goodwill**
                      
                      **to
                          Amortization**Gross
                          Carrying Amount
                      
                      $
                      2,302,179
                      
                      $
                      911,522Accumulated
                          Amortization
                      
                      
                      -
                      
                      
                      (767,598
                      )Balance
                          at December 31, 2006
                      
                      $
                      2,302,179
                      
                      $
                      143,924The
                          estimated aggregate amortization expense of the intangibles
                          is as
                          follows:2007
                      
                      
                      
                      
                      
                      82,5692008
                      
                      
                      
                      
                      
                      41,9622009
                      
                      
                      
                      
                      
                      19,393Total
                      
                      
                      
                      
                      $
                      143,924
  **Note 5.
              Long Term Debt**
  The
              Company had the following long-term debt at December 31, 2006:
 Long
                          Term DebtTwo
                          unsecured notes payable due to one entity maturing on July
                          1, 2008, with
                          an interest rate of 7% payable at maturity.
                      
                      $
                      6,000,000Nine
                          capital leases with related parties that are carrying interest
                          rates at
                          9.50% to 12.00% and maturing September 2007 to October
                          2009 (see Note
                          10).
                      
                      
                      1,585,172Total
                          long term debt
                      
                      
                      7,585,172Less
                          current maturities
                      
                      
                      (891,070
                      )Total
                          long term debt less current maturities
                      
                      $
                      6,694,102
  Accrued
              interest on the unsecured notes payable at December 31, 2006 equaled
              $37,838 and
              was included in interest expense during the year. Total interest expense
              for the
              years ended December 31, 2006, and 2005, was $245,822 and $629,559,
              respectively. Of that amount, $143,177 and $210,860 was expense to
              related
              parties for the years ended December 31, 2006, and 2005, respectively.
  The
              carrying value of the unsecured notes 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.
  The
              following is a schedule of aggregate maturities required on long-term
              debt due
              in future years as of December 31, 2006:
  *F-12*
  *Notes
                to Consolidated Financial Statements*
 
  2007
                      
                      $
                      891,0702008
                      
                      
                      6,472,2222009
                      
                      
                      221,880Total
                      
                      $
                      7,585,172
  **Note 6.
              Income Taxes**
  Net
              deferred tax asset includes the following components as of December 31,
              2006:
 **Total**Deferred
                          tax assets:Net
                          operating loss carryforward
                      
                      $
                      24,345,316Allowance
                          for doubtful accounts
                      
                      
                      58,279Valuation
                          allowance
                      
                      
                      (24,403,595
                      )$
                      -
  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, 2006, and 2005 due to the following:
 **2006**
                      
                      **2005**Computed
                          "expected" tax benefit
                      
                      $
                      (1,853,556
                      )
                      $
                      (1,317,129
                      )Increase
                          (decrease) in income taxes (benefits) resulting from:Benefit
                          from state taxes
                      
                      
                      (327,098
                      )
                      
                      (232,434
                      )Nondeductible
                          expenses
                      
                      
                      57,559
                      
                      
                      52,063Increase
                          in valuation allowance
                      
                      
                      2,123,095
                      
                      
                      1,497,500Total
                          provision for income taxes
                      
                      $
                      -
                      
                      $
                      -
  The
              Company has net operating losses of approximately $60,863,000 to carryforward
              for future tax purposes that expire from 2010 to 2026. It is reasonably
              possible
              the Section 382 limitations of Internal Revenue Service regulations
              may limit
              the amount of net operating loss carryforward. Due to the uncertainty
              surrounding the timing of the realization of the benefit from the net
              operating
              loss carryforward, the Company has recorded a valuation allowance to
              offset the
              deferred tax asset.
  **Note 7.
              Common Stock, Stock Options, Warrants and Benefit Plan**
  In
              December 2004, the Financial Accounting Standards Board (“FASB”) published FASB
              Statement No. 123 (revised 2004), “ *Share-Based
              Payment* ”
(“SFAS
              123(R)” or the “Statement”). SFAS 123(R) requires that the compensation cost
              relating to share-based payment transactions, including grants of employee
              stock
              options, be recognized in financial statements. That cost will be measured
              based
              on the fair value of the equity or liability instruments issued, SFAS
              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. SFAS 123(R) is a replacement
              of FASB
              Statement No. 123, *Accounting
              for Stock-Based Compensation* ,
              and
              supersedes APB Opinion No. 25, *Accounting
              for Stock Issued to Employees* ,
              and its
              related interpretive guidance (APB 25).
  *F-13*
 *Notes
                to Consolidated Financial Statements*
 
  The
              Company adopted SFAS 123(R) as of January 1, 2006, using the modified
              prospective transition method for valuing stock options. Under this
              method,
              stock based compensation expense if recognized using the fair-value
              based
              accounting method for all employee awards granted, modified, or settled
              during a
              period. The effect of the Statement is to require the Company to measure
              the
              cost of 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
              is not
              restating any of the prior period stock based compensation
              disclosures.
  The
              significant assumptions used in the black scholes model to estimate
              compensation
              expense are as follows:
  ·
                    Risk
                        free interest rate of 4.63%
  ·
                    Expected
                        volatility factor of 86.27%
  ·
                    Expected
                        option term is 3.5 to 6.5 years
  ·
                    Dividends
                        of $0
  ·
                    Forfeitures
                        is 0% for senior executives and 21% for non-senior
                        executives
  The
              Company recorded pre-tax compensation expense for stock options issued
              to its
              employees of $395,279 and $13,680 for the years ended December 31,
              2006 and
              2005, respectively. The Company has recorded a full valuation allowance
              on
              deferred tax assets; therefore, no tax benefit is recognized.
  *Common
              Stock*
  In
              2006
              and 2005, the Company issued 3,582 and 7,599 shares of common stock,
              respectively, to nonmanagement 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 $8,000 and $17,000 for
              the years ended December 31, 2006, and 2005, respectively.
  *Stock
              Options*
  As
              of
              January 1, 2005, the Company had 1,114,354 outstanding options. During
              2005, the
              Company granted 54,550 options, 41,392 options were forfeited by the
              holders and
              6,100 options were exercised. As of January 1, 2006, the Company had
              1,121,412 outstanding options. During 2006, the Company granted 912,531
              options,
              63,442 options were forfeited by the holders and 1,385 options were
              exercised.
              At December 31, 2006, the Company had 1,969,116 outstanding options.
              Stock
              option expense of $395,279 and $13,680 has been recorded for the years
              ended
              December 31, 2006, and 2005, respectively for options issued.
  *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 years
              ended 2006
              and 2005, grants for 71,175 and 19,550 shares of Common Stock under
              the 2001
              Plan were made, respectively. Options exercised under the 2001 Plan
              during the
              years ended December 31, 2006, and 2005, were 1,385 and none, respectively.
              Options forfeited for the same time periods were 46,150 and 41,392,
              respectively. At December 31, 2006, there were 150,992 outstanding
              options in
              conjunction with the 2001 Plan. No further options may be issued under
              this
              plan.
  *F-14*
 *Notes
                to Consolidated Financial Statements*
 
  *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 year ended 2006, grants
              for 658,356
              shares of Common Stock were made under the 2006 Plan. No options were
              exercised
              under the 2006 Plan during the year ended December 31, 2006. Options
              forfeited
              under the 2006 Plan during the year ended December 31, 2006, were 1,667.
              At
              December 31, 2006, there were 656,689 outstanding options in conjunction
              with
              the 2006 Plan.
  *Non-Plan
              Stock Options*
  In
              January 2005, the Company granted options to purchase in the aggregate
              of 15,000
              shares of common stock to the Director of Software Engineering at an
              exercise
              price 85% of the daily closing price of common stock on the date when
              the
              options were granted. These options were issued as a performance bonus
              by the
              Board of Directors. The options vest on a monthly basis over a two
              year period
              of time which began January 3, 2005. In all, 14,375 of these options
              had vested
              as of December 31, 2006.
  In
              August
              2005, the Company granted options to purchase in the aggregate of 20,000
              shares
              of common stock to the Vice President of Sales at an exercise price
              85% of the
              daily closing price of common stock on the date when the options were
              granted.
              The options vest on a monthly basis over a two year period of time
              which began
              August 1, 2005. In all, 13,333 of these options had vested as of December
              31,
              2006.
  In
              March
              2006, the Company granted options to purchase 36,000 shares of common
              stock to
              each of the Chief Financial Officer, Senior Vice President of Product
              and
              Project Development and Senior Vice President of Technology at an exercise
              price
              of $2.01. These options vest on a monthly basis over a two year period
              of time
              which began January 1, 2005. In all, 103,500 of these options had vested
              as of
              December 31, 2006. These options were issued as a performance bonus
              by the Board
              of Directors and expire March 9, 2011.
  In
              March
              2006, the Company granted options to purchase 75,000 shares of common
              stock to
              the former President of iSECUREtrac at an exercise price of $2.01.
              The options
              vest on a monthly basis over a two year period of time which began
              January 1,
              2005. In all, 59,375 of these options had vested in 2006, while 15,625
              of these
              options were forfeited upon his resignation. These options were issued
              as a
              performance bonus by the Board of Directors and expire on May 31,
              2007.
  In
              2005,
              6,100 stock options that had previously been issued to a former employee
              were
              exercised.
  At
              December 31, 2006, 959,060 options granted prior to January 1, 2005,
              were still
              outstanding.
  A
              summary
              of options issued to employees during the years ended December 31,
              2006, and
              2005, is as follows:
  *F-15*
 *Notes
                to Consolidated Financial Statements*
 
  **For
                          the Year Ended December 31,2006**
                      
                      **For
                          the Year Ended December 31,2005****Weighted
                          Average**
                      
                      
                      
                      **Weighted
                          Average****Options**
                      
                      **Shares**
                      
                      **Exercise
                          Price**
                      
                      **Shares**
                      
                      **Exercise
                          Price**Outstanding
                          at beginning of year
                      
                      
                      1,121,412
                      
                      $
                      2.62
                      
                      
                      1,114,354
                      
                      $
                      2.70Granted
                      
                      
                      912,531
                      
                      
                      2.08
                      
                      
                      54,550
                      
                      
                      1.88Exercised
                      
                      
                      (1,385
                      )
                      
                      2.23
                      
                      
                      (6,100
                      )
                      
                      2.82Forfeited
                      
                      
                      (63,442
                      )
                      
                      3.23
                      
                      
                      (41,392
                      )
                      
                      2.79Outstanding
                          at end of year
                      
                      
                      1,969,116
                      
                      $
                      2.35
                      
                      
                      1,121,412
                      
                      $
                      2.62Exercisable
                          at end of year
                      
                      
                      1,314,707
                      
                      $
                      2.49
                      
                      
                      1,073,764
                      
                      $
                      2.65Weighted-average
                          fair value for options granted during the year
                      
                      
                      912,531
                      
                      $
                      1.45
                      
                      
                      54,550
                      
                      $
                      1.62
  Additional
              information regarding options outstanding at December 31, 2006, is
              as
              follows:
 **Options
                          Outstanding**
                      
                      
                      
                      **Options
                          Exercisable****Number**
                      
                      **Weighted
                          Average**
                      
                      **Weighted****Average**
                      
                      **Number**
                      
                      **Weighted
                          Average****Range
                          of Exercise Prices**
                      
                      **Outstanding**
                      
                      **Remaining
                          Life**
                      
                      **Exercise
                          Price**
                      
                      Exercisable
                      
                      **Exercise
                          Price**$0.50
                          to 2.00
                      
                      
                      204,890
                      
                      
                      7
                          years
                      
                      $
                      1.33
                      
                      
                      19,865
                      
                      $
                      1.54$2.01
                          to 3.00
                      
                      
                      1,598,766
                      
                      
                      3
                          years
                      
                      
                      2.37
                      
                      
                      1,129,382
                      
                      
                      2.37$3.01
                          to 4.00
                      
                      
                      125,418
                      
                      
                      6
                          years
                      
                      
                      3.09
                      
                      
                      125,418
                      
                      
                      3.09$4.01
                          to 5.00
                      
                      
                      40,042
                      
                      
                      2
                          years
                      
                      
                      4.55
                      
                      
                      40,042
                      
                      
                      4.55$5.01
                          to 10.00
                      
                      
                      -
                      
                      
                      
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Totals
                      
                      
                      1,969,116
                      
                      
                      
                      
                      
                      
                      
                      
                      1,314,707
  The
              aggregate intrinsic value of outstanding and exercisable options at
              December 31,
              2006, was $185 and $0, respectively.
  As
              of
              December 31, 2006, there was approximately $973,000 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
              2.3 years.
  *Common
              Stock Warrants*
  Prior
              to
              2005, iSECUREtrac issued warrants to purchase common stock to stockholders
              and
              non-employees in connection with various services these individuals
              provided the
              Company. No such warrants were issued during 2006 or 2005. The Company
              accounts
              for the fair value of the warrants in accordance with SFAS No. 123. During
              2006 and 2005, 6,250 and 1,000 warrants expired, respectively, in connection
              with warrants issued prior to 2005 in relation to services
              rendered.
  Prior
              to
              2005, iSECUREtrac issued detachable warrants to purchase common stock
              in
              connection with obtaining convertible debt. During the years ended
              December 31,
              2006 and December 31, 2005, none and 76,087 of these warrants, respectively,
              were exercised and none and 142,713 of these warrants, respectively,
              expired.
              Fair value of the detachable warrants was calculated by using the Black-Scholes
              pricing model.
  *F-16*
 *Notes
                to Consolidated Financial Statements*
 
  Prior
              to
              2005, iSECUREtrac issued warrants in connection with equity financing.
              Except
              with respect to the Series C Exchangeable Preferred Stock investment
              described
              below, no such warrants were issued during 2006 or 2005. During the
              years ended
              December 31, 2006, and December 31, 2005, 208,861 and 298,192 of these
              warrants,
              respectively, had expired in relation to equity financing.
  On
              June
              27, 2005, warrants to purchase 3,234,248 shares of common stock were
              issued by
              the Company to Mykonos 6420, LP in conjunction with issuance of 1,000,000
              shares
              of Series C Exchangeable Preferred Stock to Mykonos. These warrants
              mirror the
              terms of the Company’s outstanding warrants and options as of June 27, 2005,
              including amounts and exercise prices ranging from $2.30 to $16.50
              per share.
              The applicable expiration date for these warrants shall be March 1
              of the year
              following the calendar year of the expiration date of the mirrored
              warrants and
              options. As of March 1, 2006, 47,658 warrants expired in relation to
              such
              mirrored warrants and options.
  The
              fair
              value of each warrant is estimated at the grant date using the Black-Scholes
              option-pricing model with the following weighted-average assumptions
              for
              warrants in 2006 and 2005: dividend rate of 0%; price volatility of
              0% and
              87.00%; risk-free interest rate of 5%; and expected lives of one to
              four years.
  A
              summary
              of the status of all the warrants issued at December 31, 2006, and 2005 and
              changes during the years ended on those dates is as follows:
 **For
                          the Year Ended December 31,2006**
                      
                      **For
                          the Year Ended December 31,2005****Weighted
                          Average**
                      
                      
                      
                      **Weighted
                          Average****Warrants**
                      
                      **Shares**
                      
                      **Exercise
                          Price**
                      
                      **Shares**
                      
                      **Exercise
                          Price**Outstanding
                          at beginning of year
                      
                      
                      5,005,155
                      
                      $
                      3.67
                      
                      
                      2,288,899
                      
                      $
                      3.90Granted
                      
                      
                      -
                      
                      
                      -
                      
                      
                      3,234,248
                      
                      
                      3.43Exercised
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (76,087
                      )
                      
                      2.30Forfeited
                      
                      
                      (262,769
                      )
                      
                      4.61
                      
                      
                      (441,905
                      )
                      
                      3.19Outstanding
                          at end of year
                      
                      
                      4,742,386
                      
                      
                      3.62
                      
                      
                      5,005,155
                      
                      
                      3.67Exercisable
                          at end of year
                      
                      
                      4,742,386
                      
                      $
                      3.62
                      
                      
                      5,005,155
                      
                      $
                      3.67Weighted-average
                          fair value of warrants granted during the year
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      
                      $
                      1.70
  A
              further
              summary about warrants outstanding at December 31, 2006, is as follows:
 **Number
                          Outstanding**
                      
                      **Weighted
                          Average**
                      
                      **Weighted
                          Average****Range
                          of Exercise Prices**
                      
                      **and
                          Exercisable**
                      
                      **Remaining
                          Life**
                      
                      **Exercise
                          Price**$1.00
                          to 2.50
                      
                      
                      1,144,136
                      
                      
                      3.00
                          years
                      
                      $
                      2.30$2.51
                          to 5.00
                      
                      
                      3,460,315
                      
                      
                      2.00
                          years
                      
                      
                      3.95$5.01
                          to 7.50
                      
                      
                      123,185
                      
                      
                      1
                          year
                      
                      
                      5.71$7.51
                          to 16.50
                      
                      
                      14,750
                      
                      
                      0.25
                          years
                      
                      
                      11.86Total
                      
                      
                      4,742,386
  *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 contribution, capped at the first $100,000 of annual
              compensation.  The employer contribution vests over a 4-year graded
              schedule.
  *F-17*
 *Notes
                to Consolidated Financial Statements*
  **Note 8.
              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
              B Convertible Preferred Stock*
  During
              2002 and 2003, the Company issued a total of 300 shares of its Series
              B
              Convertible Preferred Stock, par value $0.01 per share (the “Series B
              Preferred”). The holders of Series B Stock are entitled to receive fixed-rate
              dividends per annum at the following rates:
  10.0%
              months 1 - 6
  11.0%
              months 7-12
  12.0%
              months 13-24
  13.0%
              months 25-60
  If
              declared, dividends are payable quarterly and shall be payable in cash
              or in
              additional shares of Series B Preferred at the sole discretion of the
              Board of
              Directors. If dividends are paid in shares of Series B Preferred, each
              share
              shall be valued for this purpose at an amount equal to the original
              price at
              which the Series B Preferred was issued. No Series B Preferred dividends
              were
              paid in 2005 or 2004. On January 11, 2005, all Series B Preferred was
              converted
              into a total of 50,010 shares of Common Stock, and no additional shares
              of
              Series B Preferred will be issued.
  *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.
  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 will be charged to Additional Paid-In Capital.
 
 As
              of
              December 31, 2006, the Company had accrued Series C Preferred Stock
              dividends
              totaling $1,366,631 and accretion to redemption value of the Series
              C Preferred
              Stock totaling $294,776. Of these amounts, $915,781 and $196,518, respectively,
              were the amounts accrued in 2006.
  *F-18*
 *Notes
                to Consolidated Financial Statements*
 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 9.
              Restricted Cash**
  At
              December 31, 2004, the Company had $700,000 of cash held in escrow
              received from
              certain stockholders. The offsetting liability was included in accrued
              expenses.
              This cash was restricted for the use of certain stockholders and had
              been
              classified as restricted cash for report purposes. On January 7, 2005,
              the cash
              was removed from escrow and returned to the stockholders.
  **Note 10.
              Lease Obligations**
  In
              2006,
              the Company financed the acquisition of approximately $1,250,000 of
              monitoring
              equipment through five sale-leaseback agreements with a related party,
              with an
              additional $1,000,000 remaining available for future financing transactions.
              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 Sale-leaseback Transactions consists of amortization of this deferred
              gain.
              As of December 31, 2006, the Company had nine capital leases in conjunction
              with
              these transactions which expire from September 2007 to October 2009.
              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
              9.50% to
              12.00%.
  The
              Company also has two noncancelable operating leases. The first one
              was for its
              main facility in Omaha, NE and was renewed through December 2009. Monthly
              rental
              payments under this lease were $1,616 through April 2005, $4,839 from
              April 2005
              through October 2005, $9,879 from November 2005 through October 2006,
              $6,847
              from November 2006 through October 2007, $7,053 from November 2007
              through
              October 2008 and $7,265 from November 2008 through December 2009. Rent
              expense
              is recorded on the straight line basis at $6,652 per month. The Company
              has a
              second operating lease, also in Omaha, which runs through December
              2009. Rent
              expense for that lease is recorded monthly at $1,125 beginning January
              2007. The
              Company’s pro rata share of operating expenses on the leased premises is $3,275
              per month. Lease payments related to the operating leases were $112,494
              and
              $55,262 for the years ended December 31, 2006, and 2005, respectively.
  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:
  *F-19*
 *Notes
                to Consolidated Financial Statements*
 
  **Capital
                          Leases**
                      
                      **Operating****Related
                          Party**
                      
                      **Lease**2007
                      
                      $
                      1,028,773
                      
                      $
                      96,0862008
                      
                      
                      531,721
                      
                      
                      98,5642009
                      
                      
                      230,198
                      
                      
                      100,680Total
                          approximate minimum lease payments
                      
                      $
                      1,790,692
                      
                      $
                      295,330Less
                          the amount representing interest
                      
                      
                      (205,520
                      )
                      
                      -Approximate
                          present value of minimum lease payments
                      
                      $
                      1,585,172
                      
                      $
                      295,330
  The
              depreciated cost of monitoring equipment under capital leases is as
              follows:
 **2006**
                      
                      **2005**Equipment
                      
                      $
                      3,107,829
                      
                      $
                      3,166,721Less
                          accumulated depreciation
                      
                      
                      (1,795,440
                      )
                      
                      (2,444,680
                      )Total
                      
                      $
                      1,312,389
                      
                      $
                      722,041
 
 **Note
              11. Common and Preferred Shares Issued for Cash**
  A
              summary
              of common and preferred stock issued for cash is as follows:
 **For
                          the Year Ended**
                      
                      **Common**
                      
                      **Preferred
                          C *****December
                          31, 2005**
                      
                      **Per
                          Share**
                      
                      **Total**
                      
                      **Per
                          Share**
                      
                      **Total**Gross
                          Proceeds
                      
                      
                      $2.30
                            - $2.815
                      
                      $
                      192,175
                      
                      $
                      11.00
                      
                      $
                      11,000,000Offering
                          costs
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      (421,314
                      )Net
                          proceeds
                      
                      
                      
                      
                      $
                      192,175
                      
                      
                      
                      
                      $
                      10,578,686**For
                          the Year Ended**
                      
                      **Common**
                      
                      **Preferred
                          C****December
                          31, 2006**
                      
                      
                      **Per
                          Share**
                      
                      
                      **Total**Gross
                          Proceeds
                      
                      
                      $1.53
                            - $2.30
                      
                      $
                      3,089
                      
                      
                      
                      
                      $
                      -Offering
                          costs
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      -Net
                          proceeds
                      
                      
                      
                      
                      $
                      3,089
                      
                      
                      
                      
                      $
                      -
 *
                Of the $11,000,000 of proceeds, $1,543,396 was allocated to warrants
                that were
                issued with the preferred shares.
  **Note
              12. Related Party Transaction**
 
 AHK
              Leasing, LLC, a company controlled by three stockholders, one of which
              is a
              current director, lent the Company money during 2006 and 2005. These
              loans were
              in the form of capital leases with terms ranging from 18 months to
              three years
              and bearing interest at a rate of 9.50% to 12.00% per annum. The Company
              has a
              total of nine capital leases which expire from September 2007 to October
              2009.
              As of December 31, 2006, the aggregate balance on these nine capital
              leases
              totaled $1,585,172. The interest expense to AHK Leasing in 2006 was
              $143,177.
              See Notes 5 and 10.
  *F-20*
  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 holder
              of all shares of our Series C Preferred Stock. Both loans bear interest
              at a
              rate of 7% per annum. These loans mature on the earlier of (i) July
              1, 2008 or
              (ii) the first date on which the Company 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
              Lender of the $6,000,000 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 two notes
              were approved by a Special Committee of the Board of Directors consisting
              solely
              of disinterested directors.
  **Note
              13. Concentrations**
 
 The
              Company maintains cash in excess of the Federal Deposit Insurance Corporation
              limit of $100,000. The Company has not experienced such losses in these
              accounts.
 
 For
              the
              year ended December 31, 2006, the Company had one customer who accounted
              for
              15.29% of the year-to-date equipment monitoring and hosting revenues.
              The
              receivable balance for this customer at December 31, 2006, was $489,044.
 
 **Note
              14. 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:
 
 Investments:
              The carrying amount approximates fair value due to the short maturity
              dates of
              the investments.
 
 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: Based on the issuance during
              2005, the
              carrying amount approximates fair value.
  Note
              15. Subsequent Event
  On
                March
                8, 2007, a lawsuit was filed by Pro Tech Monitoring, Inc. (“Pro Tech") against
                the Company in United States District Court for the Middle District
                of Florida.
                Pro Tech alleges that the Company has infringed and continues to
                infringe on a
                U.S. patent held by Pro Tech relating to GPS tracking and monitoring
                apparatus
                and systems. The action filed by Pro Tech seeks an injunction and
                monetary
                damages. The Company denies all material allegations made by Pro
                Tech and
                intends to vigorously defend itself against this lawsuit. The Company
                is unable
                to predict the outcome of this lawsuit at this time.
 
 F-21