As filed with the Securities and Exchange Commission on March 31, 2005.
================================================================================

                                  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, 2004

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
         For the transition period from _____________ to _____________.

                        Commission file number: 000-26455

                                iSecureTrac Corp.
                 (Name of small business issuer in its charter)

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

                             5078 South 111th 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 (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 [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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. [ ]

State issuer's revenues for its most recent fiscal year: $4,679,486.

The aggregate market value of the common stock of the registrant held by
non-affiliates, all of which is voting, was approximately $11,080,736, based on
the closing sale price reported on March 28, 2005.

As of March 28, 2005, there were 90,514,475 shares of the registrant's common
stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant's 2005 Annual
Meeting of Stockholders to be filed within 120 days of the fiscal year ended
December 31, 2004, 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 [  ] NO [X]

================================================================================


<PAGE>

                                     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 "iSt" or the  "Company")
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 June 19,
2001, the name of the Company was changed to iSecureTrac Corp.

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 iSt 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
employing global  positioning  satellite ("GPS") technology and related services
to criminal justice agencies, both in the United States and internationally, for
use in offender  management  programs.  The Company's three principal sources of
revenues  are: (i) selling and leasing of monitoring  units to criminal  justice
agencies,  (ii)  providing  agencies the use of Company's  proprietary  software
including its web-based  tracking and monitoring  system known as  tracNET24(TM)
and (iii)  providing  ancillary  services such as training,  monitoring and data
archiving.

By using the  Company's  products  and  services,  these  agencies can realize a
substantial  cost  savings  over  the  cost of  incarceration  and  improve  the
efficiency of probation and parole  officers and other limited  resources.  As a
result,  the  Company's  products and  services  offer the  backlogged  criminal
justice  system a more  secure  solution  to the  problems  of  rapidly  growing
criminal  populations,  overcrowded  correctional  facilities  and more  lenient
sentencing alternatives.  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 pay for electronic  monitoring;  (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.

According to the U.S. Bureau of Justice Statistics latest report, dated July 25,
2004,  6.9 million  adults were under some form of  correctional  supervision at
December 31, 2003. The number of prisoners under the  jurisdiction of federal or


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state  correctional  authorities  on that  date  reached  a  record  high of 2.1
million. Moreover, 4.8 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  45.5%  from 1992 to 2003.  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.  Unfortunately,  the  ability of
criminal justice  agencies to monitor the increasing  number of probationers and
parolees  effectively has resulted in a steady increase in the average caseloads
assigned to probation officers and other caseworkers.  Traditional  methods used
by agencies to monitor  individuals  under  their  supervision  do not allow for
effective  supervision of offenders.  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.   Non-incarceration
programs can 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,
alternative sentencing 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  such as  transportation.  The  Company's  system  was
developed  to be readily  adaptable  to meet the needs of locating  and tracking
vehicles  and other  assets.  The  Company  also  maintains  the  capability  to
undertake special projects to help customers to meet their unique needs.

Products

The Company's tracking and monitoring products include:

      o     GPS offender tracking,


      o     continuous or "House Arrest" monitoring, and


      o     remote automated breath alcohol testing systems.


GPS Offender Tracking.  The Company's  GPS-based offender tracking system tracks
the geographic location of offenders, reports specific activities and identifies
violations  against  customer-established  parameters.  The system consists of a
Personal Tracking Unit (PTU), a transmitter bracelet worn on the wrist or ankle,
and a charger  base.  The PTU records GPS  tracking  points every 10 seconds and
transmits offender  time/location/violation  data to a highly secure, completely
redundant central  monitoring  system.  The central monitoring system then sends
any violation  notifications to law enforcement personnel using various methods,
including  telephone calls,  paging,  e-mail and web-based  reports.  The PTU is
easily  carried or worn on the  offender's  waist by  slipping  it into a Velcro
pouch that  attaches  to the belt.  If the  offender  moves into an area that is
off-limits  (known  as an  exclusion  zone),  the PTU will  record a  violation.
Conversely,  if the  offender is not where  he/she  should be at a certain  time
(known as an inclusion zone), the PTU will also record a violation. The offender
wears a radio  frequency  ("RF")  transmitter at all times;  the  transmitter is
waterproof,  shockproof,  and  has a  minimum  battery  life  of one  year.  The
transmitter  emits an RF signal with a maximum  range of  approximately  130-150
feet. The PTU receives the transmitter's signal and, if the two are separated by
more than 150 feet,  the  signal  fades and the PTU  records a  violation.  This
effectively  "tethers" the offender to the PTU. If the offender  tampers with or
removes  the  transmitter,  a  unique  tamper  signal  is  sent to the PTU and a
violation is reported.  When the offender returns home, he/she can place the PTU
in the charging  base but still must stay within  130-150 feet of the PTU.  This
allows for uninhibited movement within a house during PTU charging.

Monitoring can be done on either an active or passive basis. Active GPS tracking
utilizes  cellular  technology  and has the  ability to notify  law  enforcement
personnel in real-time when offender violations occur. The Company's 2250 active


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<PAGE>

PTU  notifies  authorities  within 60 seconds of a  violation.  Clients can also
locate offenders  enrolled in active GPS tracking programs by using an on-demand
offender  locate feature in tracNET24.  The Company's 2150 passive PTU transfers
all  offender  tracking/violation  data  over a  standard,  land-line  telephone
connection  whenever  the  passive  PTU is  placed  in the  charging  base.  Law
enforcement  personnel  can then review  offender  tracking and  compliance on a
next-day basis, rather than in real-time.

House Arrest.  House Arrest is a system that enables law enforcement agencies to
verify an offender's presence in a building (such as a residence or work release
facility)  and  to  monitor  the  offender's  compliance  to  an  agency-defined
schedule/curfew.  An offender on House Arrest wears an RF  transmitter  bracelet
and is  continuously  monitored  by a House  Arrest  Unit  (HAU)  located in the
building.  The HAU records  whenever the  transmitter  signal goes out of range,
meaning  that the  offender  is no longer in the  confines of the house or other
building. The HAU communicates with the central monitoring system over land-line
telephone  connections  or cellular  connections,  depending on the needs of the
agency.  iSt's House  Arrest  system can be readily  converted  to a passive GPS
system.

Remote Breath Alcohol  Testing.  iSt's 2000 VB remote  automated  Breath Alcohol
Testing system allows participants' breath alcohol levels to be tested remotely,
rather than on-site.  The 2000 VB System  incorporates two methods of electronic
monitoring  supervision  into one product:  (i) visual  recognition  utilizing a
visual   display   telephone;   and  (ii)  breath  alcohol   testing   employing
microelectro-mechanical  systems  (MEMS)  technology.  The  2000 VB  HomeStation
analyzes  a  participant's  breath  sample,  photographs  the  participant,  and
transfers  information to the monitoring center.  Failed tests and other similar
instances  of  non-compliance  are  reported  to the law  enforcement  agency by
monitoring center personnel.

Web-based Monitoring Services

Agencies can manage both GPS tracking and House  Arrest  systems  through  iSt's
web-based  offender  monitoring  software,  known as tracNET24.  Law enforcement
personnel  can  access  violation   reports/information  and  GPS  tracking  (if
applicable)  through  secure  logins to iSt's  tracNET24  website.  Rather  than
requiring  customers to install  proprietary  software on each agency  computer,
iSt's software is completely  web-based,  meaning that any Internet-ready device
(laptop,  desktop PC, or wireless  PDA) has access to  tracNET24.  Customers use
tracNET24 to  enroll/delete  offenders,  customize  offender  schedules,  create
inclusion and exclusion zones, view GPS tracking maps, view  reports/stats,  and
change notification preferences. The primary backbone of the system, running the
website and storing vital offender  information,  is housed in an  ultra-secure,
redundant, and virtually disaster-proof (designed to withstand a direct hit by a
tornado) data center in Omaha, Nebraska.

The standard hosting  services  agreement  contains terms for guaranteed  system
availability  and  capacity,  accessibility  through the Internet  with standard
browsing  software and access to archived  data. A daily fee is charged for each
monitoring  system tracked for a customer.  The usual term of such agreements is
from one to three years, with automatic one year renewals thereafter.

Customers

The Company's principal customers are federal,  state, county, and municipal law
enforcement agencies in both the United States and in various foreign countries.
Currently,  the Company provides  offender tracking products and services to 227
customers in 42 states and one foreign country. No single customer accounted for
more than 5% of the Company's  total  revenues  during 2004.  The total combined
revenues from the Company's top ten customer  accounted for less than 25% of the
Company's total revenues for 2004.


                                       4
<PAGE>

Sales and Distribution Channels

The Company  markets and sells its  products  and  services to criminal  justice
agencies  throughout the United States directly through its in-house sales force
and indirectly  through third party  distributors  and service  providers  (i.e.
private  companies  that  operate   monitoring  centers  for  state  and  county
agencies).  The  Company's  in-house  sales  force  is  made up of  eight  sales
professionals  who are  each  assigned  a  specific  geographic  region  and are
responsible for all federal,  state, county, and municipal  opportunities within
their  region.   The  Company  markets  and  sells  its  products  and  services
internationally  through  exclusive  strategic  alliances  that are  formed on a
country-by-country basis.

Agreements with  distributors and service  providers  typically take the form of
sales  agreements,  authorizing  resale and  leasing of  monitoring  units,  and
hosting  services  agreements,  which  provide  for  the  use of  the  Company's
web-based software or monitoring services.  Negotiated product volume discounts,
product shipping and delivery terms, pricing for training,  and extended product
warranties are also described in the distribution agreements.

Competition

The  market  for  GPS-enabled  offender  monitoring  products  and  services  is
fragmented and no single company controls a dominated market position.  A number
of companies currently compete in this market including Pro Tech Monitoring,  BI
Incorporated and Sentinel Monitoring.  In addition,  several other companies are
known to be attempting to deploy a GPS product,  including Satellite Tracking of
People LLC, Passpoint,  and Celltrack. The Company competes with other providers
of electronic  monitoring primarily on the basis of price, the functionality and
quality of its product and the quality of service.

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.  iSt 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,  iSt  contracted  with  Altron  Inc,  of Anoka,
Minnesota,  an ISO-9002 qualified  electronics  manufacturer,  to be the primary
manufacturer of PTUs.

Intellectual Property Rights

To establish and protect its proprietary  technologies and products, the Company
relies on a combination of patent,  copyright,  trademark and trade-secret laws,
as well as confidentiality provisions in its contracts. iSt has 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 April 24, 2017; (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 April 24, 2017; and (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 October 18, 2020; 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 October 18, 2020.

Regulation

The  Company is subject to various  regulations  of the  Federal  Communications
Commission  relating  to  the  manufacture,  sale  and  use of  radio  frequency
radiation devices.  Similarly,  devices utilizing GPS technology must conform to
government specifications. The Series 2100 PTU received FCC Part 15C approval in
August,  2001 (OAM2100).  The Series 2130 received FCC Part 15C approval in May,


                                       5
<PAGE>

2003 (OAM2100-433). The 2150 and 2250 Series PTUs received FCC Part 22H and Part
24E approvals in March, 2004 (OAM2250).

Research and Development

The  Company's  research and  development  efforts are focused on the design and
development  of  its  offender   monitoring   products,   including   additional
functionality  in the  Series  2150 and 2250  PTUs.  During  2004 and 2003,  iSt
expended $687,914 and $750,443,  respectively,  toward research and development.
The costs of such research and  development  are typically  borne by the Company
and not by customers.

Employees

As of January 31,  2005,  iSt had 48  full-time  employees  (FTEs),  1 part-time
employee  and  1  contract  employee  on  staff.  Of  the  48  FTEs,  seven  are
administrative  personnel,  nine are in sales, six are in customer support,  ten
are in the monitoring center, and 17 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.

Risk Factors

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

The Company has a history of losses and expects to incur losses in the future.

The Company has experienced  losses since  inception of its operations.  Its net
losses to common  shareholders  were $10.6  million and $7.9 million in 2004 and
2003,  respectively.  As a result,  on  December  31,  2004,  the Company had an
accumulated  deficit of $51.2 million.  iSt incurred  losses  primarily  because
sales volumes were insufficient to cover fixed costs of revenues and high levels
of sales,  general and administrative  expenses and interest and other financing
costs. Our sales depend primarily on the awarding of government  contracts.  The
amounts and timing of such  contracts  are subject to  substantial  uncertainty,
including failures to receive legislative  appropriations.  Until the market for
the  Company's  products  develops and it is able to generate  higher  levels of
revenues,  the Company  expects to  continue to generate  losses and there is no
assurance that it will become profitable.

The Company has the authority to issue a certificate of preferred stock which
may have rights senior to those of the common stock and could give the holders
thereof the ability to control the Company.

The Company's Certificate of Incorporation authorizes the Board of Directors to
issue new classes (or modify existing classes) of preferred stock which could
include rights senior to those of the common stock with respect to voting,
payment of dividends and distributions upon liquidation or other corporate
events. Accordingly, the holders of any preferred stock could have the ability
to control most decisions made by the Company, including any decision to sell
the Company or its assets or to merge with another company.


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<PAGE>


The  Company's  technology,  products and services may become  obsolete and this
could result in  substantial  amounts to be expended to upgrade its products and
services or lose market share, either of which could materially adversely affect
business operations.

The market in which the Company competes is characterized by rapid technological
change, evolving industry standards, frequent introductions of new products, and
changes in customer  demands  that can render  existing  products  obsolete  and
unmarketable.  iSt's future  success will depend upon its ability to address the
increasingly  sophisticated  needs  of  customers  by  supporting  existing  and
emerging  hardware,   software,   database,  and  networking  platforms  and  by
developing and introducing enhancements to existing products and new products on
a timely basis that keep pace with technological developments, evolving industry
standards, and changing customer requirements.  If the technology,  products and
services become obsolete, iSt's business operations will be materially adversely
affected.

The Company  faces  significant  competition  and this may make it  difficult to
achieve profitability.

The market for  GPS-based  offender  tracking  equipment  and  services  is very
competitive.   iSt  competes  with  many  other  companies  including  Pro  Tech
Monitoring, BI Incorporated and Sentinel Monitoring. In addition,  several other
companies are known to be attempting to deploy GPS product,  including Satellite
Tracking of People LLC, Passpoint,  and Celltrack, and other companies may enter
the  market  in the  future.  Many of these  competing  companies  have  greater
resources  than iSt or may enjoy other  competitive  advantages.  This may allow
them to more  effectively  market their products to iSt's customers or potential
customers,  to develop products that make iSt's products  obsolete or to produce
and sell less  expensive  products.  As a result of these  competitive  factors,
demand  for  and  pricing  of the  Company's  products  and  services  could  be
negatively affected.

If any of the key vendors that  manufacture the Company's  monitoring  equipment
are unable to meet supply needs, business will be materially adversely affected.

The Company currently relies on one mid-sized electronics manufacturer to manage
the supply chain of electronic  components and manufacture its PTUs. If iSt were
unable to obtain equipment from current venders in sufficient quantities or in a
timely  manner,  its  ability  to market  its  products  and  services  could be
impaired,  which could limit future revenues.  In addition, if iSt were required
to seek alternative  sources of supply,  it could be time consuming or expensive
or require significant and costly modification to its products.

The Company does not control GPS  technology  and if it does not have  continued
access to this technology, business will be materially adversely affected.

The Company's  products and services rely on signals from GPS  satellites  built
and maintained by the U.S.  Department of Defense. If it does not have continued
access to GPS technology and satellites,  it will be unable to deliver  products
and services and revenues will decrease significantly.  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 the  Company's
services may cease and customer satisfaction would suffer. In addition, the U.S.
government  could  decide not to continue to operate and maintain the GPS system
satellites  over a long  period  of  time  or to  charge  for the use of the GPS
system. Furthermore, because of increasing commercial applications of GPS, other
U.S.  government  agencies  may become  involved  in the  administration  or the
regulation  of the use of GPS signals in the future.  If the  foregoing  factors
affect the  availability and pricing of GPS technology,  the Company's  business
will suffer.  GPS technology is also  dependent upon the use of radio  frequency
spectrum.   An   international   organization   known   as   the   International
Telecommunications   Union   controls  the   assignment  of  spectrum.   If  the


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<PAGE>

International  Telecommunications  Union reallocates  radio frequency  spectrum,
iSt's  services may become less useful or less  reliable.  This would,  in turn,
harm business. In addition, emissions from mobile satellites and other equipment
using other frequency bands may adversely  affect the utility and reliability of
iSt's services.

The measures iSt takes to protect its proprietary  information rights may not be
adequate  and if the  Company is not able to protect its  intellectual  property
rights, business may be materially adversely affected.

The Company relies on a combination of patents,  copyrights,  trade secrets, and
trademark  laws. It also relies on  confidentiality  procedures and  contractual
provisions to protect its intellectual property rights. It believes that factors
such as the technological and creative skills of company personnel,  new product
developments,  frequent product  enhancements,  name  recognition,  and reliable
product  maintenance are essential to establishing  and maintaining a technology
leadership position.  There are risks: (1) that any patents issued to iSt may be
invalidated, circumvented, or challenged; (2) that the rights granted thereunder
will  not  provide  competitive  advantages;   or  (3)  that  no  future  patent
applications  will be issued with the scope of protection sought by the Company,
if at all.  Furthermore,  there is a risk that others may  develop  technologies
that are similar or superior to iSt's  technology  or design  around any patents
issued  to it.  Despite  efforts  to  protect  proprietary  information  rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use  information  regarded as proprietary.  In addition,  the laws of
some foreign countries do not protect proprietary information rights as fully as
do the laws of the United  States.  The Company is  currently  a defendant  in a
lawsuit to declare one of its existing patents invalid.  Even if iSt prevails in
this lawsuit and the validity of the patent is acknowledged, the matter may cost
substantial  time and money.  There is no assurance that similar claims will not
be made in the future by other  parties,  obligating  the  Company to defend the
validity of its patents at potentially significant costs.

The protection of intellectual property in foreign countries is uncertain.

The Company has not registered  its 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.

The Company depends on licensed  technologies and may need to obtain  additional
licenses in the future to remain competitive.

The  Company  has  been  granted  a  nonexclusive  software  license  from  SiRF
Technology Incorporated. SiRF Technology has designed GPS chip sets and software
solutions that allow iSt to embed GPS technology into its products. This license
is for an indefinite  term;  however,  it may be  terminated if SiRF  Technology
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 the Company's business.  In addition,  iSt may need
to obtain licenses to additional technologies in the future in order to keep its
products  competitive.  If iSt fails to license or otherwise  acquire  necessary
technologies,  it may not be able to  develop  new  products  needed  to  remain
competitive.

The Company's  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,  iSt's 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 the Company's  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


                                       8
<PAGE>

all. This may lead others to assert patent  infringement  or other  intellectual
property claims against the Company.

There are a large number of common  shares  underlying  outstanding  convertible
securities  and  warrants  and the issuance and sale of these shares may depress
the market price of the Company's common stock.

The Company recently  converted a substantial  amount of debt into common stock.
In  addition,  it may issue a  significant  number  of  shares  of common  stock
pursuant to additional  debt  conversions  and/or  placement(s)  of equity.  The
issuance  of  these   shares  will  result  in   substantial   dilution  to  the
proportionate  equity  interest  and voting  power of  holders of the  Company's
common stock.  The sale of these shares also has potential to cause  significant
downward  pressure on the price of the 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 the common stock. This presents an opportunity for short sellers
to  contribute  to the  further  decline  of  the  stock  price.  If  there  are
significant  short sales of the 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.

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

The  Company's  common stock is  classified as a "penny stock" as defined by the
Securities and Exchange Commission. For any transaction involving a penny stock,
unless  exempt,  SEC Rule  15g-9  requires  that a broker  or  dealer  approve a
person's  account for  transactions  in penny  stocks;  and 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  sets forth the basis on which the
broker or dealer made the suitability determination;  and states that the broker
or dealer  received a signed,  written  agreement from the investor prior to the
transaction.   Accordingly,  brokers  are  generally  less  willing  to  execute
transactions in securities  subject to the "penny stock" rules. This may make it
more  difficult  for  holders  of  iSt's  common  stock  to sell  their  shares.
Disclosure  also has to be made about the risks of  investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative,  current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock  transactions.  Finally,  monthly  statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.

Item 2. Description of Property

The Company leases  approximately  11,477 square feet of office space located at
5078 South 111th  Street,  Omaha,  Nebraska.  The lease term ends on November 1,
2007.  The base rent for this property is $6,652 per month and the Company's pro
rata share of operating  expenses on the leased premises is $500 per month. Most
of the Company's  administrative,  service,  and other  business  operations are
conducted  at this  location.  In the  opinion of  management,  the  property is
adequately covered by insurance. The Company terminated the lease obligations it
had for the office space at 5022 S. 114th Street,  Suite 103,  Omaha,  NE and at
2404 Park Drive, Harrisburg, PA during the fourth quarter of 2004.


                                       9
<PAGE>

Item 3. Legal Proceedings

On December 22, 2004, a lawsuit was filed by Satellite  Tracking of People,  LLC
("STOP")  against the  Company in United  States  District  Court for the Middle
District  of  Tennessee.  STOP plans to enter into the market for  tracking  and
monitoring  individuals  using  GPS  technology  in the  United  States  and has
acquired U.S. rights to the BluTag(R) remote electronic monitoring, tracking and
surveillance  technologies.  Among other  things,  STOP alleges that the Company
notified  STOP's  predecessor  in interest that the  technology  underlying  the
BluTag(R) system  infringes on two U.S. patents held by the Company.  The action
filed by STOP seeks a declaratory  judgment that (i) STOP's BluTag(R) technology
does not  infringe on the  Company's  patents,  (ii) the  Company's  patents are
invalid  and/or (iii) the Company has granted STOP a license  under its asserted
patents. The Company intends to vigorously defend any lawsuit brought by STOP on
these  grounds.  In  addition,  the Company has filed a lawsuit  against STOP in
United States District Court for the District of Nebraska, alleging infringement
of the  Company's  patented  technology  by STOP and is seeking  to  consolidate
STOP's lawsuit with the Company's  lawsuit in the Nebraska court. The Company is
unable to predict the outcome of either of these lawsuits at this time.

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

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

No matters were submitted to stockholders during the fourth quarter of 2004.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

iSt's common stock is listed on the OTC Bulletin  Board under the trading symbol
ISRE.  The  following  table  sets  forth the high and low sale  prices  for the
Company's common stock during each calendar quarter of 2003 and 2004:

--------------------------------------------
   Year      Quarter      High       Low
--------------------------------------------
   2003        1st       $0.99     $0.27
            --------------------------------
               2nd       $0.85     $0.37
            --------------------------------
               3rd       $0.65     $0.43
            --------------------------------
               4th       $0.69     $0.33
--------------------------------------------
   2004        1st       $0.69     $0.33
            --------------------------------
               2nd       $0.54     $0.25
            --------------------------------
               3rd       $0.35     $0.12
            --------------------------------
               4th       $0.28     $0.12
--------------------------------------------

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 March 28, 2005 there were approximately 450 stockholders of record for the
Company's  common stock.  iSt 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 2004.

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, 2004 is set forth in the following table:


                                       10
<PAGE>

<TABLE>
<CAPTION>
--------------------------------  ---------------------------   ----------------------------   -------------------------
      Plan category                Number of securities to be   Weighted average exercise      Number of securities
                                   issued upon exercise of      price of outstanding           remaining available for
                                   outstanding options,         options, warrants and rights   future issuance under
                                   warrants and rights                                         equity compensation plans
--------------------------------  ---------------------------   ----------------------------   -------------------------
<S>                                    <C>                               <C>                          <C>
                                          (a)                             (b)                           (c)
--------------------------------  ---------------------------   ----------------------------   -------------------------
Equity compensation plans
approved by security holders            1,491,958                        $0.28                        147,720
--------------------------------  ---------------------------   ----------------------------   -------------------------
Equity compensation plans not
approved by security holders            9,651,583                        $0.26                              0
--------------------------------  ---------------------------   ----------------------------   -------------------------
Total                                  11,143,541                        $0.27                        147,720
--------------------------------  ---------------------------   ----------------------------   -------------------------
</TABLE>


Equity  compensation  plans not approved by security  holders consist of options
issued to employees per their employment  agreements or per performance bonuses.
Exercise prices range from $0.23 to $0.49.

All previously unreported, unregistered sales of common stock during 2004 are as
follows:

<TABLE>
<CAPTION>
                               Amount of
  Date        Title         Securities Sold      Recipient           Description of Transaction        Offering Price
---------------------------------------------------------------------------------------------------------------------
<S>        <C>                  <C>            <C>                 <C>                                    <C>

08/13/04   Common Stock           326,087      Bill Dailey         Shares issued for cash                 $ 75,000
11/12/04   Common Stock         4,021,739      Total Tech, LLC     Shares issued for cash                 $925,000
02/25/04   Common Stock             9,524      Various Directors   Shares issued for directors' fees
02/25/04   Common Stock            19,841      Ken Macke           Shares issued for directors' fees
04/01/04   Common Stock            10,415      Various Directors   Shares issued for directors' fees
06/18/04   Common Stock            12,500      Various Directors   Shares issued for directors' fees
08/27/04   Common Stock            13,635      Various Directors   Shares issued for directors' fees
11/03/04   Common Stock            29,410      Various Directors   Shares issued for directors' fees
12/08/04   Common Stock            21,052      Various Directors   Shares issued for directors' fees
01/15/04   Common Stock            30,014      Thomas Woolston     Shares issued for services
01/23/04   Common Stock            12,500      Thomas Woolston     Shares issued for services
10/01/04   Common Stock           217,391      Mary Collison       Shares issued for services
</TABLE>


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 to a limited  number of  persons.
There was no general solicitation and each purchaser  represented that they were
purchasing the shares for their own account.


                                       11
<PAGE>

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, 2004 and 2003 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, 2004 and 2003

<TABLE>
<CAPTION>

                                                             2004              2003             Change
--------------------------------------------------------------------------------------------------------
<S>                                                     <C>               <C>               <C>
Revenues:

       Equipment                                        $    377,509      $    171,759      $    205,750

       Leasing                                             1,331,895           402,972           928,923

       Hosting                                             2,243,137           757,106         1,486,031

       Gain on sale-leaseback transactions                   588,757           123,083           465,674

       Service                                               138,188            38,187           100,001
--------------------------------------------------------------------------------------------------------
          Total revenues                                   4,679,486         1,493,107         3,186,379
--------------------------------------------------------------------------------------------------------
Operating expenses:

       Cost of revenues                                    4,403,047         1,141,334         3,261,713

       Research and development                              687,914           750,443           (62,529)

       Sales, general and administrative                   6,582,008         5,557,414         1,024,594
--------------------------------------------------------------------------------------------------------
          Total operating expenses                        11,672,969         7,449,191         4,223,778
--------------------------------------------------------------------------------------------------------
       Operating loss                                     (6,993,483)       (5,956,084)       (1,037,399)
--------------------------------------------------------------------------------------------------------
Other income (expense):

       Interest income                                            32               523              (491)

       Interest expense                                   (2,681,115)         (444,886)       (2,236,229)

       Financing fees                                        (21,598)         (638,603)          617,005
--------------------------------------------------------------------------------------------------------
       Total other income (expense)                       (2,702,681)       (1,082,966)       (1,619,715)
--------------------------------------------------------------------------------------------------------
       Loss before provision for income taxes             (9,696,164)       (7,039,050)       (2,657,114)

       Provision for income taxes                                 --                --                --
--------------------------------------------------------------------------------------------------------
Net loss                                                $ (9,696,164)     $ (7,039,050)     $ (2,657,114)
========================================================================================================
Preferred dividends                                         (911,983)         (848,200)          (63,783)
--------------------------------------------------------------------------------------------------------
Net loss available to common stockholders               $(10,608,147)     $ (7,887,250)     $ (2,720,897)
========================================================================================================
Basic and diluted loss per common share                 $      (0.18)     $      (0.19)
========================================================================================================
Weighted average shares of common stock outstanding       58,275,093        41,561,430
========================================================================================================
</TABLE>


Acquisition of TSC

On August 28, 2003, the Company  acquired all the  outstanding  stock of TSC and
began to operate TSC as a wholly-owned subsidiary. Four months and twelve months
of TSC's  results of  operations  for the years ending  December  31, 2003,  and
December 31, 2004,  respectively,  are  included in the  Company's  consolidated
results of  operations.  As a  consequence,  much of the change between 2003 and
2004 is  attributable  to the inclusion of a full year of TSC operations in 2004
compared to only four months of TSC operations in 2003.


                                       12
<PAGE>

Equipment Revenue

Equipment Revenue is derived from the sale of offender monitoring equipment. For
the year ended December 31, 2004,  equipment  revenues were $377,509 compared to
$171,759 during the same period in 2003.  $68,472 of this increase is due to the
acquisition of TSC with the balance of the increase  attributable to the greater
number of tracking units sold during 2004 compared to 2003.

Leasing Revenue

Leasing Revenue is derived from the rental of offender monitoring equipment. For
the period ended December 31, 2004, leasing revenues were $1,331,895 compared to
$402,972 for the same period in 2003.  $506,357 of this increase is attributable
to the  acquisition of TSC with the balance due to the increase in the number of
units under lease.

Hosting Revenue

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, and ancillary charges directly related to the monitoring of offenders. For
the year ended December 31, 2004,  hosting revenues were $2,243,137  compared to
$757,106  during  the  same  period  in  2003.  $909,805  of  this  increase  is
attributable  to the  acquisition  of TSC with the balance due to the  increased
deployment of PTUs throughout 2004.

Gain on Sale-leaseback Transactions

The Company  finances much of its monitoring  equipment  through  sale-leaseback
agreements.  Under  these  agreements,  the  Company  purchases  the  monitoring
equipment from the manufacturer,  sells it to the leasing company at a gain, and
then  leases it back  from the  leasing  company.  This  gain is  recorded  as a
liability  and  amortized  into income  over the life of the lease.  The Gain on
Sale-leaseback  Transactions consists of amortization of this deferred gain. For
the year ended December 31, 2004, the gain on  sale-leaseback  transactions  was
$588,757  compared to $123,083  during the same period in 2003. This increase is
attributable  to the  rise in  total  amount  under  these  transactions.  As of
December 31, 2004, the Company had six capital leases in conjunction  with these
transactions.

Service Revenue

For 2004,  Service  Revenue  consisted of sales of non-core  services  including
server maintenance  agreements and monitoring  equipment  repairs.  For the year
ended December 31, 2004,  Service  Revenue was $138,188  compared to $38,187 for
the comparable  period of 2003.  $36,506 of this increase is attributable to the
acquisition  of TSC with the  balance  primarily  due to the  larger  number  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.  A portion of the cost of revenues
consists of the amortization of product  development costs, which began in March
2002. For the year ending  December 31, 2004,  Cost of Revenues was  $4,403,047,
compared to $1,141,334 during the same period in 2003. $643,310 of this increase
is  attributable  to the  acquisition  of TSC.  During  the  year,  the  Company
initiated strategies of migrating away from the MEMS 2001 to its tracNET24 based
House Arrest  product and  systematically  upgrading its MEMS 2000  product.  To
reflect these strategies,  the Company took impairment charges of $1,129,627 and
$211,624 against the MEMS 2001 and MEMS 2000 product,  respectively. The balance
of the  increase in Cost of Revenues is primarily  due to the overall  growth in
deployment of PTUs.


                                       13
<PAGE>

Research and Development

Research and  Development  expenses are the direct costs  associated  with iSt's
development of its proprietary  products.  Expenses in this category include the
cost of outside contracted  engineering and design,  staffing expenses for iSt'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  $687,914 for the year
ended December 31, 2004,  compared to $750,443 for the same period in 2003. This
decrease in research  and  development  expenses  was the result of Company cost
saving measures and the focus on core offerings.

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,  2004,  SG&A  expenses
increased to $6,582,008 from  $5,557,414 in the comparable  period of 2003. This
increase is attributable  to the following:  $856,753 to the acquisition of TSC;
$302,298 for the write down of  monitoring  contracts for the MEMS 2001 and MEMS
2000  monitoring  equipment;  and  $389,424  for the  increase  in stock  option
issuance  expense.  These  increases were  partially  offset by the decreases in
other SG&A expenses as a result of  streamlining  of  operations  and other cost
cutting measures, such as renegotiating  communication contracts,  lowering rent
expenses, reducing headcount, and eliminating non-essential expenses.

Operating Loss

For the twelve months ended December 31, 2004,  operating  loss was  $6,993,483,
compared to  $5,956,084  for the same period in 2003.  The increase is primarily
attributable  to the  impairment  charges in the Cost of Revenues  as  described
above.

Interest Expense

For the year ended  December  31, 2004,  interest  expense  totaled  $2,681,115,
compared to  interest  expense of  $444,886  in the  comparable  period of 2003.
During  2004,  the company  recorded  $1,900,000  of non-cash  interest  expense
related to the issuance of convertible debt representing the value of detachable
warrants  pursuant to APB Opinion No. 14,  Accounting for  Convertible  Debt and
Debt Issued with Stock Purchase Warrants. The balance of the increase was due to
higher borrowings by the Company in 2004.

Financing Fees

For the year ended December 31, 2004,  financing fees were $21,598,  compared to
$638,603  for  the  comparable   period  of  2003.  The  decrease  is  primarily
attributable  to  termination of the Company's  practice of issuing  warrants in
conjunction with debt financing.

Net Loss

For the year ended  December 31, 2004, the Company had a net loss of $9,696,164,
compared to a net loss of $7,039,050 in the  comparable  period of 2003, for the
reasons described above.

Preferred Dividends

For the year ended December 31, 2004,  preferred dividends totaled $911,983,  as
compared  to  $848,200  for the  comparable  period of 2003.  This  increase  is
attributable  to higher  average  outstanding  shares  of  Series A  Convertible
Preferred Stock during 2004.


                                       14
<PAGE>

Net Loss Available to Common Stockholders

For the year ended  December 31, 2004,  there was a net loss available to common
stockholders  of  $10,608,147  compared to $7,887,250  in 2003.  The reasons for
these changes are described above.

Liquidity and Capital Resources

For the year ended  December 31, 2004,  the Company used  $4,249,912  of cash in
operating activities,  another $156,525 in investing  activities,  and generated
$4,326,035  in cash  from  financing  activities.  The  total of all  cash  flow
activities  resulted  in a  decrease  in the  balance of cash for the year ended
December  31, 2004 of $80,402.  For the same  period of 2003,  the Company  used
$3,414,356  of cash in operating  activities.  $88,531 of cash was  generated in
investing  activities  and  another  $3,403,850  was  generated  from  financing
activities. The total of all cash flow activities resulted in an increase in the
balance of cash of $78,025.

By the  end of  2004,  the  Company  was  incurring  approximately  $368,000  in
recurring monthly operating expenses.  Approximately 67% of this total consisted
of salaries, wages, payroll taxes, health insurance and other employee benefits.
In addition to these ongoing operating expenses,  the Company also needs cash to
finance accounts  receivables and inventories and to make debt service payments.
The Company has met its liquidity  needs  through 2004 through a combination  of
operating revenues, debt and lease financings, and the sale of additional shares
of its capital stock.

On November 9, 2004,  the Company issued  4,021,739  shares of common stock in a
private  placement to a group of existing  shareholders.  Gross  proceeds of the
sale of these shares was $925,000.

As of December 31, 2004, the Company had nine capital lease  facilities in place
which were used to finance offender monitoring  equipment.  Six of these capital
leases   were   sale-leaseback   transactions.    Under   these   sale-leaseback
arrangements,  the Company sells the inventory to a third party leasing  company
(which in  several  cases is owned by a  shareholder  of the  Company)  and then
leases  the  equipment  back.  All  capital  leases  are  treated  as  financing
transactions and carrying interest rates ranging from 9.50% to 14.36%.  Maturity
dates on these  capital  leases  run from  August  2005 to October  2007.  As of
December 31, 2004,  the aggregate  balance on these nine capital  leases totaled
$1,714,292.

As of December 31, 2004, the Company had the following borrowing arrangements in
place:

o     A $2,538,421  note  payable  from  Westburg  Media  Capital,  LP which was
      assumed in connection  with the  acquisition  of TSC in August 2003.  This
      note was purchased by a group of investors on January 3, 2005.

o     Notes  payable of  $700,000  issued to three  stockholders.  Each of these
      unsecured,  long-term  notes  mature on August 31,  2006,  and  carries an
      interest rate of 8% per annum which is payable annually in arrears.  These
      notes are subordinated to the Westburg Media Capital, LP note.

o     A $1,000,000 subordinated convertible note. This long term note carries an
      interest  rate of 10% with  quarterly  interest  payments  and  matures in
      October 2008.

o     Notes payable  totaling  $856,482 issued to three  institutional  lenders.
      These notes carry an  interest  rate of 4% which is payable  semi-annually
      and mature on May 26, 2006. These notes are convertible into shares of the
      Company's common stock at $0.23 per share.

o     A 10% convertible debenture with a balance of $30,000

o     An  unsecured  note  payable to a bank in the  amount of  $70,362  bearing
      interest at 7.0% per annum and due May 10, 2005;


                                       15
<PAGE>

o     A note  payable to a bank with a remaining  principal  amount of $103,082,
      bearing  interest at the bank's prime rate plus 1% and due March 15, 2005;
      and

o     An unsecured  note payable for services in the amount of $42,210,  bearing
      interest at 5% per annum and currently due and payable.

Management's Plans

In order for the Company to meet its liquidity needs during 2005 and to continue
as a going  concern,  it will need to secure new financing and generate  greater
cash flows from operations. There are uncertainties that raise substantial doubt
about the  ability  of iSt to  continue  as a going  concern  and the  financial
statements  do  not  include  any   adjustments   that  may  result  from  these
uncertainties.  As  shown  in the  statements  of  operations,  iSt  has not yet
achieved  profitable  operations.  Management  implemented the following plan in
2004 in order to continue financing  operations and development of the Company's
technology.  The plan is designed to lower  operating  expenses,  improve  gross
profit margins,  increase  sales,  streamline  operations,  reduce negative cash
flow, and strengthen the balance sheet.

The first step in the plan was the overhaul of the executive management team. On
February 19, 2004, the Company announced the appointment of Tom Wharton as Chief
Executive Officer. Subsequent to that, four positions were eliminated leaving an
executive team consisting of Mr. Wharton,  David Vana, Chief Financial  Officer,
Ed Sempek,  Chief Operating Officer,  and David Sempek, Chief Technical Officer.
The  restructuring  of  the  executive  management  team  resulted  in  the  net
elimination of $562,000 in annual salaries.

The second  step of the plan,  the  rebuilding  of the sales  organization,  was
completed in August,  2004.  This included the realignment and restaffing of the
sales  organization,  the unveiling of a new compensation plan, the rollout of a
comprehensive   one-month  sales  orientation  and  training  program,  and  the
implementation  of new processes and procedures.  Monthly revenues  increased by
approximately 33% from February to December, 2004.

Step three of the plan was the streamlining of operations. This included closing
down the Harrisburg,  Pennsylvania  facility in November 2004 and  consolidating
all  operations  at a single  12,000  square foot  facility in Omaha,  Nebraska.
Duplicate functions were eliminated,  greater  accountability in the service and
support arenas were implemented, non-essential expenditures were done away with,
and contracts  were  renegotiated  lowering  other costs.  As a result,  monthly
operating  costs and total costs of revenues were reduced by  approximately  28%
and 2%, respectively from February to December, 2004.

The fourth  step of the plan is the  strengthening  of the  Company's  financial
position  and  restructuring  of the  balance  sheet.  This  step  included  (i)
renegotiation  of  capital  leases to lower the  interest  rate and  extend  the
maturity  dates;  (ii)  elimination  of all  non-lease,  non-trade  debt;  (iii)
elimination of existing preferred equity;  and (iv) securing  additional working
capital  to  satisfy  all  cash   requirements  for  operations,   research  and
development until the Company achieves positive EBITDA. Since October, 2004, the
Company has cut monthly capital lease payments by $47,000 per month,  eliminated
over $3 million in debt, reached agreements to eliminate another $3.7 million in
debt pending the completion of the balance sheet restructuring, eliminated $10.6
million in preferred  stock,  fulfilled a private  placement of common stock for
$925,000,   and  completed  $1.4  million  in  other  financings.   Furthermore,
negotiations  are ongoing for the  elimination of an additional  $1.2 million in
debt. The result to date is a total  reduction in monthly debt service of almost
$160,000 and the elimination of over $1 million in annual preferred dividends.

iSt has signed a non-binding term sheet for an equity investment in the Company
by a private investment company. Closing of the transaction is contingent upon:
(i) elimination of all of the Company's debt (except for capital leases and
trade payables); (ii) satisfactory completion of due diligence by the investor;
(iii) an opinion by an independent analyst that the transaction is fair to the
existing shareholders of the Company; and (iv) completion and execution of a
definitive agreement. Subsequent to year end, the investor extended a $1 million
bridge loan to iSECUREtrac which is to be repaid from the proceeds of the
transaction. If the proposed transaction is consummated, the Company believes it
will have sufficient working capital to meet its liquidity needs for the
foreseeable future. There is no assurance that the proposed transaction will
close and, if it does not, the Company will need to secure alternative sources
of financing to meet its immediate liquidity needs.


                                       16
<PAGE>


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 iSt's  results of  operations  and  financial  condition  and they
require subjective or complex management judgments:

Revenue recognition

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.  Leasing and hosting  contracts with customers are typically for twelve
months.  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).

Stock-based compensation

The Company has a stock-based  compensation  plan titled the 2001 Omnibus Equity
Incentive  Plan.  The  Company  can also grant  stock-based  compensation  under
executive employment agreements. iSt accounts 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).

During  2004,  the Company  reduced  the  exercise  price of certain  previously
awarded stock  options.  The Company  accounts 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 are accounted for as variable from the
date of the  modification  to the date the option is  exercised,  forfeited,  or
expires unexercised.

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.  For the year ended  December 31,
2004,  the  Company  recorded  an  impairment  charge of  $1,341,251  related to
monitoring  equipment and an impairment  charge of $302,298  related to customer
monitoring contracts.

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.


                                       17
<PAGE>

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.

Not applicable.

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 principal executive officer and principal financial officer
have reviewed and evaluated the Company's  disclosure controls and procedures as
defined in Rules  13a-15(e) and 15d-15(e)  under the Securities  Exchange Act of
1934,  as amended (the  "Exchange  Act") as of the end of the period  covered by
this report (the "Evaluation  Date").  Based on such  evaluation,  such officers
have  concluded  that,  as of the  Evaluation  Date,  the  Company's  disclosure
controls and procedures are effective in bringing to their attention on a timely
basis material  information  relating to the Company  required to be included in
the Company's periodic filings under the Exchange Act.

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, 2004 (the "Proxy Statement").

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 43, 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 43, 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


                                       18
<PAGE>

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 42, 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.

        2.  Exhibits.

            3.01  Restated Certificate of Incorporation of the Company (1)

            3.02  Restated Bylaws of the Company (2)

            3.03  Certificate of Designations,  Preferences and Rights of Series
                  A Convertible Preferred Stock of iSt (3)

            3.04  Certificate of Designations,  Preferences and Rights of Series
                  B Convertible Preferred Stock of iSt (9)

            4.01  Form of Common Stock Certificate (1)

            4.03  2001 Omnibus Equity Incentive Plan (4)

            10.01 License Agreement with SiRF Technology, Inc. (1)

            10.02 ADT   Distribution   Agreement  (3)   Confidential   Treatment
                  Requested

            10.03 ADT Hosting Agreement (3) Confidential Treatment Requested

            10.04 Preferred  Distributor  Agreement with Premier  Geografix LTD.
                  (7)

            10.05 Share Exchange Agreement with Tracking Systems Corporation (8)


                                       19
<PAGE>

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

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

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

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

            10.10 Agreement Among Noteholders (10)

            10.11 Debt Conversion between iSt and Roger Kanne

            10.12 Debt Conversion between iSt and Martin Halbur

            10.13 Debt Conversion between iSt and Kenneth Macke

            10.14 Debt Conversion between iSt and Buckshot Capital, LLC

            10.15 Business Office Lease

            21.01 Subsidiaries of the Company

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

            31.2  Certification  of Chief Financial  Officer pursuant to Section
                  302 of the Sarbanes-Oxley Act of 2002.

            32    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)   Incorporated by reference from the registrant's  current
                        report under Form 8-K filed on June 10, 2001 (Commission
                        File No. 0-26455).

                  (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)


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.


                                       20
<PAGE>

                                   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/ Thomas E. Wharton, Jr.
                                                 --------------------------
                                                 Thomas E. Wharton, Jr.
                                                 Chief Executive Officer


                                             By: /s/ David G. Vana
                                                 -----------------
                                                 David G. Vana
                                                 Chief Financial Officer


                                             Dated: March 31, 2005

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.

<TABLE>
<CAPTION>
           Signature                                   Title                          Date
           ---------                                   -----                          ----
<S>                                <C>                                              <C>

       /s/ Roger J. Kanne               Chairman of the Board of Directors,         31-Mar-05
---------------------------------                    Director
         Roger J. Kanne

   /s/ Thomas E. Wharton Jr.       President, Chief Executive Officer, Director     31-Mar-05
---------------------------------
     Thomas E. Wharton Jr.

     /s/ Robert E. Badding                           Director                       31-Mar-05
---------------------------------
       Robert E. Badding

      /s/ Martin J. Halbur                           Director                       31-Mar-05
---------------------------------
        Martin J. Halbur

    /s/ Ronald W. Muhlbauer                          Director                       31-Mar-05
---------------------------------
      Ronald W. Muhlbauer

         /s/ Ravi Nath                               Director                       31-Mar-05
---------------------------------
           Ravi Nath

       /s/ David G. Vana                Chief Financial Officer, Secretary          31-Mar-05
---------------------------------
         David G. Vana
</TABLE>


                                       21
<PAGE>

                       iSECUREtrac Corp. and Subsidiaries
                          Consolidated Financial Report





                                Table of Contents





      Report of Independent Registered Public Accounting Firm.....F-1

      Consolidated Financial Statements:
        Balance Sheet.............................................F-2
        Statements of Operations..................................F-3
        Statements of Stockholders' Deficit.......................F-4
        Statements of Cash Flows..................................F-5

      Notes to Consolidated Financial Statements..................F-6


                                      F-0
<PAGE>

             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,  2004,  and  the  related  Consolidated
Statements  of  Operations,  Stockholders'  Deficit and Cash Flows for the years
ended  December  31,  2004,  and  2003.  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, 2004, and the results of their  operations
and their  cash  flows for the years  ended  December  31,  2004,  and 2003,  in
conformity with U.S. generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
the Company  will  continue as a going  concern.  As discussed in Note 13 to the
financial statements,  the Company has suffered recurring losses from operations
and its total  liabilities  exceeds its total  assets.  This raises  substantial
doubt about the Company's  ability to continue as a going concern.  Management's
plans in regard to these  matters are also  discussed in Note 13. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

/s/ McGladrey & Pullen, LLP
Kansas City, Missouri
January  28,  2005,  except  for (D) and (E) in Note 5 as to  which  the date is
February 28, 2005


                                      F-1
<PAGE>

                       iSECUREtrac Corp. and SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                               December 31, 2004
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>
ASSETS (Note 5)
Current Assets
     Cash                                                                                 $     44,997
     Cash - restricted  (Note 9)                                                               700,000
     Accounts receivable, net of allowance for doubtful accounts of $13,869                  1,049,654
     Inventories                                                                               140,938
     Prepaid expenses and other                                                                 75,734
------------------------------------------------------------------------------------------------------
        Total current assets                                                                 2,011,323
------------------------------------------------------------------------------------------------------
Equipment, net of accumulated depreciation of $582,243                                         222,834
Leasehold Improvements, net of accumulated depreciation of $177                                 10,434
Monitoring Equipment, net (Notes 3 and 10)                                                   2,496,657
Product Development Costs, net of accumulated amortization of $907,233                          82,728
Intangibles, subject to amortization  (Note 4)                                                 362,883
Goodwill  (Note 4)                                                                           2,302,179
Other Assets                                                                                   173,651
------------------------------------------------------------------------------------------------------
        Total assets                                                                      $  7,662,689
======================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
     Notes payable  (Note 5)                                                              $    215,654
     Current maturities of long-term debt  (Notes 5 and 10)                                  1,410,647
     Accounts payable and accrued expenses  (Note 9)                                         1,823,401
     Deferred gain on sale-leaseback transaction  (Note 10)                                    870,383
     Accrued interest payable  (Note 5)                                                        142,406
------------------------------------------------------------------------------------------------------
        Total current liabilities                                                            4,462,491
------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities  (Notes 5 and 10)                                    5,428,548
------------------------------------------------------------------------------------------------------
Commitments and contingencies  (Notes 10, 12 and 13)                                                --
------------------------------------------------------------------------------------------------------
Stockholders'  Deficit  (Notes 7 and 8)
     Series A convertible preferred stock, 10,000 shares designated at $0.01 par value;
        0 issued and outstanding                                                                    --
     Series B convertible preferred stock, 3,500 shares designated at $0.01 par
        value; 300 issued and outstanding stated value $1,000 per share                        295,000
     Common stock, 150,000,000 shares authorized at $0.001 par value;
        88,651,536 issued and outstanding                                                       88,651
     Additional paid-in capital                                                             48,594,197
     Accumulated deficit                                                                   (51,206,198)
------------------------------------------------------------------------------------------------------
        Total stockholders'  deficit                                                        (2,228,350)
------------------------------------------------------------------------------------------------------
        Total liabilities and stockholders' deficit                                       $  7,662,689
======================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.


                                      F-2
<PAGE>

                       iSECUREtrac Corp. and SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     Years Ended December 31, 2004 and 2003
<TABLE>
<CAPTION>

                                                              2004            2003
------------------------------------------------------------------------------------
<S>                                                     <C>             <C>
Revenues:
       Equipment                                        $    377,509    $    171,759
       Leasing                                             1,331,895         402,972
       Hosting                                             2,243,137         757,106
       Gain on sale-leaseback transactions  (Note 10)        588,757         123,083
       Service                                               138,188          38,187
------------------------------------------------------------------------------------
          Total revenues                                   4,679,486       1,493,107
------------------------------------------------------------------------------------
Operating expenses:
       Cost of revenues                                    4,403,047       1,141,334
       Research and development                              687,914         750,443
       Sales, general and administrative                   6,582,008       5,557,414
------------------------------------------------------------------------------------
          Total operating expenses                        11,672,969       7,449,191
------------------------------------------------------------------------------------
       Operating loss                                     (6,993,483)     (5,956,084)
------------------------------------------------------------------------------------
Other income (expense):
       Interest income                                            32             523
       Interest expense  (Notes 5 and 7)                  (2,681,115)       (444,886)
       Financing fees                                        (21,598)       (638,603)
------------------------------------------------------------------------------------
       Total other income (expense)                       (2,702,681)     (1,082,966)
------------------------------------------------------------------------------------
       Loss before provision for income taxes             (9,696,164)     (7,039,050)
       Provision for income taxes  (Note 6)                       --              --
------------------------------------------------------------------------------------
Net loss                                                $ (9,696,164)   $ (7,039,050)
====================================================================================
       Preferred dividends  (Note 8)                        (911,983)       (848,200)
------------------------------------------------------------------------------------
Net loss available to common stockholders               $(10,608,147)   $ (7,887,250)
====================================================================================
Basic and diluted loss per common share                 $      (0.18)   $      (0.19)
====================================================================================
Weighted average shares of common stock outstanding       58,275,093      41,561,430
====================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.


                                      F-3
<PAGE>

                       iSECUREtrac Corp. AND SUBSIDIARIES
                       STATEMENT OF STOCKHOLDERS' DEFICIT
                     Years Ended December 31, 2004 and 2003

<TABLE>
<CAPTION>

                                                                               Series A              Series B
                                                                              Convertible           Convertible
                                                                            Preferred Stock       Preferred Stock    Common Stock
                                                                        ----------------------   -----------------   ------------
                                                                           Shares      Amount   Shares    Amount        Shares
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>       <C>            <C>    <C>           <C>
Balance, December 31, 2002                                                8,483   $  8,482,662   150    $145,000      34,919,703
  Shares issued for cash, net of offering costs                             416        416,000   150     150,000       3,516,766
  Shares issued for acquisition of subsidiary  (Note 2)                      --             --    --          --       4,423,077
  Shares issued upon exercise of warrants                                    --             --    --          --         554,913
  Shares issued for directors' fees and services  (Note 7)                  189        189,000    --          --       4,316,202
  Shares issued upon conversion of Series A preferred stock                (605)      (605,000)   --          --       1,173,638
  Compensation related to stock options issued  (Note 7)                     --             --    --          --              --
  Warrants issued for financing fees and consulting services (Note 7)        --             --    --          --              --
  Series A preferred stock dividends  (Note 8)                              643        642,808    --          --              --
  Net loss                                                                   --             --    --          --              --
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003                                                9,126      9,125,470   300     295,000      48,904,299
  Shares issued for cash, net of offering costs                              --             --    --          --      12,275,966
  Shares issued upon conversion of notes  (Note 2)                           --             --    --          --      13,456,113
  Shares issued upon exercise of options                                     --             --    --          --       2,438,345
  Shares issued upon exercise of warrants                                    --             --    --          --         869,565
  Shares issued for director's fees  (Note 7)                                --             --    --          --         116,377
  Shares issued for services  (Note 7)                                       --             --    --          --         334,905
  Amortization of unearned consulting expense                                --             --    --          --              --
  Compensation related to stock options issued  (Note 7)                     --             --    --          --              --
  Warrants issued in conjunction for convertible notes  (Note 7)             --             --    --          --              --
  Warrants issued for consulting services  (Note 7)                          --             --    --          --              --
  Series A preferred stock dividends  (Note 8)                            1,130      1,130,496    --          --              --
  Shares issued upon conversion of Series A preferred stock             (10,256)   (10,255,966)   --          --      10,255,966
  Net loss                                                                   --             --    --          --              --
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004                                                   --   $         --   300    $295,000      88,651,536
=================================================================================================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                    Common Stock Additional   Unearned
                                                                    ------------  Paid-in    Consulting   Accumulated
                                                                        Amount    Capital     Expense       Deficit         Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>      <C>          <C>         <C>            <C>
Balance, December 31, 2002                                             $34,919  $21,510,819  $      --   $(32,710,801)  $(2,537,401)
  Shares issued for cash, net of offering costs                          3,517    1,487,473         --             --     2,056,990
  Shares issued for acquisition of subsidiary  (Note 2)                  4,423    2,295,577         --             --     2,300,000
  Shares issued upon exercise of warrants                                  555      192,169         --             --       192,724
  Shares issued for directors' fees and services  (Note 7)               4,316    1,277,694   (357,000)            --     1,114,010
  Shares issued upon conversion of Series A preferred stock              1,174      603,826         --             --            --
  Compensation related to stock options issued  (Note 7)                    --      144,912         --             --       144,912
  Warrants issued for financing fees and consulting services (Note 7)       --    1,012,263         --             --     1,012,263
  Series A preferred stock dividends  (Note 8)                              --           --         --       (848,200)     (205,392)
  Net loss                                                                  --           --         --     (7,039,050)   (7,039,050)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003                                              48,904   28,524,733   (357,000)   (40,598,051)   (2,960,944)
  Shares issued for cash, net of offering costs                         12,276    3,466,737         --             --     3,479,013
  Shares issued upon conversion of notes  (Note 2)                      13,456    2,974,812         --             --     2,988,268
  Shares issued upon exercise of options                                 2,438      383,969         --             --       386,407
  Shares issued upon exercise of warrants                                  870      199,130         --             --       200,000
  Shares issued for director's fees  (Note 7)                              116       33,217         --             --        33,333
  Shares issued for services  (Note 7)                                     335       76,045         --             --        76,380
  Amortization of unearned consulting expense                               --           --    357,000             --       357,000
  Compensation related to stock options issued  (Note 7)                    --      534,336         --             --       534,336
  Warrants issued in conjunction for convertible notes  (Note 7)            --    1,900,000         --             --     1,900,000
  Warrants issued for consulting services  (Note 7)                         --      255,508         --             --       255,508
  Series A preferred stock dividends  (Note 8)                              --           --         --       (911,983)      218,513
  Shares issued upon conversion of Series A preferred stock             10,256   10,245,710         --             --            --
  Net loss                                                                  --           --         --     (9,696,164)   (9,696,164)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004                                             $88,651  $48,594,197  $      --   $(51,206,198)  $(2,228,350)
====================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>

                       iSECUREtrac CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Years Ended December 31, 2004 and 2003
<TABLE>
<CAPTION>

                                                                                             Year Ended December 31,
                                                                                              2004            2003
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>             <C>
Cash Flows From Operating Activities
    Net loss                                                                             $ (9,696,164)   $ (7,039,050)
    Adjustments to reconcile net loss to net cash used in operating activities
       Depreciation and amortization                                                        1,911,843         949,756
       Impairment charge of monitoring equipment                                            1,341,251              --
       Impairment charge of intangibles subject to amortization                               302,298              --
       Interest expense related to warrants issued in connection with convertible debt      1,900,000              --
       Expenses paid by issuance of stock, warrants, and options in lieu of cash              899,557       1,922,009
       Amortization of unearned consulting expense                                            357,000         357,000
       Gain on sale - leaseback transactions                                                 (588,757)       (123,083)
       Changes in assets and liabilities, net of effects of acquisition
          (Increase) in accounts receivable                                                  (447,287)        (26,036)
          (Increase) decrease in inventories                                                    3,213         (29,170)
          (Increase) decrease in prepaid expenses                                              16,798         (17,839)
          Increase (decrease) in accounts payable and accrued expenses                       (196,483)        442,583
          Increase (decrease) in accrued interest payable                                     (53,181)        149,474
----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities                                                      (4,249,912)     (3,414,356)
----------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
    Acquisition of subsidiary, net of acquisition costs                                            --         216,311
    Purchases of leasehold improvements and equipment                                         (14,484)        (24,516)
    Purchases of monitoring equipment                                                            (878)        (95,901)
    (Increase) in other assets                                                               (141,163)         (7,363)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                                          (156,525)         88,531
----------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
    Proceeds from notes                                                                       270,000         750,000
    Principal payments on notes                                                              (817,435)       (281,708)
    Proceeds from long-term debt                                                            1,940,000       1,000,000
    Principal payments on long-term debt                                                   (1,913,965)       (806,540)
    Preferred stock dividends paid in cash                                                         --        (190,000)
    Proceeds from issuance of common stock                                                  4,065,420       1,565,890
    Proceeds from issuance of preferred stock                                                      --         566,000
    Proceeds from sale-leaseback transaction                                                  782,015         800,208
----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                                   4,326,035       3,403,850
----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash                                                                   (80,402)         78,025
Cash at beginning of period                                                                   125,399          47,374
----------------------------------------------------------------------------------------------------------------------
Cash at end of period                                                                    $     44,997    $    125,399
======================================================================================================================
Supplemental Disclosure of Cash Payments for
    Interest                                                                                  834,296         295,412
Supplement Disclosure Of Noncash Investing and Financing Activities
    Conversion of long-term debt to notes payable                                                  --         301,790
    Issuance of Common and Preferred Stock in lieu of payment on
       long-term debt, notes payable and accrued interest payable                           2,988,268         117,824
    Issuance of Preferred Stock in payment of Preferred Stock dividends                     1,130,496         642,808
    Issuance of Common Stock upon Conversion of Series A Preferred Stock                   10,255,966              --
    Issuance of Common Stock  for investment in subsidiary (Note 2)                                --       2,300,000
    Preferred Stock dividends declared but not paid                                                --         218,513
    Conversion of accounts payable to notes payable                                                --         166,077
    Increase in restricted cash and stockholders' escrow liability                            700,000              --
    Capital lease obligations incurred for monitoring equipment                             1,085,000       1,855,000
</TABLE>
See Notes to Consolidated Financial Statements.


                                      F-5
<PAGE>

                        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  ("iSt" or "the Company") designs,  develops,
produces,  sells, leases and supports wireless products and services relating to
the tracking, monitoring, and reporting of individuals and objects. iSt 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,  iSt primarily  markets to the criminal  justice  industry for continuous
electronic monitoring of criminal offenders.

iSt was  formed on  January 5, 1992,  for the  purpose  of  developing  wireless
products  and  services  relating  to  tracking,  monitoring  and  reporting  of
individuals and objects.

Significant Accounting Policies

Principles of consolidation:  The consolidated  financial statements include the
accounts of iSt and its wholly-owned  subsidiaries,  iSt Services,  Inc., formed
September 25, 2002,  and Tracking  Systems  Corporation,  acquired on August 28,
2003.  ABS Nebraska,  Inc., an inactive  wholly-owned  subsidiary,  dissolved in
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.

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 $6,131 of bad debt
expenses for 2004 and none for 2003.

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.

Because of the high costs  associated  with  maintaining  the MEMS 2000 and MEMS
2001 home arrest  product,  the Company began  development  in April,  2004 of a
tracNET24-based  replacement home arrest product. This development was completed
in the fourth quarter and the Company  immediately  commenced  moving  customers
from the MEMS 2001 to the  tracNET24  platform.  In  addition,  during the third


--------------------------------------------------------------------------------
                                      F-6
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


quarter of 2004,  the Company  released the iSt cuff RF  transmitter  and ceased
offering the Elmo Tech and Premier Geografix transmitters for use in its GPS and
home arrest offerings.

During the year ended  December 31, 2004,  the Company took  impairment  charges
totaling  $1,341,251 against its MEMS 2001 ($1,129,627) and MEMS 2000 ($211,624)
monitoring  equipment.  This impairment  charge has been included in the cost of
revenues in the  consolidated  statement  of  operations.  The Company  used the
discounted  cash  flow  method  for  revenues  generated  by this  equipment  to
determine the fair value of this equipment.

Product development:  iSt 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.  At December 31, 2004, the majority of
the  capitalized  costs related to the  development of a web-based  tracking and
monitoring system, known as tracNET24.  The capitalization of these costs begins
when a product's  technological  feasibility has been  established and ends when
the  product  is  available  for  general  release  to  customers.   No  product
development  costs were  capitalized in 2003 or 2004. iSt began amortizing these
costs in 2002 on a straight-line basis over an estimated economic useful life of
three years.  It is reasonably  possible that the remaining  estimated  economic
life of the  product  would be  reduced  significantly  in the near  term due to
competitive pressures or technological changes. As a result, the carrying amount
of the capitalized  software and hardware costs may be reduced materially in the
near term.  Based upon unit sales to date,  and projected  sales for the future,
management  believes  there is no  impairment of product  development  costs and
therefore,  there was no charge to  expense  for  impairment  in the year  ended
December 31, 2004, or December 31, 2003.  Amortization  of capitalized  software
and hardware development costs totaled $314,862 for the years ended December 31,
2004 and 2003.

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.  iSt has recorded no impairment  charges related to goodwill for the
years ended December 31, 2004, and 2003.

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:

<TABLE>
<CAPTION>
                                                 December 31, 2004     December 31, 2003
----------------------------------------------------------------------------------------
<S>                                                  <C>                    <C>
Shares issuable upon conversion/exercise of:
  Series A Convertible Preferred Stock                       --             9,125,470
  Series B Convertible Preferred Stock                  500,100               500,100
  Subordinated Convertible Note                       2,631,579             2,000,000
  Other Convertible Notes                             3,723,835                    --
  Common stock options outstanding                   11,143,541             9,145,251
  Common stock warrants outstanding                  22,888,991             4,209,116
  Convertible subordinated debentures                     4,950                 4,950
----------------------------------------------------------------------------------------
</TABLE>


--------------------------------------------------------------------------------
                                      F-7
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


Revenue recognition:  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.

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: The Company has a stock-based compensation plan titled
the 2001 Omnibus  Equity  Incentive  Plan.  The Company also grants  stock-based
compensation under executive employment agreements. iSt accounts 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 $534,336 and $144,912 has
been  reflected  in net loss for the years ending  December 31, 2004,  and 2003,
respectively.  During 2004,  the Company  reduced the exercise  price of certain
previously  awarded stock options.  The Company  accounts 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 are accounted for as variable from the
date of the  modification  to the date the option is  exercised,  forfeited,  or
expires unexercised. $353,124 of the stock-based compensation for the year ended
December 31, 2004, is attributable to variable  accounting for stock options for
which the exercise price had been reduced.

The  following  table  illustrates  the effect on net loss for the years  ending
December 31, 2004,  and 2003,  as if iSt had applied the fair value  recognition
provisions  of  SFAS  No.  123,  Accounting  for  Stock-Based  Compensation,  to
stock-based compensation.


<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                                     2004            2003
-------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>             <C>
Net loss, as reported                                                           $ (9,696,164)   $ (7,039,050)
Add:  Stock-based employee compensation expense included in reported net loss        534,336         144,912
Deduct:  Total stock-based employee compensation expense determined
  under fair value based method for all awards                                    (1,263,470)       (570,352)
-------------------------------------------------------------------------------------------------------------
Pro forma net loss                                                               (10,425,298)     (7,464,490)
Preferred dividends                                                                 (911,983)       (848,200)
-------------------------------------------------------------------------------------------------------------
Pro forma net loss available to common stockholders                             $(11,337,281)   $ (8,312,690)
=============================================================================================================
Basic and diluted loss per share:

     As reported                                                                $      (0.18)   $      (0.19)
=============================================================================================================
     Pro forma                                                                  $      (0.19)   $      (0.20)
-------------------------------------------------------------------------------------------------------------
</TABLE>


--------------------------------------------------------------------------------
                                      F-8
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


In  determining  the pro forma amounts above during 2004 and 2003,  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 79.30%
and 89.43%.

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  currently  only has one  segment  line of
business.

Advertising  costs:  Advertising  costs are  expensed as  incurred.  Advertising
expense for the years ended December 31, 2004, and 2003 was $10,605 and $26,265,
respectively.

Recent  Accounting  Pronouncements:  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 effect of the Statement  will be to require  entities 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.  FAS 123(R) permits  entities to
use any  option-pricing  model  that  meets  the  fair  value  objective  in the
Statement.

The  Company  will be required  to apply FAS 123(R) as of the  beginning  of its
first interim period that begins after December 15, 2005, which will be the year
ending December 31, 2006.

FAS 123(R) allows two methods for determining the effects of the transition: the
modified prospective  transition method and the modified retrospective method of
transition.  Under the modified  prospective  transition method, an entity would
use the fair value based  accounting  method for all  employee  awards  granted,
modified,  or  settled  after the  effective  date.  As of the  effective  date,
compensation cost related to the nonvested  portion of awards  outstanding as of
that  date  would be based  on the  grant-date  fair  value of those  awards  as
calculated  under the  original  provisions  of Statement  No. 123;  that is, an
entity would not remeasure the  grant-date  fair value  estimate of the unvested
portion of awards  granted prior to the effective  date. An entity will have the
further  option to either apply the Statement to only the quarters in the period
of adoption and  subsequent  periods,  or apply the Statement to all quarters in
the  fiscal  year  of  adoption  Under  the  modified  retrospective  method  of
transition, an entity would revise its previously issued financial statements to
recognize  employee  compensation cost for prior periods presented in accordance
with the original provisions of Statement No. 123.

The Company has not yet  completed its study of the  transition  methods or made
any decisions  about how it will adopt FAS 123(R).  The impact of this Statement
on the Company in fiscal 2006 and beyond will depend upon various factors, among
them being our future  compensation  strategy.  The pro forma compensation costs
presented  in the table above and in prior  filings  for the  Company  have been
calculated using a Black-Scholes  option pricing model and may not be indicative
of amounts which should be expected in future years. No decisions have been made
as to which  option-pricing model is most appropriate for the Company for future
awards.


Note 2. Acquisition of Subsidiary

On August 28, 2003, the Company acquired all of the outstanding capital stock of
Tracking Systems Corporation, ("TSC") a provider of criminal offender monitoring
equipment.  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.  The Company issued 4,423,077 shares of its
common stock and assumed  $4,294,933 of TSC debt in exchange for all outstanding
TSC  shares.  The  total  acquisition  price was  $6,452,862  plus  $115,316  of
acquisition related expenses.  The acquisition price was allocated among the TSC
assets  as  set  forth  in  the  following  table,  which  reflect  management's
assessment of the fair value of these assets:


--------------------------------------------------------------------------------
                                      F-9
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


-------------------------------------------------------------------------------
Assets acquired
     Cash, net of acquisition costs                                 $   216,311
     Accounts receivable                                                482,727
     Other current assets                                               124,842
     Leasehold improvements and equipment                               206,346
     Monitoring equipment                                             2,584,516
     Intangible asset subject to amortization                           911,522
     Goodwill                                                         2,302,179
     Other noncurrent assets                                             16,044
Liabilities assumed
     Accounts payable and accrued expenses                             (249,554)
     Long-term debt                                                  (4,294,933)
Stock issued for consideration                                       (2,300,000)
-------------------------------------------------------------------------------
                                                                    $        --
===============================================================================


$911,522  of  intangibles  related  to the  fair  value of  existing  monitoring
contracts  acquired was recorded  pursuant to the  transaction.  This intangible
will  be  amortized  over  seven  years,  which  is the  estimated  life  of the
monitoring contracts.  In addition,  $2,302,179 of goodwill that will be subject
to annual  impairment tests was recorded.  This goodwill,  which arises from the
excess of the purchase  price over the fair value of the assets,  represents the
value to be gained  from the  increased  synergies  and sales  potential  of the
combined entities.

As part of the  consideration,  the Company assumed a $3,452,239 note payable to
Westburg Media Capital, LP, a related party. This note payable, which includes a
blanket security interest in the all assets,  accounts,  rights,  licenses,  and
general  intangibles,  calls for monthly payments  including interest of $67,000
with a balloon payment for the remaining amount of principal and interest due in
November 2007. The interest rate is based on the U.S. Bank of Washington's prime
rate plus 4%. This note also contains various financial covenants that are to be
measured on an annual basis.

$700,000 of unsecured and  subordinated  notes payable to other related  parties
were also  assumed.  These notes mature on August 31, 2006 and carry an interest
rate of eight (8.0%) per annum and shall be payable annually in arrears.

The following  table  presents pro forma  financial  information  as though this
business combination had been completed as of the January 1, 2003.


--------------------------------------------------------------------------------
                                      F-10
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                       For the Year Ended   From January 1, 2003
                                                        December 31, 2003    to August 28, 2003
                                                               iSt                 TSC             Adjustments        Total
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                  <C>                 <C>             <C>
Total revenues                                           $  1,493,107         $  1,878,547        $    (28,266)   $  3,343,388
Operating loss                                             (5,956,084)            (277,993)             (6,141)     (6,240,218)
-------------------------------------------------------------------------------------------------------------------------------
Net loss                                                 $ (7,039,050)        $   (212,419)       $    (79,473)   $ (7,330,942)
===============================================================================================================================
     Preferred dividends                                     (848,200)                                                (848,200)
===============================================================================================================================
Net loss available to shareholders                       $ (7,887,250)                                            $ (8,179,142)
===============================================================================================================================
Net loss per share of Common Stock - basic and diluted                                                            $      (0.20)
===============================================================================================================================
Weighted average shares common stock outstanding                                                                    41,561,430
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Pro forma  adjustments are for  amortization of monitoring  contract,  change in
depreciation  due to adjustment of equipment to fair value,  and  elimination of
intercompany transactions.

Note 3. Monitoring Equipment

Monitoring equipment at December 31, 2004, is as follows:

<TABLE>
<CAPTION>
                                    Active        Passive       MEMS 2000      MEMS 2001         Other         Total
-----------------------------------------------------------------------------------------------------------------------
<S>                             <C>            <C>            <C>            <C>            <C>            <C>
Monitoring Equipment                875,001      2,306,859        964,897      1,278,816        321,056      5,746,628
Less accumulated depreciation      (217,554)    (1,236,451)      (412,497)    (1,278,816)      (104,653)    (3,249,971)
-----------------------------------------------------------------------------------------------------------------------
Monitoring Equipment, net       $   657,448    $ 1,070,407    $   552,400    $        --    $   216,402    $ 2,496,657
=======================================================================================================================
</TABLE>

Because of the high costs  associated  with  maintaining  MEMS 2001 home  arrest
product,  the Company  began  development  in April,  2004 of a  tracNET24-based
replacement  home arrest product.  This  development was completed in the fourth
quarter of 2004 and the Company immediately  commenced moving customers from the
MEMS 2001 to the tracNET24 platform.

During the year ended December 31, 2004,  the Company took an impairment  charge
of  $1,129,627  against  its MEMS  2001  monitoring  equipment  to  reflect  its
obsolescence.  At the same  time,  the  Company  took an  impairment  charge  of
$211,624  against its MEMS 2000 monitoring  equipment to reflect the uncertainty
of its viability as a profitable  offering.  These impairment  charges have been
included in the cost of revenues in the  consolidated  statement of  operations.
The Company used the discounted cash flow method for revenues  generated by this
equipment to determine its fair value.


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, 2004.

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  $459,973,
including a $302,298 write down of the customer monitoring contracts on the MEMS
2001 and MEMS 2000  equipment  to fair value,  in 2004 and $88,666 in 2003.  The
$302,298 write down was to reflect the uncertainty of customer  retention as the
company began replacing the products with the tracNet24-based product.

The  composition of goodwill and  intangible  assets at December 31, 2004, is as
follows:


--------------------------------------------------------------------------------
                                      F-11
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                               Intangibles, subject
                                                                                   Goodwill      to Amortization
-------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>              <C>
Gross Carrying Amount                                                            $2,302,179       $  911,522
   Accumulated Amortization, including $302,298 of impairment loss                       --         (548,639)
   Impairment losses - Goodwill                                                          --               --
-------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004                                                     $2,302,179       $  362,883
===================================================================================================================
The estimated aggregate amortization expense of the intangibles is as follows:
  2005                                                                                            $  126,253
  2006                                                                                                92,707
  2007                                                                                                82,569
  2008                                                                                                41,962
  2009                                                                                                19,392
-------------------------------------------------------------------------------------------------------------------
Total                                                                                             $  362,883
===================================================================================================================
</TABLE>

Note 5. Pledged Assets, Notes Payable, Long Term Debt, and Subsequent Event

iSt has the following notes payable and long-term debt at December 31, 2004:


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
<S>                                                                                <C>
Notes Payable

  Unsecured, note payable due to a financial institution, principal and interest
    (7.00%) due at maturity (May 10, 2005). (D)                                    $ 70,362

  Note payable due to a financial institution, due in monthly installments of
    $16,557 including interest at the Bank's prime rate plus 1% (6.25% at December
    31, 2004) through March 15, 2005, when all remaining principal and interest
    are due. The note is collateralized by substantially all the assets of the
    Company and the personal guarantees of various stockholders. (A) (D)            103,082

  Unsecured note payable to an entity resulting from the conversion of accounts
    payable. Principal and interest (5%) are currently due. (D)                      42,210

-------------------------------------------------------------------------------------------
Total notes payable                                                                $215,654
-------------------------------------------------------------------------------------------
</TABLE>


--------------------------------------------------------------------------------
                                      F-12
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
<S>                                                                                <C>
Long Term Debt

  Unsecured, subordinated notes payable due to certain stockholders maturing on
    August 31, 2006, interest rate of 8% per annum and shall be payable in
    arrears.(C)                                                                    $   700,000

  Note payable due to a stockholder calling for monthly principal and interest
    payments of $67,000 with a balloon payment for the remaining amount due in
    full in November 2007. The interest rate is based on the U.S. Bank of
    Washington prime rate plus 4%. As of December 31, 2004, the rate in effect was
    9.25%. This note is secured by all corporate assets. (B)                         2,538,421

  Unsecured, subordinated convertible note with interest (10%) payable quarterly
    and principal due at maturity (October 2008). Convertible to 2,631,579 shares
    of common stock. (C)                                                             1,000,000

  A Series of unsecured notes with three entities at 4% interest convertible
    into shares of the Company's common stock at $0.23 per share. These
    convertible notes mature on May 28, 2006. (E)                                      856,482

  10% convertible debenture, currently due, convertible into Common Stock at
    $6.06 per share. (D)                                                                30,000

  Three separate capital leases carrying interest rates ranging from 10.66% to
    14.36% and maturing August 2005 to November 2005 (see Note 10)                      38,107

  Six separate capital leases with certain stockholders that are carrying
    interest rates at 9.50% and maturing March 2006 to October 2007 (see Note 10)    1,676,185

----------------------------------------------------------------------------------------------
  Total long term debt                                                               6,839,195

  Less current maturities                                                           (1,410,647)
----------------------------------------------------------------------------------------------
  Total long term debt less current maturities                                     $ 5,428,548
----------------------------------------------------------------------------------------------
</TABLE>

      (A)   Shares of common  stock and common  stock  warrants  were  issued to
            those stockholders guaranteeing this note.

      (B)   This  note  contains  various  financial  covenants  that  are to be
            reviewed on an annual basis.

      (C)   These notes are subordinated to the note referenced by (B).

      (D)   These notes were converted or paid off after December 31, 2004.

      (E)   On January  3,  2005,  an entity  converted  $100,000  of their note
            payable with the Company into 434,783 shares of the Company's common
            stock at a  conversion  price of $0.23 per share.  On  February  28,
            2005,  an entity  converted  $20,000 of their note  payable with the
            Company  into  86,957  shares  of the  Company's  common  stock at a
            conversion price of $0.23 per share.

Interest  expense to  stockholders  for the years ended  December 31, 2004,  and
2003, was approximately $391,000 and $293,000, respectively. Accrued interest to
stockholders at December 31, 2004, was approximately $100,000.

The carrying value of fixed rate notes payable and long-term  debt  approximates
its fair value at December 31, 2004, due to the  stockholder  guarantees and the
relatively short-term nature of the borrowings.

The following is a schedule of aggregate  maturities  required on long-term debt
due in future years as of December 31, 2004:


--------------------------------------------------------------------------------
                                      F-13
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


2005                                                                 $ 1,410,647

2006                                                                   2,780,516

2007                                                                   1,648,032

2008                                                                   1,000,000
--------------------------------------------------------------------------------
Total                                                                $ 6,839,195
--------------------------------------------------------------------------------

Note 6. Income Taxes

Net deferred  tax asset  includes the  following  components  as of December 31,
2004:


                                                                       Total
--------------------------------------------------------------------------------
Deferred tax assets:
  Net operating loss carryforward                                  $ 20,783,000
  Valuation allowance                                               (20,783,000)
--------------------------------------------------------------------------------
                                                                   $         --
--------------------------------------------------------------------------------

The income tax  provision  differs from the amount of income tax  determined  by
applying  the  statutory  federal  income tax rate to pretax  loss for the years
ended December 31, 2004, and 2003 due to the following:

<TABLE>
<CAPTION>
                                                                     2004           2003
--------------------------------------------------------------------------------------------
<S>                                                              <C>            <C>
Computed "expected" tax benefit                                  $(3,296,699)   $(2,393,277)
Increase (decrease) in income taxes (benefits) resulting from:
  Benefit from state taxes                                          (581,301)      (422,343)
  Nondeductible expenses                                                  --        482,620
  Increase in valuation allowance                                  3,878,000      2,333,000
--------------------------------------------------------------------------------------------
Total provision for income taxes                                 $        --    $        --
--------------------------------------------------------------------------------------------
</TABLE>


iSt has net operating  losses of  approximately  $51,713,000 to carryforward for
future tax purposes that expire from 2010 to 2024. 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,  iSt has recorded a valuation allowance to offset the deferred tax
asset.

Note 7. Common Stock, Stock Options and Warrants

Common Stock

In 2004 and 2003, iSt issued shares of 116,377 and 195,388, respectively to
Board members in lieu of director fees. The shares of common stock issued were
based on the current fair market value as of the date of the meeting. Expense
related to these services totaled $33,217 and $98,000 for the years ended
December 31, 2004, and 2003, respectively.

In 2004 and 2003,  iSt issued shares of 334,905 and 4,120,814,  respectively  to
unrelated third parties for services rendered.  These services primarily related
to consulting activities.  These shares of common stock were issued based on the
fee of such consultant, converted based on current fair market value. Consulting
expense  related to these services  totaled $76,045 and $1,179,694 for the years
ended December 31, 2004, and 2003, respectively.


--------------------------------------------------------------------------------
                                      F-14
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


Stock Options

As of January 1, 2003, iSt had 7,603,575  outstanding  options.  During 2003 the
Company  granted  1,865,000  options and 323,324  options were  forfeited by the
holders.  No options  were  exercised  in 2003.  As of January 1, 2004,  iSt had
9,145,251 outstanding options. During 2004 the Company granted 5,634,250 options
and  1,197,615  options were  forfeited by the holders.  2,438,345  options were
exercised in 2004 and 3,470,500 were cancelled and reissued at a lower price. At
December 31, 2004, iSt had 11,143,541 outstanding options.

In June 2001, the shareholders of iSt approved the 2001 Omnibus Equity Incentive
Plan. The 2001 Omnibus Equity  Incentive Plan provides for the granting of stock
options and other equity  incentives for up to 1,000,000 shares of the Company's
Common Stock to the Company's officers,  directors,  consultants or advisers who
provide  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.  As of January 1st of each year,  commencing
with the year 2002,  the  aggregate  number of options that may be awarded under
the Plan will  automatically  increase by a number  equal to the lesser of 1% of
the total number of Common Shares then outstanding or 200,000.  During the years
ended 2004 and 2003,  grants for 731,750 and 715,000 shares of Common Stock have
been made,  respectively.  Options  exercised  under the Omnibus plan during the
years ended  December 31, 2004,  and 2003,  were 26,345 and none,  respectively.
Options   forfeited  for  the  same  time  periods  were  549,698  and  182,499,
respectively.  As of December  31, 2004,  147,720  shares of Common Stock remain
available  for new option  grants under this plan.  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.

In February  2003,  iSt granted  options to purchase in the aggregate of 400,000
shares of common stock at an exercise  price 85% of the daily  closing  price of
the common  stock on the date when the options  were  granted to the Senior Vice
President  Corporate  Development and General Counsel,  Chief Financial Officer,
Senior  Vice  President  of Product  and  Project  Development  and Senior  Vice
President of  Technology.  The options are to vest on a monthly basis over a two
year period of time which began  February 3, 2003.  29,167 of these options were
forfeited in 2004.  In all,  345,834 of these  options had vested as of December
31, 2004.

In August  2003,  iSt granted  options to purchase in the  aggregate  of 500,000
shares of common stock at an exercise  price 85% of the daily  closing  price of
the common  stock on the date when the options  were  granted to the Senior Vice
President of Sales.  The options are to vest on a monthly  basis over a two year
period of time  which  began  August 4,  2003.  375,000  of these  options  were
forfeited in 2004.  At December 31,  2004,  125,000 of these  options were fully
vested.

In August  2003,  iSt granted  options to purchase in the  aggregate  of 250,000
shares of common stock at an exercise  price 85% of the daily  closing  price of
the common stock on the date when the options  were granted to the  President of
Tracking Systems Corporation.  The options are to vest on a monthly basis over a
two year period of time which began  August 28, 2003.  177,083 of these  options
were  forfeited  in 2004.  The  remaining  72,917  options  were fully vested at
December 31, 2004.

In February 2004, iSt granted  options to purchase in the aggregate of 1,250,000
shares of common stock at an exercise  price 85% of the daily  closing  price of
the common stock on the date when the options  were granted to the  President of
iSt.  These options are to vest on a monthly basis over a twelve month period of
time which began  February 9, 2004.  At December  31,  2004,  1,041,667 of these
options were fully vested.

In February  2004,  iSt granted  options to purchase in the aggregate of 100,000
shares of common  stock at an exercise  price 85% of the average  daily  closing
price of the  common  stock on the date when the  options  were  granted  to the
Senior Vice President Corporate Development and General Counsel. 66,667 of these
options  forfeited in 2004.  The remaining  33,333  options were fully vested at
December 31, 2004.


--------------------------------------------------------------------------------
                                      F-15
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


In March 2004,  iSt granted  options to  purchase  in the  aggregate  of 202,500
shares of common stock at an exercise  price of 85% of the average daily closing
price of the  common  stock on the date when the  options  were  granted  to the
President  of Tracking  Systems  Corporation.  The  options are fully  vested at
December 31, 2004.

In April 2004,  iSt granted  options to  purchase  in the  aggregate  of 600,000
shares of common stock at an exercise  price 85% of the daily  closing  price of
the  common  stock on the date  when  the  options  were  granted  to the  Chief
Financial Officer,  Senior Vice President of Product and Project Development and
Senior Vice President of Technology.  The options are to vest on a monthly basis
over a two year period of time which began April 30,  2004.  In all,  200,000 of
these options had vested as of December 31, 2004.

In December 2004, iSt granted  options to purchase in the aggregate of 1,250,000
shares of common  stock at an exercise  price of $0.23 to the  President of iSt.
These options were issued as a performance bonus by the Board of Directors. They
are fully vested at December 31, 2004, and expire in five years from the date of
grant.

In December 2004, iSt granted  options to purchase in the aggregate of 1,500,000
shares  of common  stock at an  exercise  price of $0.23 to the Chief  Financial
Officer,  Senior Vice  President of Product and Project  Development  and Senior
Vice President of Technology.  These options were issued as a performance  bonus
by the Board of  Directors.  They are fully  vested at December  31,  2004,  and
expire in five years from the date of grant.

In 2003,  140,825  stock  options  that had  previously  been issued to a former
stockholder were forfeited.

In 2004,  2,412,000  stock options that had  previously  been issued to a former
employee were exercised.

Stock option  expense of $534,336  and $144,912 has been  recorded for the years
ended December 31, 2004, and 2003, respectively for options issued.

During  2004,  the Company  reduced  the  exercise  price of certain  previously
awarded stock  options.  The Company  accounts 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 are accounted for as variable from the
date of the  modification  to the date the option is  exercised,  forfeited,  or
expires unexercised.

A board  resolution was issued on December 3, 2004,  declaring that the exercise
price for  options  granted up to December 1, 2004 to  employees  and  directors
under the 2001 Omnibus Equity  Incentive Plan and options granted pursuant or in
reference to Executive  Employment  Agreements  between the  Corporation and the
President, Chief Financial Officer, Senior Vice President of Product and Project
Development and Senior Vice President of Technology be reset to the lower of the
existing exercise price or an exercise price being $0.23 per share. In addition,
during 2004,  options  previously  issued to a former  executive  were repriced.
Compensation  expense related to the repricing of stock options was $353,124 for
2004 and is included in the $534,336 of total stock option expense.

A summary of options  issued to  employees  during the years ended  December 31,
2004, and 2003, is as follows:


--------------------------------------------------------------------------------
                                      F-16
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           For the Year Ended            For the Year Ended
                                                                            December 31,2004              December 31,2003
                                                                      ----------------------------  ---------------------------
                                                                                  Weighted Average             Weighted Average
Options                                                                 Shares     Exercise Price    Shares     Exercise Price
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>              <C>          <C>             <C>
Outstanding at beginning of year                                       9,145,251       $ 0.39       7,603,575       $ 0.99
Granted                                                                5,634,250         0.24       1,865,000         0.41
Repriced                                                               3,470,500         0.23              --           --
Exercised                                                             (2,438,345)        0.16              --           --
Cancelled                                                             (3,470,500)        0.70              --           --
Forfeited                                                             (1,197,615)        0.43        (323,324)       13.99
-------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year                                            11,143,541       $ 0.27       9,145,251       $ 0.39
===============================================================================================================================
Exercisable at end of year                                            10,314,499       $ 0.27       7,710,997       $ 0.38
===============================================================================================================================
Weighted-average fair value for options granted during the year                        $ 0.24                       $ 0.31
===============================================================================================================================
</TABLE>

A further summary about options outstanding at December 31, 2004, is as follows:

<TABLE>
<CAPTION>
                                      Options Outstanding                         Options Exercisable
                          ------------------------------------------------  -----------------------------
                             Number     Weighted Average  Weighted Average    Number     Weighted Average
Range of Exercise Prices  Outstanding    Remaining Life    Exercise Price   Exercisable   Exercise Price
---------------------------------------------------------------------------------------------------------
<C>      <C>                <C>             <C>                <C>           <C>              <C>
$0.01 to 0.25               6,810,708       2 years            $0.23         5,981,666        $0.23
$0.26 to 0.50               4,196,166       2 years             0.31         4,196,166         0.31
$0.51 to 0.75                  35,000       1 year              0.60            35,000         0.60
$0.76 to 1.00                 101,667       1 year              0.93           101,667         0.93
---------------------------------------------------------------------------------------------------------
Totals                     11,143,541                                       10,314,499
---------------------------------------------------------------------------------------------------------
</TABLE>


Common Stock Warrants

iSt issued 1,785,869 and 1,886,576 warrants to stockholders and non-employees in
connection  with various  services  these  individuals  provided iSt in 2004 and
2003,  respectively.  iSt  accounts  for  the  fair  value  of the  warrants  in
accordance  with SFAS No. 123.  Compensation  expense  that has been  charged to
income for these  warrants  was  $255,508  and  $1,012,263  for the years  ended
December 31, 2004, and 2003, respectively. None of these warrants had expired as
of December 31, 2004.

In 2004, iSt issued 8,260,870  detachable  warrants in connection with obtaining
convertible  debt. As of December 31, 2004,  869,565 of these  warrants had been
exercised  and  1,072,866 of these  warrants had  expired.  Interest  expense in
regards to these  warrants  has been charged for  $1,900,000  for the year ended
December 31, 2004. Fair value of the detachable warrants was calculated by using
the Black-Sholes pricing model.

In connection with equity financing obtained,  iSt issued warrants of 10,827,566
and 1,057,000 in 2004 and 2003, respectively. None of these warrants had expired
as of December 31, 2004.

The fair  value of each  warrant  is  estimated  at the  grant  date  using  the
Black-Sholes   option-pricing   model   with  the   following   weighted-average
assumptions for warrants in 2004 and 2003: dividend rate of 0%; price volatility
of 98.76% and 94.99%;  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,  2004,  and
2003 and changes during the years ended on those dates is as follows:


--------------------------------------------------------------------------------
                                      F-17
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                           For the Year Ended            For the Year Ended
                                                                            December 31,2004              December 31,2003
                                                                      ----------------------------  ---------------------------
                                                                                  Weighted Average             Weighted Average
Warrants                                                                Shares     Exercise Price     Shares    Exercise Price
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>              <C>          <C>             <C>
Outstanding at beginning of year                                       4,209,116       $0.56        1,858,324       $0.63
Granted                                                               20,874,305        0.35        2,943,576        0.47
Exercised                                                               (869,565)       0.23         (541,872)       0.34
Forfeited                                                             (1,324,865)       0.39          (50,912)       0.24
-------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year                                            22,888,991        0.39        4,209,116        0.56
===============================================================================================================================
Exercisable at end of year                                            22,888,991       $0.39        4,209,116       $0.56
===============================================================================================================================
Weighted-average fair value of warrants granted during the year                        $0.19                        $0.34
===============================================================================================================================
</TABLE>


A further  summary  about  warrants  outstanding  at December  31,  2004,  is as
follows:


<TABLE>
<CAPTION>
                             Number Outstanding       Weighted Average    Weighted Average
Range of Exercise Prices       and Exercisable         Remaining Life      Exercise Price
------------------------------------------------------------------------------------------
<C>                              <C>                      <C>                  <C>
$0.23 to 0.25                     4,959,742               1.00 years           $0.23
$0.26 to 0.50                    15,933,871               4.00 years            0.41
$0.51 to 0.75                     1,922,878               1.25 years            0.61
$0.76 to 1.65                        72,500               1.50 years            1.56
------------------------------------------------------------------------------------------
Total                            22,888,991
------------------------------------------------------------------------------------------
</TABLE>


Note 8. Convertible Preferred Stock

The Company may issued up to 1,000,000  shares of  Preferred  Stock from time to
time in one or more  series  with such  designations,  rights,  preferences  and
limitations as the Board of Directors may determine.

Series A Convertible Preferred Stock

In 2003,  the Company  issued 605 shares of its Series A  Convertible  Preferred
Stock,  par value  $0.01 per share  (the  "Series A  Preferred").  The  Series A
Preferred  provided that the holders thereof were entitled to an annual dividend
equal to 9.5% of the  stated  value  which can be paid in cash or in  additional
shares of Series A  Preferred.  The Company paid  dividends  payable in Series A
Preferred valued at $1,130,496  (including  $218,513 for dividends payable as of
December 31, 2003) on the Series A Preferred  during the year ended December 31,
2004.  During the year ended  December  31,  2003,  the Company  paid a dividend
payable in Series A Preferred  valued at $642,808 and cash dividends of $205,392
on the Series A Preferred.  All Series A Preferred was converted into a total of
10,255,966 shares of Common Stock on December 30, 2004.

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

--------------------------------------------------------------------------------
                                      F-18
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

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 2004 or 2003. On January 11, 2005,  all Series B Preferred was converted
into a total of 500,100 shares of Common Stock.

Note 9. Restricted Cash

The  Company  has  $700,000  of  cash  held  in  escrow  received  from  certain
stockholders.  The offsetting  liability is included in accrued  expenses.  This
cash is restricted for the use of certain  stockholders  and has 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 2004, the Company  financed the  acquisition of  approximately  $1,125,000 of
monitoring   equipment   through  two   sale-leaseback   agreements  with  three
shareholders  of  the  Company.   The  Company   recorded  a  deferred  gain  on
sale-leaseback transactions and is amortizing the gain into income over the life
of the related leases.

The Company has a total of nine capital  leases which expire from August 2005 to
October 2007. 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 from 9.50% to 14.36%. In 2004, the Company refinanced five of its
nine capital  leased,  lowering the interest  rate on each to 9.5% and extending
the maturity  dates by up to 15 months.  The Company also has one  noncancelable
operating  lease,  which expires  November  2007,  and requires  monthly  rental
payments of $1,616  through April 2005,  $4,839 from April 2005 through  October
2005,  $9,879 from November  2005 through  October 2006 and $6,847 from November
2006 through  October 2007. Rent expense is recorded on the straight line basis.
Future  minimum  lease  payments,  by year and in  aggregate,  under the capital
leases and  noncancelable  operating  lease,  with initial  terms of one year or
more, are due as follows:

The depreciated cost of monitoring equipment under capital leases is as follows:


                                                   2004                 2003
--------------------------------------------------------------------------------
Equipment                                      $ 4,148,817          $ 1,945,120
Less accumulated depreciation                   (2,602,351)            (287,506)
--------------------------------------------------------------------------------
Total                                          $ 1,546,466          $ 1,657,614
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                   Capital Leases             Operating
                                                         Stockholders          Other            Lease
--------------------------------------------------------------------------------------------------------
<C>                                                      <C>               <C>               <C>
2005                                                     $   870,443       $    46,302       $    55,256
2006                                                         628,213                --           112,484
2007                                                         381,733                --            68,470
--------------------------------------------------------------------------------------------------------
Total approximate minimum lease payments                 $ 1,880,389       $    46,302       $   236,210
  Less the amount representing interest                     (204,204)           (8,195)               --
--------------------------------------------------------------------------------------------------------
Approximate present value of minimum lease payments      $ 1,676,185       $    38,107       $   236,210
========================================================================================================
</TABLE>


--------------------------------------------------------------------------------
                                      F-19
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


Rent  expense  related  to the above  operating  lease was $3,232 and $0 for the
years ended December 31, 2004, and 2003, respectively. Total rent expense on all
operating leases was $69,164 and $63,126, for the years ended December 31, 2004,
and 2003, respectively.

The recap of the activity in the deferred gain on sale-leaseback transactions is
as follows:

                                                            2004          2003
--------------------------------------------------------------------------------
Beginning Balance                                        $ 677,125    $      --
Amortization of gain on sale-leaseback transactions       (588,757)    (123,083)
Proceeds from the sale-leaseback transactions              782,015      800,208
--------------------------------------------------------------------------------
Ending Balance                                           $ 870,383    $ 677,125
--------------------------------------------------------------------------------

Note 11. Common and Preferred Shares Issued for Cash

A summary of common and preferred stock issued for cash is as follows:


<TABLE>
<CAPTION>
                                               Preferred A                  Preferred B                     Common
                                        -------------------------   --------------------------   ---------------------------
For the Year Ended December 31, 2003      Per Share       Total       Per Share        Total       Per Share        Total
----------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>           <C>            <C>           <C>             <C>
Gross Proceeds                          $     1,000   $   416,000   $     1,000    $   150,000   $0.30 - $0.35   $ 1,590,890
  Offering costs                                               --                           --                       (25,000)
----------------------------------------------------------------------------------------------------------------------------
Net proceeds                                          $   416,000                  $   150,000                   $ 1,565,890
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                               Preferred A                  Preferred B                     Common
                                        -------------------------   --------------------------   -----------------------------
For the Year Ended December 31, 2004      Per Share       Total       Per Share        Total       Per Share        Total
------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>           <C>            <C>           <C>              <C>
Gross Proceeds                          $     1,000   $        --   $     1,000    $        --   $0.127 - $0.39   $ 4,075,420
  Offering costs                                               --                           --                        (10,000)
------------------------------------------------------------------------------------------------------------------------------
Net proceeds                                          $        --                  $        --                    $ 4,065,420
------------------------------------------------------------------------------------------------------------------------------
</TABLE>


Note 12. Legal Proceedings

On December 22, 2004, a lawsuit was filed by Satellite  Tracking of People,  LLC
("STOP")  against the  Company in United  States  District  Court for the Middle
District  of  Tennessee.  STOP plans to enter into the market for  tracking  and
monitoring  individuals  using  GPS  technology  in the  United  States  and has
acquired U.S. rights to the BluTag(R) remote electronic monitoring, tracking and
surveillance  technologies.  Among other  thing,  STOP  alleges that the Company
notified  STOP's  predecessor  in interest that the  technology  underlying  the
BluTag(R) system  infringes on two U.S. patents held by the Company.  The action
filed by STOP seeks a declaratory  judgment that (i) STOP's BluTag(R) technology
does not  infringe on the  Company's  patents,  (ii) the  Company's  patents are
invalid  and/or (iii) the Company has granted STOP a license  under its asserted
patents. The Company intends to vigorously defend any lawsuit brought by STOP on
these  grounds.  In  addition,  the Company has filed a lawsuit  against STOP in
United States District Court for the District of Nebraska, alleging infringement
of the  Company's  patented  technology  by STOP and is seeking  to  consolidate
STOP's lawsuit with the Company's  lawsuit in the Nebraska court. The Company is
unable to predict the outcome of either of these lawsuits at this time.

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


--------------------------------------------------------------------------------
                                      F-20
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


Note 13. Going Concern

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.

As shown in the  accompanying  financial  statements,  the  Company  has not yet
achieved  profitable  operations and does not have adequate  working  capital to
meet its ongoing  liquidity  needs. As a result,  there are  uncertainties  that
raise  substantial  doubt that the  Company  will be able to continue as a going
concern. The financial statements do not include any adjustments relating to the
recoverability  or  classification  of recorded  asset amounts or the amounts or
classification  of recorded  liabilities  that may result  should the Company be
unable to continue as a going concern.

The  Company  implemented  a plan in 2004 to address  its  working  capital  and
liquidity  issues.  Among other  things,  the plan is designed to increase  cash
flows from operations and to strengthen the Company's  balance sheet. As part of
this plan, the Company signed a non-binding term sheet for an equity  investment
in the Company by a private  investment  company.  Closing of the transaction is
contingent  upon:  (i)  elimination  of all of the  Company's  debt  (except for
capital  leases  and  trade  payables);  (ii)  satisfactory  completion  of  due
diligence by the investor;  (iii) an opinion by an independent  analyst that the
transaction  is fair to the  existing  shareholders  of the  Company;  and  (iv)
completion and execution of a definitive agreement.  Subsequent to year end, the
investor  extended a $1 million bridge loan to iSECUREtrac which is to be repaid
from  the  proceeds  of  the  transaction.   If  the  proposed   transaction  is
consummated,  the Company  believes it will have  sufficient  working capital to
meet its liquidity needs for the foreseeable future.  There is no assurance that
the proposed  transaction  will close and, if it does not, the Company will need
to secure  alternative  sources of  financing  to meet its  immediate  liquidity
needs.


                                      F-21