UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 333-124962

SECURUS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Delaware

20-0673095

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

14651 Dallas Parkway, Suite 600

Dallas, Texas 75254-8815

(972) 277-0300

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

11% Second-priority Senior Secured Notes due 2011

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

No established published trading market exists for either the common stock, par value $0.001 per share, of Securus Technologies, Inc. or the Class B common stock, par value $0.001 per share, of Securus Technologies, Inc.

Shares outstanding of each of the registrant’s classes of common stock:

Class	Outstanding at December 31, 2008
Common Stock	602	shares
Class B Common Stock	160,435	shares

Documents Incorporated By Reference

(i) Certificate of Amendment to Securus’ Articles of Incorporation

(ii) First Amendment to 2004 Restricted Stock Plan

PART I

ITEM 1. BUSINESS

ITEM 1A. RISK FACTORS

ITEM 1B. UNRESOLVED STAFF COMMENTS

ITEM 2. PROPERTIES

ITEM 3. LEGAL PROCEEDINGS

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

PART III

ITEM 10. MANAGEMENT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

PART I

ITEM 1. BUSINESS

Overview

We are one of the largest independent providers of inmate telecommunications services to correctional facilities operated by city, county, state and federal authorities and other types of confinement facilities, such as juvenile detention centers and private jails in the United States and Canada. With 62 patents and some 75 patent applications filed or in process, we believe we are the leading technology innovator in the correctional industry. As of December 31, 2008, we provided service to approximately 2,600 correctional facilities in the United States and Canada, and processed over 11 million calls per month.

Our core business consists of installing, operating, servicing and maintaining sophisticated call processing systems and communications systems in correctional facilities and providing related services. We enter into multi-year agreements (generally three to five years) directly with the correctional facilities in which we serve as the exclusive provider of telecommunications services to inmates. In exchange for the exclusive service rights, we typically pay a negotiated commission to the correctional facility generally based upon revenues generated by actual inmate telephone use. Additionally, on larger contracts we may partner with other telecommunications companies, for which we have provided our equipment and back office support including validation and billing and collections services, and charged a fee for such services. Based on the particular needs of the corrections industry and the requirements of the individual correctional facility, we also sell platforms and specialized equipment and services, such as law enforcement management systems, call activity reporting and call blocking.

We sell information management systems that work in conjunction with our communications systems and allow facilities managers and law enforcement personnel to analyze and manage data to reduce costs, prevent and solve crimes and facilitate inmate rehabilitation through a single user interface. We also offer investigative tools and bad debt risk management services based on the particular needs of the corrections industry and the requirements of the individual correctional facility.

In addition, we sell offender management systems and related systems and services. We believe our offender management software represents the leading enterprise solution for the corrections industry. Our offender management software is operating in more than 500 correctional facilities and probation offices maintaining records for over 300,000 offenders in the United States, Canada, the United Kingdom and Australia.

The inmate telecommunications industry requires highly specialized systems and related services in order to address the unique needs of the corrections industry. Security and public safety concerns require that correctional facilities have the ability to control inmate access to telephones and certain telephone numbers and to monitor inmate telephone activity. In addition, concerns regarding fraud and the credit quality of the parties billed for inmate telephone usage have led to the development of billing and validation systems and procedures unique to this industry.

We estimate that the inmate telecommunications market opportunity for city, county, state and federal correctional facilities in the United States is approximately $1.5 billion and the offender management technology market opportunity is approximately $700 million worldwide.

Our business is conducted primarily through our three principal subsidiaries: T-Netix, acquired in March 2004, Evercom, acquired in September 2004, and Syscon, acquired in June 2007.

For the year ended December 31, 2008, our revenues were $388.6 million, of which approximately 86% represented direct call provisioning to correctional facilities, 6% represented sales and services related

to our offender management software and 8% represented the wholesale service provision of solutions, telecommunications and billing services to our telecommunication carrier partners.

Securus was incorporated in Delaware on January 12, 2004. We maintain a web site with the address www.securustech.net. We are not including the information contained on our web site as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.

Industry Overview

The corrections industry has experienced sustained growth over the last decade as a result of societal and political trends. Anti-crime legislation, limitations on parole and spending authorizations for crime prevention and construction of additional correctional facilities have contributed to this industry growth.

The United States has one of the highest incarceration rates of any country in the world. The U.S. Department of Justice estimates that as of year end 2007, there were approximately 2.3 million inmates housed in U.S. correctional facilities, or approximately one inmate for every 133 U.S. residents. Of this total, approximately two-thirds were housed in federal and state prisons and approximately one-third were housed in city and county correctional facilities. According to U.S. Department of Justice statistics, the inmate population in federal and state prisons, which generally house inmates for longer terms than city and county facilities, increased from approximately 1.2 million at December 31, 1997 to approximately 1.5 million at December 31, 2007, representing an average annual growth rate of approximately 2.6%. The inmate population in city and county facilities, which generally house inmates for terms of one year or less, increased from approximately 0.6 million at December 31, 1997 to approximately 0.8 million at December 31, 2007, an annual growth rate of approximately 3.3%. Between December 31, 1997 and December 31, 2007, the overall incarcerated population grew an average 2.8% annually. Population growth during the 12-month period ending December 31, 2007 was higher in federal prisons (up 3.4%) than in local jails (up 1.9%) and state prisons (up 1.5%).

The corrections industry requires specialized information technology, telecommunications systems and related services. Security and public safety concerns associated with inmate telephone use require that correctional facilities have the ability to control inmate access to telephones and to certain telephone numbers and to monitor inmate telephone activity. In addition, concerns regarding fraud and the credit quality of the parties billed for inmate telephone usage have also led to the development of systems and procedures unique to this industry. Correctional facilities also have unique information technology requirements relating to managing and monitoring inmate (and probation) activity and development. These include offender management, financial applications, health and activity records as well as predictive tools for future inmate behavior. Facilities are increasingly seeking to utilize enhanced automated systems to offset the challenges of budget cuts, understaffing and prison overpopulation.

Within the inmate telecommunications industry, companies compete for the right to serve as the exclusive provider of inmate calling services within a particular correctional facility. Contracts may be awarded on a facility-by-facility basis, such as for most city or county correctional systems, which generally include small and medium-sized facilities, or system-wide, such as for most state and the federal

prison systems. Generally, contracts for federal facilities and state systems are awarded pursuant to a competitive bidding process, while contracts for city and county facilities are awarded both through competitive bidding and negotiations with a single party. Contracts generally have multi-year terms and typically contain renewal options. As part of the service contract, the service provider generally installs, operates, and maintains all inmate telecommunications equipment. In exchange for the exclusive contract rights, the service provider pays a commission to the operator of the correctional facility based upon inmate telephone use. These commissions have historically been used by the facilities to support their law enforcement activities.

Historically, offender management systems have been developed independently and internally by government agencies to provide basic information management capabilities to run the business of an incarceration facility. Often, these agencies have outsourced design, or certain aspects thereof, to third party consultants. We are one of a very small group of providers offering a comprehensive off-the-shelf

software package for offender management and related activities. The market is highly fragmented and it is our belief that most of the “home-grown” systems may not effectively manage the inmate, parole and probation populations. We believe that only a fraction of the market has been outsourced to firms that develop enterprise inmate systems like we do, and that we have the largest portion of the outsourced market. Our systems currently track an estimated 300,000 of the approximate 10 million people estimated to be incarcerated worldwide. For extremely large projects, we often partner with larger systems integrators, such as IBM and Electronic Data Systems.

Competition

In the inmate telecommunications business, we historically have competed with numerous independent providers of inmate telephone systems such as Global Tel*Link, as well as RBOCs, LECs, and IXC that include AT&T and Embarq. Unisys also has recently entered the market. Several of our competitors are larger, better capitalized, and have significantly greater financial resources than we have. We believe that the principal competitive factors in the inmate telecommunications industry are system features and functionality, system reliability and service, the ability to customize inmate call processing systems to the specific needs of the particular correctional facility, relationships with correctional facilities, rates of commissions paid to the correctional facilities, end-user rates, and the ability to identify and manage credit risks and bad debt and calling rates. We seek to compete for business on local, county, state and federal levels, and in privately managed correctional facilities.

Historically, federal and state correctional facilities, which are generally bid on a system-wide basis, have been served by RBOCs, large LECs and IXCs that are able to leverage their brand and network infrastructure to serve these large, high-volume customers through sub-contracting with independent providers for their platform and back office operations. These same service providers, however, have generally not focused to the same degree on the smaller city and county correctional systems. Because of the variance in the level of service required by these relatively small facilities, service providers must maintain a more extensive service infrastructure in order to compete within this portion of the corrections industry. Due to greater costs associated with serving smaller facilities and their lower volume of telecommunications traffic, we believe that large service providers have historically found the smaller facilities less attractive to serve. As a result, a significant portion of city and county correctional facilities are served by independent inmate telephone and public pay telephone companies. We believe that the market for city and county correctional facilities is fragmented and is occupied by a number of competing service providers.

In 2005, large industry participants Verizon and the former AT&T began to exit the inmate telecommunications sector. During 2004, Verizon and AT&T were our two largest telecommunications services customers, and AT&T was our largest solutions customer. The exit of Verizon and AT&T continued the trend of large telecommunications carriers exiting the direct inmate telecommunications business. Both Verizon and AT&T subsequently sold their inmate telecommunications business to our competitors in 2005. As a result of this trend and the Verizon and AT&T sales, our revenue associated with these product lines declined by 25.5% in 2007 and 33.9% in 2008 and is expected to continue to decline.

We believe that we are well positioned to expand our market share by offering new and enhanced products to our existing customers, and attracting new facilities with “one stop shopping” for their communications and technology needs at a lower cost than our competitors. We believe we are well positioned relative to our competitors because of our belief that our costs are lower as a result of our packet based architecture and proprietary bad debt risk management systems. These lower costs coupled with our technological capabilities are expected to enable us to make attractive bids while retaining our historical direct margins. Further, we believe our acquisition of Syscon provides greater access for our direct provisioning business to new geographic markets where Syscon has significant relationships.

In the offender management market, we compete with a small group of offender management software providers, each of whom we believe is smaller than we are. We also compete with large and small software consultant organizations who do not offer off-the-shelf prepackaged software, but who can develop systems from scratch to the client’s specifications.

Primary Sources of Revenues

The following chart summarizes the primary sources of our revenues for the year ended December 31, 2008.

	% of Total
Revenue Source		Revenues		Description
Direct Call Provisioning		86	%	Direct call provisioning services through multi-year contracts directly to local correctional facilities as well as large county jails and state departments of corrections facilities.
Wholesale Services		8	%	Wholesale Services include both solutions and billing services (validation, fraud management and billing and collection services to third parties including some of the world’s largest communication service providers) and telecommunications services (equipment, security enhanced call processing, validation and customer service and support to corrections facilities through contracts with other inmate telecommunications providers).
Offender Management Software		6	%	Software sales and development services for complete offender management, providing correctional facilities with the ability to manage and monitor inmate, parole and probation activity and development at a sophisticated level.

Direct Call Provisioning

We provide inmate telecommunications services directly as a state certificated telecommunications provider to correctional facilities. In a typical arrangement, we operate under a site-specific, exclusive contract, generally for a period of three to five years. We provide the equipment, security-enhanced call processing, validation, and customer service and support directly to the facility. We bill calls via the billed party’s LEC bill, via our own proprietary billing platform, or through prepaid products by the inmate or called party. Direct call provisioning revenues are substantially higher than that of our wholesale services because we receive the entire retail value of the collect call. In our direct call provisioning business, we are responsible for customer commissions, line charges and other operating costs, including billing and bad debt costs. Consequently, our gross profit dollars are higher but our gross margin percentages are lower as compared to our wholesale services.

Wholesale Services

Our wholesale services business consists of the solutions, telecommunications, and equipment sales business. In 2008, the Company combined the Solutions Services, Telecommunications Services, and Equipment Sales segments into the Wholesale Services segment as these were the determinants for how management makes operating decisions, assesses performance and allocates resources. These three segments demonstrate similar economic characteristics and are similar in the nature, class of customer, distribution methods, and regulatory environment for their products and services.

Our solutions business within wholesale services consists of offering inmate telecommunications products and services, including validation, bad debt management and billing services, to other telecommunications companies to support their telecommunications contracts with larger county, state and federal correctional facilities. In this business, we enter into long-term contracts with other telecommunication carriers pursuant to which we typically purchase accounts receivable generated from calls placed by inmates in correctional facilities and accept responsibility for call validation, uncollectible accounts and billing and collections costs, with no recourse to the customer. These purchased receivables are processed and validated through our risk management system prior to allowing the call to be completed and are also typically processed through our proprietary systems.

Our revenues from the solutions service equal the difference between the face value of the receivables purchased and the amount we pay the customer for the discounted accounts receivable. Because our

revenues associated with the solutions business represent only a percentage of the face value of the receivables purchased, the associated billing and collection fees and uncollectible account expense represent a much higher percentage of revenues as compared to our direct call provisioning business. In the solutions business, we do not bear any of the costs of facility commissions, equipment, line charges or other direct sales charges, but bear the risk of unbillable and uncollectible accounts receivable. In light of the industry trend of large industry telecommunications carriers exiting the business, we experienced a decline of revenues generated from the solutions services business of $12.5 million from fiscal year 2007 to 2008. We expect our solutions revenues to decline significantly in the future because the majority of our solutions revenues are generated from a customer that is also our main competitor that has been eliminating our services, and has indicated an intention to continue to do so.

In our telecommunications services business within wholesale services, we have often partnered with RBOCs, LECs and IXCs on larger contracts where the working capital requirements to win the contract were significant. For example, some of the larger state and county departments of corrections inmate telecommunications contracts often require multi-million dollar up-front payments, surety bonds and/or guaranteed commissions. In such cases, we provide at our expense some or all of our equipment, technology, security enhanced call processing, call validation and other services and/or customer service through the provider, rather than directly to the facility. Our telecommunications service customer does the billing and we either share the revenues or receive a prescribed fee from them for each call completed, but have no exposure to bad debt. We do, however, incur typical capital expenditures related to installing our equipment and technology at the corrections facility. We receive additional fees for validating the phone numbers dialed by inmates, digital recording systems, voice security and other services we provide. By partnering with some of the largest industry participants on capital intensive, larger contracts, we increase our likelihood of participating in the contract, which increases our market penetration, leverages our infrastructure and generates additional income. In light of the industry trend of large industry telecommunications carriers exiting the business, we experienced a decline of $2.6 million of revenue generated from the telecommunications services within our wholesale business from fiscal year 2007 to 2008.

In 2008, the Company announced a partnership with Embarq, to install, operate, and maintain a sophisticated network that would allow inmates in the State of Texas prison system for the first time to make secure outgoing calls to friends and family. The contract provides for installation of approximately 6,000 phones to be used on a controlled basis to make outbound calls. Installation of the phones will provide approximately 120,000 Texas inmates with phone privileges by the end of the third quarter of 2009. The contract specifies providing Secure Call Platform (SCP) providing closely monitored outbound calling on a proprietary sophisticated platform. This contract represents one of the largest contracts ever signed in the inmate telecommunications sector.

In addition to the solutions businesses and telecommunications services we also sell our products, including our inmate calling applications and facility management products, to a limited number of telecommunications service provider customers.

Offender Management Software

We develop enterprise software for the correctional facility industry. Our core product is a sophisticated and comprehensive software system, “ELITE,” utilized by correctional, probation and parole agencies for complete offender management. Our system enables these clients to address the increasing challenge of managing an ever growing number of offenders in confinement and in the community on a cost efficient basis.

Our offender management software is the centerpiece for the United Kingdom’s National Offender Management Information System for Her Majesty’s Prison Service project, with Electronic Data Systems Inc. (“EDS”), providing overall project management and certain testing and consulting services. Our offender management software operates in more than 500 correctional facilities and probation and parole offices maintaining records for over 300,000 offenders in the United States, Canada, the United Kingdom and Australia.

Our offender management revenues have four main components:

•	License fees: The product purchase cost, providing clients with the license to use the core platform;

•	Implementation fees: The revenue associated with the physical installation of the system;

•	Consulting fees: Most of this work is done prior to implementation. The primary activities include: planning, design, consultation, debugging, customization, etc.

•	Software maintenance and support: These post sale fees provide a future annuity stream as we continue to generate fees from assistance with new modules, training, version upgrades, etc.

Customers

We have direct contracts to provide inmate telecommunications services on either an exclusive basis or jointly with another provider to approximately 2,600 correctional facilities ranging in size from small municipal jails to large, state-operated facilities, as well as other types of confinement facilities, including juvenile detention centers and private jails.

Most of our direct call provisioning contracts have multi-year terms (generally three to five years) and typically contain renewal options. We often seek to negotiate extensions of our contracts before the end of their stated terms. For the year ended December 31, 2008, we retained approximately 90% of our annualized revenue up for renewal. Many of our contracts provide for automatic renewal unless terminated by written notice within a specified period of time before the end of the current term.

In the offender management software segment, our customers consist typically of large national and state or provincial incarceration agencies including Her Majesty’s Prison Service in the United Kingdom via a sub-contracting agreement with EDS, along with several states and provinces in the United States, Canada, and Australia. We believe that once a customer has selected us for offender management software and related services, it is less likely to switch systems due to the high cost of switching. As a result, we have a strong growing base of customers for our new versions, modules and ongoing maintenance. We believe that this allows us to derive sustainable revenue from new modules and versions of our software rather than from long-term contracts.

Direct Customers

We provide our direct call provisioning products and services directly to correctional facilities. For the year ended December 31, 2008, 86% of our revenues were generated from direct contracts with correctional facilities as the exclusive provider of telecommunications services to inmates within the

facility. No direct customer accounted for more than 7% of our total direct call provisioning revenues for the year ended December 31, 2008.

Wholesale Service Provider Customers

We provide our products and services to wholesale service providers, primarily Global Tel*Link, FSH Communications, AT&T, Embarq and other inmate call providers. For the year ended December 31, 2008, 8% of our total revenues were generated from contracts with wholesale service providers.

Offender Management Software Customers

We are the largest offender management software provider to EDS for the United Kingdom’s National Offender Management System for Her Majesty’s Prison Service. Syscon has offices in the United States, Canada, the United Kingdom and Australia, serving federal, state and local government agencies in all of these geographic locations. This EDS account represented 72% of our offender management revenues for the year ended December 31, 2008.

Marketing

We seek new direct contracts by participating in competitive bidding processes and by negotiating directly with the individuals or entities responsible for operating correctional facilities. We market our inmate telecommunications services through a sales staff largely made up of former law enforcement officials and others with experience in the corrections and telecommunications industries who understand the specialized needs of correctional facilities. Our marketing strategy emphasizes our specialized products and services, our proprietary technology, our knowledge, experience and reputation in the inmate telecommunications industry and our high level of service. We believe we have the largest national sales force dedicated to serving the inmate telecommunications industry. We rely on the experience and background of our sales staff to effectively communicate our capabilities to both existing and potential customers. In addition to conducting in-person sales calls to the operators of correctional facilities, we participate in trade shows and are active in local law enforcement associations.

Principal Products and Services

We believe that the specialized products and services we offer differentiate us from our competitors. Unlike many of our competitors who specialize in specific segments of the market (i.e. call management systems, jail management systems, etc.), our strategy is centered on the production and distribution of applications and services focused on the entire operation of a facility. Our applications are designed to streamline the operations of corrections facilities and empower administrators with administrative, investigative and economic capabilities. Our principal specialized applications and services include:

SCA Architecture™

Our SCA Architecture™ is comprised of a robust data repository housing multiple data marts, each holding billions of bytes of stored information gathered from multiple sources. SCA’s intelligent retrieval system retrieves all this information and processes all user requests through a cross application, cross data-mart retrieval process. The backbone of our entire system, SCA is expected to result in significantly lower operating and capital costs as its full implementation is realized. We currently operate numerous inmate calling applications that preceded our development of this architecture. We are migrating the majority of our customer installations to our new systems utilizing this architecture as current contracts expire, a process likely to take several years.

SCN Secure Connect Network™

Our SCN Secure Connect Network™ is a packet-based, digital transmission system for all communications transport. SCN allows our calling platform to provide real-time turn-on/turn-off flexibility for most system features, 24-7 offsite monitoring, immediate system upgrades and repairs from one central location.

Secure Call Platform™

Our Secure Call Platform™ call management system services correctional facilities as well as detainees and friends and family members. Utilizing SCN allows this fully integrated inmate calling applications manager to offer innovative feature applications that give facilities extensive administrative and investigative control. The system offers networking functions, robust system and application stability and redundancy, heightened security features, user auditing, and password-specific utilities.

The Securus User Interface

Access to many of our applications is accomplished through S-GATE™ user interface. This portal provides single point access to programs, applications and services.

Securus Support

We provide support through professional, dedicated customer support centers:

•	Accessible 24-7

•	Independent visibility into customers account activity and information

•	Site status is monitored continuously by support systems and proactive actions are instituted to correct issues before customers are impacted

•	Our field support services provides nationwide support by local area responsive technicians

Prepaid Calling Programs

Inmate telecommunications systems historically allowed calls to be placed as collect only, without the involvement of a live operator. Our prepaid calling systems offer a paperless, card-free prepaid calling solution for both the called parties and the inmates. The prepaid account is managed by either the called party or the inmate. Our prepaid calling products allow correctional facilities to offer inmates or their friends and families an alternative to collect calls and acts as a cash management tool to help those families budget more effectively for calls. Additionally, because prepayment virtually eliminates bad debt, fewer calls are blocked and correctional facilities recognize the financial benefits of higher call volumes.

We also continue to provide prepaid calling cards for facilities that desire a fast and simple calling solution for their inmates. These cards are sold to facilities or their commissaries who then sell directly to the inmates. The cards may be used for both domestic and international calling.

Correctional Billing Services (CBS)

We are one of the few companies in the industry to provide a nationwide customer care and billing center dedicated to the inmate’s friends and family members. We provide dedicated customer service to the called party 24 hours per day, 365 days per year. We also offer multiple payment options including prepayment of charges, remittance directly to the local phone company, credit card payments and check by phone.

Intelligent Call and Billing Management Solution (ICBS)

We develop and provide our customers with an Intelligent Call and Billing Management Solution, or ICBS system, which is a proprietary call validation and billing technology that is designed to minimize bad debt expense. Our solutions services include ICBS technology. Specifically, ICBS allows us to rapidly identify and block collect calls from being connected to potential non-paying call recipients through a continuously growing and improving database. As an enhancement to revenues, the blocked call recipient is notified that an inmate has attempted contact and, upon request, can receive inmate calls through various prepaid methods. We believe that our technology provides us with generally lower bad debt expense as a percentage of revenues, while offering the broadest, most sophisticated suite of payment method alternatives in the industry.

Additional Securus Applications

We also offer a multitude of additional applications and features that provide task-specific solutions designed to satisfy focused areas of a facility’s operations. These applications assist correctional facility investigators, administrators, and support personnel with investigative capabilities, recidivism programs, fraud prevention and detainee identifications.

“ELITE” Software

The ELITE system provides correctional facilities with the ability to manage inmates and monitor parole and probation activity and development at a very sophisticated level. The key functions of the system include management of incarcerated prisoners, management and monitoring of offenders on parole

and probation, financial applications and electronic health records. The ELITE system has 30 different modules and is a “smart” application that not only provides monitoring tools, but has predictive tools for future inmate behavior.

We are continually developing new suites of applications that are designed to provide a wide array of solutions-based, technologically advanced, fully integrated, industry best-practices applications and services for the criminal justice community. These applications and services are focused on providing solutions targeted at the identified needs of the criminal justice community.

Systems and Equipment

We currently utilize automated operator calling systems that consist of third-party and internally developed software applications installed on specialized equipment. We are transitioning the majority of our customer installations from these legacy systems to our Secure Connect Network as existing contracts expire. Our specialized systems limit inmates to collect calls or prepaid calls, validate and verify the payment history of each number dialed for billing purposes, and confirm that the destination number has not been blocked. If the number is valid and has not been blocked, the system automatically requests the inmate’s name, records the inmate’s response, and waits for the called party to answer. When the call is answered the system informs the called party that there is a collect call, plays back the name of the inmate in the inmate’s voice, and instructs the called party to accept or reject the call. The system completes calls that have been accepted by the called party.

The system automatically records the number called and the length of the call and transmits the data to our centralized billing center for bill processing and input into our call activity database. Our database of telephone numbers and call activity allows us to provide extensive call activity reports to correctional facilities and law enforcement authorities, in addition to identifying numbers appropriate for blocking, thus helping to reduce the number of uncollectible calls. These include reports that can further assist law enforcement authorities in connection with ongoing investigations. We believe this database offers competitive advantages, particularly within states in which we have achieved substantial market penetration.

Maintenance, Service and Support Infrastructure

We provide and install telephone systems in correctional facilities at no cost to the facility and generally perform all maintenance activities. We maintain a geographically dispersed staff of trained field service technicians and independent contractors, which allows us to respond quickly to service interruptions and perform on-site repairs and maintenance. In addition, we have the ability to make some repairs remotely through electronic communication with the installed equipment without the need of an on-site service call. We believe that system reliability and service quality are particularly important in the inmate telecommunications industry because of the potential for disruptions among inmates if telephone service remains unavailable for extended periods.

Billing and Collection

We use LEC direct billing agreements and third-party clearinghouse billing agreements to bill and collect phone charges. Under these agreements, the LEC includes collect call charges for our services on the local telephone bill sent to the recipient of the inmate collect call. We generally receive payment from the LEC for such calls 60 days after the end of the month in which the call is submitted to the LEC for billing. The payment that we receive is net of a service fee and net of write-offs of uncollectible accounts for which we previously received payment, or net of a reserve for future uncollectible accounts.

Unlike many smaller independent service providers with lower telecommunications traffic, we have been able to enter into direct billing agreements with LECs in most of our markets because of our high market penetration. We believe that direct billing agreements with LECs decrease bad debt expense and billing expenses by eliminating an additional third-party billing entity, while expediting and increasing collectibility. In addition, direct billing agreements help us resolve disputes with billed parties by

facilitating direct communication between us and the called party, thereby reducing the number of charge-offs.

In the absence of a LEC direct billing arrangement, we bill and collect our collect calls through third-party billing and collection clearinghouses that have billing and collection agreements with LECs, or through our proprietary direct billing. When we employ third-party billing and collection clearinghouses, the account proceeds are forwarded by the various LECs to the clearinghouses, which then forward the proceeds to us, less a processing fee. With both LEC direct and third-party billing and collection agreements, we reconcile our call records with collections and write-offs on a regular basis. The entire billing and collection cycle (including reconciliation), takes on average, between six to nine months after we submit the call record to the LEC or to third-party billing and collection clearinghouses.

Our specialized billing and bad debt management system integrates our LEC direct billing arrangements with our call blocking, validation and customer inquiry procedures.

Research and Product Development

We believe that the timely development of new products and enhancements to existing products is essential to maintain our competitive position. We conduct ongoing research and development for the development of new products and enhancement of existing products that are complementary to the existing product line.

Our current research and development efforts are focused on further improvements to our bad debt management systems, enhanced three-way call detection, advanced call validation systems, and general improvements to our Secure Connect Network and other call processing platforms in order to improve operating efficiency and reduce capital costs of new installations, and to continue to deliver state- of-the-art products and services to our correctional facilities and law enforcement customers. We enhanced our bad debt management by reducing the processing time of call records through our back office systems. In addition, we are developing products and services that will provide law enforcement officials with greater access to communications capabilities, inmate information and intelligence on inmate calls within a correctional facility as well as on inmate calls between correctional facilities and other law enforcement agencies.

Patents and Other Proprietary Rights

We rely on a combination of patents, copyrights and trade secrets to establish and protect our intellectual property rights. We have been issued 62 patents. We consider any patents issued or licensed to us to be a significant factor in enabling us to more effectively compete in the inmate calling industry and we vigorously defend our patents from infringement by other inmate telecommunications providers.

We believe that our intellectual property portfolio provides our customers leading edge technology that is recognized as technologically superior within the inmate telecommunications industry. We believe that we currently hold the broadest intellectual property portfolio in the industry, with 62 issued patents and some 75 patent applications filed and/or in process. We believe that the duration of applicable patents is adequate relative to our product and service offerings.

Although we have filed many patent applications and hold several patents relating to our internally developed call processing and other technology, such technology and intellectual property rights could infringe on other parties’ intellectual property rights and could be contested or challenged. Should our call processor or any material feature of our call processor or other proprietary technology be determined to violate applicable patents, we may be required to cease using these features or to obtain appropriate

licenses for the use of that technology and could be subject to material damages if our infringement were determined to be lengthy or willful.

Regulation

The inmate telecommunications industry is subject to varying degrees of federal, state, and local regulation. Regulatory actions have affected, and are likely to continue to affect, our correctional facility customers, our telecommunications service provider customers, our competitors and us.

The inmate telecommunications market is regulated at the federal level by the FCC and at the state level by public utilities commissions or equivalent agencies (“PUCs”) of the various states. In addition, from time to time, Congress or the various state legislatures may enact legislation that affects the telecommunications industry generally and the inmate telecommunications industry specifically. Court decisions interpreting applicable laws and regulations may also have a significant effect on the inmate telecommunications industry. Changes in existing laws and regulations, as well as the adoption of new laws and regulations applicable to our activities or other telecommunications businesses, could have a material adverse effect on us. See “Risk Factors — Regulatory Risks.”

Federal Regulation

Prior to 1996, the federal government’s role in the regulation of the inmate telecommunications industry was relatively limited. The enactment of the Telecommunications Act of 1996 (the “Telecom Act”), however, marked a significant change in scope of federal regulation of the inmate telecommunications service. Generally, the Telecom Act (i) opened local exchange service to competition and preempted states from imposing barriers preventing such competition, (ii) imposed new unbundling and interconnection requirements on incumbent local exchange carrier networks, (iii) removed prohibitions on inter-LATA services and manufacturing when certain competitive conditions are met, (iv) transferred any remaining requirements of the consent decree governing the 1984 Bell System divestiture (including its nondiscrimination provisions) to the FCC’s jurisdiction, (v) imposed requirements to conduct certain competitive activities only through structurally separate affiliates, and (vi) eliminated many of the remaining cable and telephone company cross-ownership restrictions.

This legislation and related rulings significantly changed the competitive landscape of the telecommunications industry as a whole. For the inmate telecommunications industry, the Telecom Act added Section 276 to the principal U.S. federal communications statute, the Communications Act of 1934. Section 276 directed the FCC to implement rules to overhaul the regulation of the provisioning of pay phone service, which Congress defined to include the provisioning of inmate telecommunications service in correctional institutions.

Before the adoption of the Telecom Act, the regulatory landscape allowed the LECs to subsidize their inmate telecommunications operations from regulated revenues. This allowed the LECs to offer commissions to correctional facilities that were often significantly higher than those that independent inmate telecommunications service providers can offer. The Telecom Act directed the FCC to adopt regulations to end the subsidization. Congress also directed the FCC to ensure that the RBOCs could not discriminate in favor of their own operations to the competitive detriment of independent inmate telecommunications service providers.

State Regulation

In many states, inmate telecommunications service providers must obtain prior authorization from, or register with, the PUC and file tariffs or price lists of their rates. The most significant state involvement in the economic regulation of inmate telecommunications service is the limit on the maximum rates that can be charged for intrastate collect calls set by many states, referred to as “rate caps.” Since collect calls are the only kind of calls that can be made by inmates at many facilities, such state-imposed rate caps can have a significant effect on our business.

In many states, the rate caps on inmate collect calls are tied to the rates charged by the LEC or “dominant” long distance carrier and subject to state regulatory approval. Thus, where the LEC or dominant long distance carrier chooses not to raise their rates, independent inmate telecommunications service providers are precluded from raising theirs. Prior to the passage of the Telecom Act, the LECs and dominant long distance carriers had less incentive to raise their rates than independent inmate

telecommunications service providers because they were able to subsidize their inmate telecommunications service operations and discriminate in their favor, as described above. See “Federal Regulation.”

In its rulemaking in implementing the Telecom Act, the FCC declined to address these state rate caps. The FCC ruled that inmate telecommunications providers must first seek relief from the state rate caps at the state level. The outcome of any such proceedings at the state level, if undertaken, is uncertain. Further, despite reserving the right to do so, it is uncertain whether the FCC would intervene or if so, how, in the event a state failed to provide relief.

In addition to imposing rate caps, the states may regulate various other aspects of the inmate telecommunications industry. While the degree of regulatory oversight varies significantly from state to state, state regulations generally establish minimum technical and operating standards to ensure that public interest considerations are met. Among other things, most states have established rules that govern the service provider in the form of postings or verbal announcements, and requirements for rate quotes upon request.

The foregoing discussion does not describe all present and proposed federal, state and local regulations, legislation, and related judicial or administrative proceedings relating to the telecommunications industry, including inmate telecommunications services, and thereby affecting our business. The effect of increased competition on our operations will be influenced by the future actions of regulators and legislators, who are increasingly advocating competition. While we would attempt to modify our customer relationships and our service offerings to meet the challenges resulting from changes in the telecommunications competitive environment, there is no assurance we would be able to do so.

Employees

As of December 31, 2008, we employed 654 full-time equivalent employees, of which 393 are salaried and 261 are hourly employees. None of our employees are represented by a labor union, and we have not experienced any material work stoppages to date. We believe that our management currently has a good relationship with our employees.

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K and, in particular, the description of our Business set forth in Item 1 and our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding:

•	projected future sales growth;

•	expected future revenues, operations, expenditures and cash needs;

•	estimates of the potential for our products and services, including the anticipated drivers for future growth;

•	sales and marketing plans; and

•	assessment of competitors and potential competitors.

In addition, any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements. You can identify these forward-looking statement by use of the words “thinks,” “believes,” “expects,” “anticipates,” “plans,” “may,” “will,” “would,” “intends,” “estimates” and other similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve the plans, intentions or expectations

disclosed in the forward looking statements made. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, without limitation, those set forth below under the heading “Risk Factors.” We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below, together with all of the other information contained in this Form 10-K, before making an investment decision. The risks described below are not the only ones facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our financial condition, results of operations or cash flow. Any of the following risks could materially and adversely affect our financial condition or results of operations.

Risks Related to our Senior Notes

We have a substantial amount of debt outstanding and will have significant interest payments.

We have a significant amount of debt outstanding. As of December 31, 2008, we had $288.3 million of long-term debt outstanding (net of $2.4 million of OID for our 11% Second-priority Senior Secured Notes due 2011 and $2.3 million of fair value attributable to warrants) and stockholders’ deficit of $128.8 million.

Our substantial debt could have significant consequences. For example, it could:

•	require us to dedicate a substantial portion of our cash flow from operations to make payments on our debt, thereby reducing funds available for operations, future business opportunities and other purposes;

•	limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•	make it more difficult for us to satisfy our obligations with respect to our debt obligations;

•	limit our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes;

•	increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates;

•	place us at a competitive disadvantage compared to our competitors that have less debt; and

•	prevent us from raising the funds necessary to repurchase notes tendered to us if there is a change of control, which would constitute a default under the indenture governing the notes and our revolving credit facility.

We cannot assure you that we will generate sufficient cash flow to service and repay our debt and have sufficient funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs or compete successfully in our markets. In September of 2008, we entered into a new revolving credit facility to refinance the existing revolving credit facility. The new revolving credit facility provides us with a $10 million letter of credit facility and a revolving facility of up to the lesser of $30 million and 125% of consolidated EBITDA (as defined therein). If we cannot meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing our debt, which would allow the lenders under our revolving credit facility to declare all borrowings outstanding to be due and payable, which would in turn trigger an event of default under the indenture and the agreements governing our senior subordinated debt. In addition, our lenders could compel us to apply all of our available cash to repay our borrowings. If the amounts outstanding under our revolving credit facility or the

notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full the money owed to the lenders or to our other debt holders. In addition, we may need to refinance our debt, obtain additional financing or sell assets, which we may not be able to do on commercially reasonable terms or at all. Any failure to do so on commercially reasonable terms could have a material adverse effect on our business, operations and financial condition.

We may be able to incur more debt, including secured debt, and some or all of this debt may effectively rank senior to the notes and the guarantees.

Subject to the restrictions in our revolving credit facility, the indenture governing the notes and the senior subordinated debt financing agreements, we may be able to incur additional debt, including secured debt that would effectively rank senior to the notes. As of December 31, 2008, we would have been able to incur approximately $13.5 million of additional secured debt under our revolving credit facility. Although the terms of our revolving credit facility, the indenture and the senior subordinated debt financing agreements contain restrictions on our ability to incur additional debt, these restrictions are subject to a number of important exceptions. If we incur additional debt, the risks associated with our substantial leverage, including our ability to service our debt, would increase.

There may not be sufficient collateral to pay all or any of the notes.

Indebtedness under our revolving credit facility (referred to herein as the “First-Priority Lien Obligations”) is secured by a first-priority lien on substantially all of our and our subsidiary guarantors’ tangible and intangible assets, except for certain excluded collateral (such as hedging agreements and any real estate interests). The notes are secured by a second-priority lien on the assets that secure the First-Priority Lien Obligations, other than our current assets. In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us or any future domestic subsidiary, the assets that are pledged as shared collateral securing the First-Priority Lien Obligations and the notes must be used first to pay the First-Priority Lien Obligations, as well as any other obligation secured by a priority lien on the collateral, in full before making any payments on the notes.

At December 31, 2008, $16.5 million of senior indebtedness (excluding the notes and guarantees) was outstanding, all of which constituted First-Priority Lien Obligations. As of the same date, we could have borrowed approximately $13.5 million additional First-Priority Lien Obligations under our revolving credit facility.

Certain of our assets, such as our accounts receivable and inventory and any proceeds thereof, are not part of the collateral securing the notes, but do secure the First-Priority Lien Obligations. With respect to those assets that are not part of the collateral securing the notes but that secure other obligations, the notes will be effectively junior to these obligations to the extent of the value of such assets. There is no requirement that the lenders of the First-Priority Lien Obligations first look to these excluded assets before foreclosing, selling or otherwise acting upon the collateral shared with the notes.

The value of the collateral for our indebtedness at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral. By their nature, some or all of the pledged assets may be illiquid and may have no readily ascertainable market value. The value of the assets pledged as collateral for the notes could be impaired in the future as a result of changing economic conditions, our failure to implement our business strategy, competition and other future trends. In the event of a foreclosure, liquidation, bankruptcy or similar proceeding, no assurance can be given that the proceeds from any sale or liquidation of the collateral will be sufficient to pay our obligations under the notes, in full or at all, after first satisfying our obligations in full under the First-Priority Lien Obligations and any other obligations secured by a priority lien on the collateral.

Accordingly, there may not be sufficient collateral to pay all or any of the amounts due on the notes. Any claim for the difference between the amount, if any, realized by holders of the notes from the sale of the collateral securing the notes and the obligations under the notes will rank equally in right of payment

with all of our other unsecured unsubordinated indebtedness and other obligations, including trade payables.

Holders of notes do not control decisions regarding collateral.

The holders of the First-Priority Lien Obligations control substantially all matters related to the collateral securing the First-Priority Lien Obligations and the notes. The holders of the First-Priority Lien Obligations may cause their administrative agents to dispose of, release or foreclose on, or take other actions with respect to the shared collateral with which holders of the notes may disagree or that may be contrary to the interests of holders of the notes. The security documents generally provide that, so long as the First-Priority Lien Obligations are in effect, the holders of the First-Priority Lien Obligations may change, waive, modify or vary the security documents without the consent of the holders of the notes, provided that any such change, waiver or modification does not disproportionately affect the rights of the holders of the notes relative to the other secured creditors. Furthermore, as long as no event of default under the indenture governing the notes has occurred, the security documents generally allow us and our subsidiaries to remain in possession of, retain exclusive control over, to freely operate, and to collect, invest and dispose of any income from, the collateral securing the notes.

The capital stock securing the notes will automatically be released from the second-priority lien and no longer be deemed to be collateral to the extent the pledge of such capital stock would require the filing of separate financial statements for any of our subsidiaries with the SEC.

The indenture governing the notes and the security documents provide that, to the extent that separate financial statements of any of our subsidiaries would be required by the rules of the SEC (or any other governmental agency) due to the fact that such subsidiary’s capital stock or other securities secure the notes, then such capital stock or other securities will automatically be deemed not to be part of the collateral securing the notes to the extent necessary to not be subject to such requirement. As a result, holders of the notes could lose a portion of their security interest in the capital stock or other securities while any such rule is in effect. The provisions described above would have the effect of limiting the amount of capital stock of T-Netix, Evercom and Syscon that constitutes collateral to, in each case, 19.9% of the outstanding capital stock.

The indenture and revolving credit facility contain covenants that can limit the discretion of our management in operating our business and could prevent us from capitalizing on business opportunities and taking other corporate actions.

The indenture, our revolving credit facility and the senior subordinated debt financing agreements impose significant operating and financial restrictions on us. These restrictions will limit or restrict, among other things, our and most of our subsidiaries’ ability to:

•	incur additional debt and issue certain types of preferred stock;

•	make restricted payments, including paying dividends on, redeeming, repurchasing or retiring our capital stock;

•	make investments and prepay or redeem debt;

•	enter into agreements restricting our subsidiaries’ ability to pay dividends, make loans or transfer assets to us;

•	create liens;

•	sell or otherwise dispose of assets, including capital stock of subsidiaries;

•	engage in transactions with affiliates;

•	engage in sale and leaseback transactions;

•	make capital expenditures;

•	engage in business other than telecommunications businesses; and

•	consolidate or merge.

In addition, the indenture governing the notes, our revolving credit facility and our senior subordinated debt financing agreements require, and any future credit facilities may require, us to comply with specified financial covenants, including, in each case, interest coverage ratios and, in the case of our revolving credit facility, minimum EBITDA levels and capital expenditure limits. Our ability to comply with these covenants may be affected by events beyond our control. Furthermore, the indenture governing the notes requires us to use a significant portion of our cash generated from operations to make an offer to purchase notes on a pro rata basis. The restrictions contained in the indenture, our revolving credit facility and the senior subordinated debt financing agreements could:

•	limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or business plans; and

•	adversely affect our ability to finance our operations, enter into acquisitions or engage in other business activities that would be in our interest.

A breach of any of the covenants contained in our revolving credit facility, debt agreements or any other future credit facilities, or our inability to comply with the financial ratios could result in an event of default, which would allow the lenders to declare all borrowings outstanding to be due and payable, which would in turn trigger an event of default under the indenture. In addition, our lenders could compel us to apply all of our available cash to repay our borrowings. If the amounts outstanding under our revolving credit facility or the notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full the money owed to the lenders or to our other debt holders. As of December 31, 2008, we were in compliance with all debt covenants.

We are a holding company and we may not have access to sufficient cash to make payments on the notes. In addition, the notes are effectively subordinated to the liabilities of our subsidiaries.

Securus Technologies, Inc., the issuer of the notes, is a holding company with no direct operations. Its principal assets are the equity interests it holds, directly and indirectly, in its subsidiaries. Since all of our operations are conducted through our subsidiaries, our ability to service our indebtedness, including the notes, will be dependent upon the earnings of our subsidiaries and the distribution of those earnings, or upon loans or other payments of funds, by our subsidiaries to us. Our subsidiaries are legally distinct from us and have no obligation to pay amounts due on our debt or to make funds available to us for such payment. The payment of dividends and the making of loans and advances to us by our subsidiaries may be subject to various restrictions, including restrictions under our revolving credit facility more fully described below. In addition, the ability of our subsidiaries to make such payments or advances to us may be limited by the laws of the relevant jurisdictions in which our subsidiaries are organized or located, including, in some instances, by requirements imposed by regulatory bodies that oversee the telecommunications industry in such jurisdictions. In certain circumstances, the prior or subsequent approval of such payments or advances by our subsidiaries to us is required from such regulatory bodies or other governmental entities. The notes, therefore, without giving effect to any guarantees of the notes, will be effectively subordinated to creditors (including trade creditors) of our subsidiaries. Although the indenture contains limitations on the amount of additional indebtedness that we and our restricted subsidiaries may incur, the amounts of such indebtedness could be substantial and such indebtedness may be First-Priority Lien Obligations. In addition, each of our subsidiaries has other liabilities, including contingent liabilities (including the guarantee obligations under our revolving credit facility and the senior subordinated debt financing) that may be significant.

In addition, our revolving credit facility will restrict all payments from our subsidiaries to us during the continuance of a payment default and will also restrict payments to us for a period of up to 180 days during the continuance of a non-payment default.

Our revolving credit facility is, and future credit facilities may be, guaranteed by our domestic restricted subsidiaries and certain foreign subsidiaries. Although the indenture contains limitations on the amount of additional indebtedness that we and our restricted subsidiaries may incur, the amounts of such indebtedness could be substantial and such indebtedness may be secured. As of December 31, 2008, we would have been able to incur approximately $13.5 million of additional secured debt constituting First-Priority Lien Obligations under our revolving credit facility.

U.S. bankruptcy or fraudulent conveyance law may interfere with the payment of the notes and the guarantees and the enforcement of the security interests.

Our incurrence of debt, such as the notes and the guarantees, as well as the security interests related to the notes and the guarantees, may be subject to review under U.S. federal bankruptcy law or relevant state fraudulent conveyance laws if a bankruptcy proceeding or lawsuit is commenced by or on behalf of our unpaid creditors. Under these laws, if in such a proceeding or lawsuit a court were to find that, at the time we incurred debt (including debt represented by the notes and the guarantees),

•	we incurred such debt with the intent of hindering, delaying or defrauding current or future creditors; or

•	we received less than reasonably equivalent value or fair consideration for incurring such debt and we:

•	were insolvent or were rendered insolvent by reason of any of the transactions;

•	were engaged, or about to engage, in a business or transaction for which our remaining assets constituted unreasonably small capital to carry on our business;

•	intended to incur, or believed that we would incur, debts beyond our ability to pay as these debts matured (as all of the foregoing terms are defined in or interpreted under the relevant fraudulent transfer or conveyance statutes); or

•	were defendants in an action for money damages or had a judgment for money damages entered against us (if, in either case, after final judgment such judgment is unsatisfied);

then that court could avoid or subordinate the amounts owing under the notes to our presently existing and future debt, void or decline to enforce the security interest and take other actions detrimental to you.

The measure of insolvency for purposes of the foregoing considerations will vary depending upon the law of the jurisdiction that is being applied in any proceeding. Generally, a company would be considered insolvent if, at the time it incurred the debt:

•	the sum of its debts (including contingent liabilities) was greater than its assets, at fair valuation;

•	the present fair saleable value of its assets was less than the amount required to pay the probable liability on its total existing debts and liabilities (including contingent liabilities) as they became absolute and mature; or

•	it could not pay its debts as they became due.

We cannot predict what standards a court would use to determine whether we or our subsidiary guarantors were solvent at the relevant time, or whether the notes, the guarantees or the security interests would be avoided or further subordinated on another of the grounds set forth above.

We may be unable to repurchase the notes upon a change of control as required by the indenture.

Upon the occurrence of a change of control, we will be required to make an offer to repurchase all outstanding notes. In addition, our revolving credit facility contains prohibitions of certain events that would constitute a change of control or require such senior indebtedness to be repurchased or repaid upon a change of control. Moreover, the exercise by the holders of their right to require us to repurchase the notes could cause a default under such agreements, even if the change of control itself does not, due to the financial effect of such repurchase on us. Under any of these circumstances, we cannot assure you that we will have sufficient funds available to repay all of our senior debt and any other debt that would become payable upon a change of control and to repurchase the notes. Our failure to purchase the notes would be a default under the indenture, which would in turn trigger a default under our revolving credit facility. We would need to refinance our revolving credit facility or cure the defaults thereunder before making the change of control offer.

The definition of change of control includes a phrase relating to the sale or other transfer of “all or substantially all” of our assets. There is no precise definition of the phrase under applicable law. Accordingly, in certain circumstances there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of “all or substantially all” of our assets, and therefore it may be unclear as to whether a change of control has occurred and whether the holders of the notes have the right to require us to repurchase such notes.

Rights of holders of notes in the collateral may be adversely affected by bankruptcy proceedings.

The right of the administrative agent of the First Lien Priority Obligations to repossess and dispose of the collateral securing the notes upon acceleration is likely to be significantly impaired by federal bankruptcy law if bankruptcy proceedings are commenced by or against us or any of our subsidiaries prior to or possibly even after the administrative agent has repossessed and disposed of the collateral. Under the U.S. Bankruptcy Code, a secured creditor, such as the administrative agent, is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from a debtor, without bankruptcy court approval. Moreover, bankruptcy law permits the debtor to continue to retain and to use collateral, and the proceeds, products, rents or profits of the collateral, even though the debtor is in

default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor’s interest in the collateral and may include cash payments or the granting of additional security, if and at such time as the court in its discretion determines, for any diminution in the value of the collateral as a result of the stay of repossession or disposition or any use of the collateral by the debtor during the pendency of the bankruptcy case. In view of the broad discretionary powers of a bankruptcy court, it is impossible to predict how long payments under the notes could be delayed following commencement of a bankruptcy case, whether or when the administrative agent would repossess or dispose of the collateral, or whether or to what extent holders of the notes would be compensated for any delay in payment or loss of value of the collateral through the requirements of “adequate protection.” Furthermore, in the event the bankruptcy court determines that the value of the collateral is not sufficient to repay all amounts due on the notes, the holders of the notes would have “undersecured claims” as to the difference. Federal bankruptcy laws do not permit the payment or accrual of interest, costs and attorneys’ fees for “undersecured claims” during the debtor’s bankruptcy case.

Risk Factors Relating to Our Business

Changes in economic conditions, particularly a further economic slowdown, could continue to adversely impact our financial condition and results of operations.

Our business is directly affected by market conditions, trends in our industry and finance, legislative and regulatory changes, and changes in the economy, all of which are beyond our control. Further deterioration in economic conditions could result in the following consequences, among others, any of which could have an adverse impact on our business operations, results of operations and financial condition:

•			Demand for our products and services may decline, resulting in lower billed calls and minutes, revenues and operating income;

•			Our bad debt may rise and we may be required to further limit credit to billed parties, which would reduce our revenues;

•			Our existing and prospective software customers may delay or defer spending on software and services;

•			Tightening of credit markets can impact borrowing availability.

These risks are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition, or results of operations.

Our financial results are dependent on the success of our billing and bad debt risk management systems.

The inmate telecommunications business is subject to significant risk of bad debt or uncollectible accounts receivable. In 2008, our direct provisioning bad debt expense was approximately 8% of our direct provisioning revenues. Many calls are collect calls paid by the called or billed party. Historically, such billed party’s ability to pay for collect calls has been tied to the economic conditions, and unemployment rates in particular, that exist in their community. Historically, our bad debt has been highly correlated to unemployment rates; however, we have developed statistical methods to identify high risk customers who we require to prepay. In 2007, approximately 35% of our direct provision revenues were prepaid, while 46% of our direct provisioning revenues were prepaid in 2008. With the current economic recession and increasing unemployment rates, it is possible that bad debt results could rapidly deteriorate. Because our bad debt visibility is delayed by six to nine months for calls that are placed on LEC bills, risks exists that we will incur future write-offs causing bad debt to increase.

We bill for our direct and wholesale services through LECs and billing aggregators, which aggregate our charges with other service providers and bill through the applicable LEC. Our agreements with the LECs and the billing aggregators specify that the LECs get paid their portion of a bill prior to ours and we share the remaining risk of nonpayment with other non-LEC service providers. In certain circumstances, LECs are unable to trace the collect call to a proper billed number and the call is unbillable. We are also subject to the risks that the LEC decides not to charge for a call on the basis of billing or service error and that we may be unable to retain our current billing collection agreements with LECs, many of which are terminable at will.

There is a significant lag time (averaging six to nine months) between the time a call is made and the time we learn that the billed party has failed to pay for a call when we bill through LECs and billing aggregators. During this period, we may continue to extend credit to the billed party prior to terminating service and thus increase our exposure to bad debt. Additionally, because of the significant lag time, deteriorating trends in collection rates may not be immediately visible and bad debt may therefore increase prior to our ability to adjust our algorithms and reduce credit limits. This risk is heightened in light of the recent economic downturn. We seek to minimize our bad debt expense by using multi-variable algorithms to adjust our credit policies and billing. In 2007, we enhanced our bad debt management systems by reducing the processing time of call records through our back office systems. We cannot assure you that these initiatives will be successful or that our algorithms are accurate or will remain accurate as circumstances change. Moreover, to the extent we overcompensate for bad debt exposure by limiting credit to billed parties, our revenues and profitability may decline as we allow fewer calls to be made. To the extent our billing and bad debt risk management systems are less than effective or we are otherwise adversely affected by the foregoing factors, our results of operations could be negatively impacted.

We expect significant declines in our wholesale revenues, which if not replaced by direct call provisioning or other revenues, could have an adverse impact on our financial condition.

Our wholesale revenues, which accounted for approximately 8% of our revenues in 2008, are expected to continue to decline over the next few years. Our wholesale customers have historically been comprised of large telecommunications carriers, which began exiting the inmate telecommunications business in early 2005. Since their exit, the larger county and state facilities that they served are increasingly being serviced by independent inmate communications companies. As a result, our wholesale revenues decreased by approximately $15.3 million, or 33.9%, from 2007 to 2008. Global Tel*Link comprised 59% of our wholesale revenue in 2008. Global’s master agreement with us expired on March 1, 2008 and we will stop providing services to them as their underlying contracts at the individual facilities expire.

We are dependent on third party vendors for our information, billing and offender management systems.

Sophisticated information and billing systems are vital to our ability to monitor and control costs, bill customers, process customer orders, provide customer service and achieve operating efficiencies. We currently rely on internal systems and third party vendors to provide all of our information and processing systems. Some of our billing, customer service and management information systems have been developed by third parties for us and may not perform as anticipated. In addition, our plans for developing and implementing our information and billing systems rely substantially on the delivery of products and services by third party vendors.

We also license critical third-party software for our offender management products that we incorporate into our own software products and are likely to incorporate additional third-party software into our new product offerings. The operation of our products would be impaired if errors occur in the third-party software that we utilize. It may be more difficult for us to correct any defects in third-party software because the software is not within our control. Accordingly, our business could be adversely affected in the event of any errors in this software. There can be no assurance that these third parties will continue to

invest the appropriate levels of resources in their products and services to maintain and enhance the capabilities of their software. If the cost of licensing any of these third-party software products significantly increases, our gross margin levels could significantly decrease.

Our right to use these systems is dependent upon license agreements with third party vendors. Some of these agreements are cancelable by the vendor, and the cancellation or nonrenewable nature of these agreements could impair our ability to process orders, bill our customers or sell our offender management products. Since we rely on third party vendors to provide some of these services or products, any switch in vendors could be costly and could affect operating efficiencies.

Additionally, if our relations with any of our third-party information and offender management systems providers are impaired or the third-party software infringes upon another party’s intellectual property rights, our business could be harmed. Although these third party software vendors generally indemnify us against claims that their technology infringes on the proprietary rights of others, such indemnification is not always available for all types of intellectual property. Sometimes software vendors are not well capitalized and may not be able to indemnify us in the event that their technology infringes on the proprietary rights of others. Defending such infringement claims, regardless of their validity, could result in significant cost and diversion of resources. As a result, we may face substantial exposure to liability in the event that technology we license from a third-party infringes on another party’s proprietary rights.

We face challenges in growing our offender management software business.

Our future success and our ability to meet forecasted operating results and pay interest and principal on the notes will depend in part on our ability to sustain our market share of the offender management software business. The majority of these revenues are currently associated with our ongoing implementation of our software for Her Majesty’s Prison Service in the United Kingdom, through a sub-contracting agreement with EDS. As our contract with Her Majesty’s Prison Service reduces in scope in 2009 and beyond, we will need to generate new contracts to compensate for the loss of this revenue.

If we are unable to grow our business successfully, we may not realize our targeted revenue, which may result in reduced profitability or operating losses and may materially and adversely affect our business, financial condition and results of operations.

A number of our customers individually account for a large percentage of our revenues, and therefore the loss of one or more of these customers could harm our business.

If we lose existing customers and do not replace them with new customers, our revenues will decrease and may not be sufficient to cover our costs. For the year ended December 31, 2008, our top five customers accounted for approximately 20% of our total revenues. If we lose one or more of these customers our revenues will be adversely affected, which could harm our business.

Our success depends on our ability to protect our proprietary technology and ensure that our systems are not infringing on the proprietary technology of other companies.

Our success depends to a significant degree on our protection of our proprietary technology, particularly in the areas of three-way call prevention, automated operators and call processing technology, bad debt risk management, revenue generation and ancillary products and services. The unauthorized reproduction or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it. Although we have taken steps to protect our proprietary technology, these steps may be inadequate. We rely on a combination of patent and copyright law and non-disclosure agreements to establish and protect our proprietary rights in our systems. However, existing trade secret, patent, copyright and trademark laws offer only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use trade secrets or other information we regard as proprietary. If we resort to legal proceedings to enforce our intellectual property rights, the proceedings would be burdensome and expensive and could involve a high degree of risk.

We cannot assure you that a third party will not accuse us of infringement on its intellectual property rights. There has been litigation in the telecommunications industry regarding alleged infringement of certain of the technology used in internet telephony services. Although this litigation involves companies unrelated to us, and we believe, technology different from ours, it is possible that similar litigation could be brought against us in the future. Certain parties to such litigation have significantly greater financial and other resources than us. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is not valid, and could perhaps prevent us from adequately defending the claim. Such a claim would also distract our management from our business. A claim may also result in a judgment involving substantial damages or an injunction or other court order that could prevent us from selling our products and services or operating our network architecture. Any of these events could have a material adverse effect on our business, operating results and financial condition.

We may not be able to adapt successfully to new technologies, to respond effectively to customer requirements or to provide new services.

The communications and software industries, including inmate communications and offender management systems, are subject to rapid and significant changes in technology, frequent new service introductions and evolving industry standards. As a result, it is difficult for us to estimate the life cycles of our products. Technological developments may reduce the competitiveness of our services and require unbudgeted upgrades, significant capital expenditures and the procurement of additional services that could be expensive and time consuming. To the extent our existing or future competitors are successful in developing competitive technologies, including through deployment of the packet based architecture that we believe provides us with a competitive advantage, our competitive position, market share and the price we receive for services may be adversely affected. To be competitive, we must develop and introduce product enhancements and new products. New products and new technology often render existing information services or technology infrastructure obsolete, excessively costly, or otherwise unmarketable. As a result, our success depends on our ability to create and integrate new technologies into our current products and services and to develop new products. If we fail to respond successfully to technological changes or obsolescence or fail to obtain access to important new technologies, we could lose customers and be limited in our ability to attract new customers or sell new services to our existing customers. The failure to adapt to new technologies could have a material adverse effect on our business, financial condition and results of operations.

The successful development of new services, which is an element of our business strategy, is uncertain and dependent on many factors, and we may not generate anticipated revenues from such services. In

addition, as communications networks are modernized and evolve from analog-based to digital-based systems, certain features offered by us may diminish in value. We cannot guarantee that we will have sufficient technical, managerial or financial resources to develop or acquire new technology or to introduce new services or products that would meet our customers’ needs in a timely manner.

Our business could be adversely affected if our products and services fail to perform or be performed properly.

Products as complex as ours may contain undetected errors or “bugs,” which could result in product failures or security breaches and render us unable to satisfy customer expectations. Further, our products must integrate with the many computer systems and software programs of our customers. Any failure of our systems or an inability of our customer to implement our products could result in a claim for substantial damages against us, regardless of our responsibility for the failure. Although we test our products and maintain general liability insurance, including coverage for errors and omissions, we cannot assure you that we will detect every error or that our existing coverage will continue to be available on reasonable terms or will be available in amounts sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The occurrence of errors could result in a loss of data to us or our customers, which could cause a loss of revenues, failure to achieve acceptance, diversion of development resources, injury to our reputation, or damages to our efforts to build brand awareness, any of which could have a material adverse effect on our market share and, in turn, our operating results and financial condition.

A system failure could cause delays or interruptions of service, which could cause us to lose customers.

To be successful, we will need to continue to provide our customers with reliable service. Some of the events that could adversely affect our ability to deliver reliable service include:

•	physical damage to our network operations centers;

•	disruptions beyond our control;

•	power surges or outages; and

•	software defects.

Disruptions may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose customers and incur unexpected expenses.

We are dependent on the communications industry, which subjects our business to risks affecting the communications industry generally.

Although we focus on the inmate communications industry, our business is directly affected by risks facing the communications industry in general. The communications industry has been, and we believe it will continue to be, characterized by several trends, including the following:

•	rapid development and introduction of new technologies and services;

•	increased competition within established markets from current and new market entrants that may provide competing or alternative services;

•	the increase in mergers and strategic alliances that allow one telecommunications provider to offer increased services or access to wider geographic markets; and

•	continued changes in the laws and regulations affecting rates for collect and prepaid calls.

The market for communications services is highly competitive. Our ability to compete successfully in our markets will depend on several factors, including the following:

•	how well we market our existing services and develop new technologies;

•	the quality and reliability of our network and service;

•	our ability to anticipate and respond to various competitive factors affecting the communications industry, including a changing regulatory environment that may affect us differently from our competitors, pricing strategies and the introduction of new competitive services by our competitors, changes in consumer preferences, demographic trends and economic conditions; and

•	our ability to successfully defend claims against us.

Competition could intensify as a result of new competitors and the development of new technologies, products and services. Some or all of these risks may cause us to have to spend significantly more in capital expenditures than we currently anticipate in order to retain existing and attract new customers.

Some of our competitors have brand recognition and financial, personnel, marketing and other resources that are significantly greater than ours. In addition, due to consolidation and strategic alliances within the communications industry, we cannot predict the number of competitors that will emerge, especially as a result of existing or new federal and state regulatory or legislative actions. Increased competition from existing and new entities could lead to higher commissions paid to correctional facilities, loss of customers, reduced operating margins or loss of market share.

Most of our customers are governmental entities that require us to adhere to certain policies that may limit our ability to attract and retain customers.

Our customers include U.S. and foreign federal, state and local governmental entities responsible for the administration and operation of correctional facilities. We are subject, therefore, to the administrative policies and procedures employed by, and the regulations that govern the activities of, these governmental entities, including policies, procedures, and regulations concerning the procurement and retention of contract rights and the provision of services. Our operations may be adversely affected by the policies and procedures employed by, or the regulations that govern the activities of, these governmental entities and we may be limited in our ability to secure additional customer contracts, renew and retain existing customer contracts, and consummate acquisitions as a result of such policies, procedures and regulations.

Our offender management software’s lengthy sales cycle and limited number of large non-recurring licenses sales make it difficult to predict quarterly revenue levels and operating results.

It is difficult for us to forecast the timing and recognition of revenues from sales of our offender management products because our existing and prospective customers often take significant time evaluating our products before licensing them. The sales process for our offender management software products is lengthy and can exceed one year. License and implementation fees for our offender management software products tend to be substantial when they occur. Additionally, the purchasing of our offender management software products is relatively discretionary and the purchasing decision typically involves members of our customers’ senior management. Accordingly, the timing of our license revenues is difficult to predict. The delay of an order could cause our quarterly revenues to fall substantially below our expectations and those of public market analysts and investors. Moreover, to the extent that we succeed in shifting customer purchases away from individual software products and toward more costly integrated suites of software and services, our sales cycle may lengthen, which could increase the likelihood of delays and cause the effect of a delay to become more pronounced. Delays in our offender management software sales could cause significant shortfalls in our revenues and operating results for any particular period and could lead to future impairment of goodwill or long-lived assets. The period between initial customer contact and a purchase by a customer may vary from nine months to more than one year. During the evaluation period, prospective customers may decide not to purchase or may scale down proposed orders of our products for various reasons, including:

•	reduced demand for offender management software solutions;

•	introduction of products by our competitors;

•	lower prices offered by our competitors; and

•	reduced need to upgrade existing systems.

Additionally, because our customers and potential customers are federal, state and local government agencies that may have limited funds allocated to information technology, decreases in any of our customer’s budgets for information technology could result in order cancellations that could have a significant adverse affect on our revenues and quarterly results.

We may not be successful in convincing potential customers to migrate to our products.

Many correctional institutions have historically used internally developed software for their offender management systems and to manage other resources. These institutions may not be willing to incur the costs or invest the resources necessary to initially implement our software products or complete upgrades to current or future releases of our products. Consequently, it may be difficult for us to convince these institutions to make substantial capital expenditures to migrate to our products. This may impede our ability to increase our market share in existing markets as well as penetrate other geographic markets or to generate new or recurring revenues.

Our international operations and sales subject us to risks associated with unexpected events.

The international reach of our business could cause us to be subject to unexpected, uncontrollable and rapidly changing events and circumstances. The following factors, among others, could adversely affect our business and earnings:

•	failure to properly comply with foreign laws and regulations applicable to our foreign activities including, without limitation, software localization requirements;

•	compliance with multiple and potentially conflicting regulations in Europe, Australia and North America, including export requirements, tariffs, import duties and other trade barriers, as well as intellectual property requirements;

•	difficulties in managing foreign operations and appropriate levels of staffing;

•	longer collection cycles;

•	seasonal reductions in business activities, particularly throughout Europe;

•	reduced protection for intellectual property rights in some countries;

•	proper compliance with local tax laws, which can be complex and may result in unintended adverse tax consequences;

•	anti-American sentiment due to the war in Iraq and other American policies that may be unpopular in certain countries;

•	difficulties in enforcing agreements through foreign legal systems;

•	fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services provided by us in foreign markets where payment for our products and services is made in the local currency;

•	changes in general economic and political conditions in countries where we operate; and

•	restrictions on downsizing operations in Europe and expenses and delays associated with any such activities.

Regulatory Risks

The FCC is currently reviewing challenges and alternatives to the rates applicable to interstate inmate telecommunications service that, if implemented, could have an adverse effect on our business.

The FCC has opened several rulemaking proceedings that question whether the current regulatory regime applicable to the rates for interstate inmate telecommunications services is responsive to the needs of correctional facilities, inmate telecommunications service providers, the inmates and their families. Parties participating in these proceedings generally include prison inmates and their families, parties receiving calls from inmates, several national inmate advocacy organizations such as Citizens United for the Rehabilitation of Errants and providers of inmate telecommunications services. In general, the position of those challenging the current regulatory regime is that inmate telecommunications service rates are excessive due to compensation paid to correctional facilities in the form of “commissions” and that the FCC should establish rate caps, prohibit commissions to correctional facilities and mandate the offering by inmate telecommunications service providers of debit (prepaid) card alternatives to collect calling. Such a regime would require a new and complex set of federal regulations that, if adopted, could reduce our revenues derived from existing contracts and could lead to increased costs associated with regulatory compliance. Moreover, if implementation of these regulations leads to technological or structural changes in the industry, it could diminish the value of our intellectual property and our customer relationships and lead to a reduction in profitability of calls originating from correctional facilities.

We operate in a highly regulated industry, and are subject to restrictions in the manner in which we conduct our business and a variety of claims relating to such regulation.

Our operations are subject to federal regulation, and we must comply with the Communications Act of 1934, as amended, and FCC regulations promulgated there under. We are also subject to the applicable laws and regulations of various states and other state agencies, including regulation by public utility commissions. Federal laws and FCC regulations generally apply to interstate telecommunications (including international telecommunications that originate or terminate in the United States), while state regulatory authorities generally have jurisdiction over telecommunications that originate and terminate within the same state. Generally, we must obtain and maintain prior authorization from and/or register with, regulatory bodies in most states where we offer intrastate services and must obtain or submit prior regulatory approval of rates, terms and conditions for our intrastate services in many of these jurisdictions. We are also in some cases required, along with other telecommunications providers, to contribute to federal and state funds established for universal service, number portability, payphone compensation and related purposes. Laws and regulations in this industry such as those identified above, and others including those regulating call recording and call rate announcements, and billing, collection, customer collection management, and solicitation practices are all highly complex and burdensome, making it difficult to be in complete compliance. The difficulty is sometimes exacerbated by technology issues. Although we actively seek to comply with all laws and regulations and remedy areas in which we become aware of inadvertent non-compliance, we may not always be in full compliance with all regulations applicable to us. Once non-compliance is identified, remedies are sought and implemented as quickly as possible. Failure to comply with these requirements can result in potentially significant fines, penalties, regulatory sanctions and claims for substantial damages. Claims may be widespread, as in the case of class actions commenced on behalf of inmates or the called parties of inmates. Significant fines, penalties, regulatory sanctions and damage claims could be material to our business, operating results and financial condition. Additionally, regulation of the telecommunications industry is changing rapidly, and the regulatory environment varies substantially from state to state. Future regulatory, judicial or legislative activities may have an adverse effect on our

operations or financial condition, and domestic or international regulators or third parties may raise material issues with regard to our compliance or non-compliance with applicable regulations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principle executive office is located in, and a portion of our operations are conducted from, leased premises located at 14651 Dallas Parkway, Suite 600, Dallas, Texas 75254-8815. We also lease additional regional facilities from which we conduct our operations located in Carrollton, Texas, used as a warehouse location; Raleigh, North Carolina; data centers located in Allen and Dallas, Texas, Atlanta, Georgia and Los Angeles, California; and we have one regional sales office in Chesterfield, Missouri. We have offices in Richmond, British Columbia, Canada; Folsom, California and Selma, Alabama. We believe that our facilities are suitable and the space contained by them adequate for their respective operations.

ITEM 3. LEGAL PROCEEDINGS

From time to time we have been, and expect to continue to be, subject to various legal and administrative proceedings or various claims in the normal course of business. We believe the ultimate disposition of these matters will not have a material effect on our financial condition, liquidity, or results of operations.

From time to time, inmate telecommunications providers, including our Company, are parties to judicial and regulatory complaints and proceedings initiated by inmates, consumer protection advocates or individual called parties alleging, among other things, that excessive rates are being charged with respect to inmate collect calls, that commissions paid by inmate telephone service providers to the correctional facilities are too high, that a call was wrongfully disconnected, that security notices played during the call disrupt the call, that the billed party did not accept the collect calls for which they were billed or that rate disclosure was not provided or was inadequate. We are also on occasion the subject of regulatory complaints regarding our compliance with various matters including tariffing, access charges and payphone compensation requirements and rate disclosure issues. In March 2007, the FCC asked for public comment on a proposal from an inmate advocacy group to impose a federal rate cap on interstate inmate calls. This proceeding could have a significant impact on the rates that we and other companies in the inmate telecommunications industry may charge. Similar proposals have been pending before the FCC for more than four years without action by the agency. This newest proceeding remains under review by the FCC and has received strong opposition from the inmate telecommunications industry. In August 2008 a group of inmate telephone service providers provided the FCC with an "industry wide" cost of service study for their consideration.

In June 2000, T-NETIX was named, along with AT&T, in a lawsuit in the Superior Court of King County, Washington, in which two private citizens allege violations of state rules requiring pre-connect audible disclosure of rates as required by Washington statutes and regulations. T-Netix and other defendants successfully obtained dismissal and a "primary jurisdiction" referral in 2002. In 2005, after several years of inactivity before the Washington Utilities and Transportation Commission (“WUTC”), the state telecommunications regulatory agency, T-Netix prevailed at the trial court in securing an Order entering summary judgment on grounds of lack of standing, but that decision was reversed by an intermediate Washington state appellate court in December 2006. T-Netix’s subsequentPetition for Review by the Washington Supreme Court was denied in January 2008, entitling Plaintiffs to continue to pursue their claims against T-Netix and AT&T. This matter was referred to the WUTC on the grounds of primary jurisdiction, in order for the WUTC to determine various regulatory issues. On May 22, 2008, AT&T filed with the trial court a cross-claim against T-Netix seeking indemnification. T-Netix moved to dismiss AT&T’s cross-claim, but the court denied that motion and deferred resolution of whether

AT&T's belated indemnification claim is within the statute of limitations for summary judgment. Because discovery has not been completed before the WUTC, we cannot estimate the Company's potential exposure or predict the outcome of this dispute.

In May 2007, Global Tel*Link Corporation (“GTL”) and Verizon Business (“Verizon”) filed formal protest petitions against the Florida Department of Corrections (“FDOC”) (the “Protests”). The Protests challenged the FDOC’s intended award to us of a five-year initial term contract for the provision of statewide inmate telephone services. More specifically, the Protests sought entry of recommended and final orders either (1) awarding the contract to the protestors or (2) rejecting all proposals. The Protests were referred to the Florida Division of Administrative Hearings (“DOAH”), and we intervened as a co-respondent with FDOC. Following a formal hearing, the DOAH entered a recommended order to approve the intended contract award to us; in turn the FDOC adopted the recommendation in its final order. GTL and Verizon appealed the final order and sought a stay to prevent entry of a formal contract between us and the FDOC during the appeal. The court denied the stay and the FDOC Contract was executed on September 25, 2007. GTL and Verizon nevertheless have continued to prosecute their appeal. On August 4, 2008, the appeals court entered an order reversing the final order entered by the FDOC on the basis of a violation of due process, finding that the FDOC Secretary who adopted the DOAH recommended order was not impartial since he had made the initial decision to award the contract to our company and had testified in support of that decision in the formal hearings before the DOAH. The case was remanded to the FDOC for further proceedings consistent with the opinion. On September 18, 2008, the FDOC issued an amended final order that also concluded that the Protests should be dismissed. GTL and Verizon asked the FDOC to reconsider the amended final order, arguing that the appellate court’s decision required appointment of a neutral third-party from outside the FDOC to issue the order. The FDOC did not respond to the request for reconsideration. On October 17, 2008, GTL and Verizon appealed of the amended final order with the state appeals court. We cannot estimate the Company's potential exposure or predict the likelihood of any outcome at this time.

In July 2007, Global Tel*Link Corporation filed suit in the Circuit Court of Montgomery County against T-Netix Inc., the State of Alabama, and the Alabama Department of Finance and Alabama Department of Corrections. This proceeding relates to the protest matter Global Tel* Link filed in Alabama in May 2007, which was concluded in April 2008. We filed a motion to dismiss that was denied; however, GTL conceded that several of its claims were not viable, and in its amended complaint included only one count, the intentional interference with business and contractual relations claim. The judge agreed to postpone setting any scheduling deadlines and postponed the trial date of August 4, 2008. The judge ordered the parties to mediate the case but did not specify a deadline. There has not been any activity in this case since the ruling in the companion matter on April 11, 2008. T-Netix has not admitted any wrongdoing and has vigorously denied each and every allegation in the case. We cannot estimate the Company's potential exposure or predict the likelihood of any outcome at this time.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2008.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information. Our common stock is not registered and there is currently no established public trading market for our issued and outstanding equity securities.

Holders of Record. As of March 3, 2009, we had 3 holders of Series A Redeemable Convertible Preferred Stock, 7 holders of Common Stock and 20 holders of Class B Common Stock. In December

2007, we effected a 1 for 1,000 reverse stock split for its Common Stock and Class B Common Stock in connection with the issuance of the Series A Redeemable Convertible Preferred Stock.

Dividends. We have never declared or paid any cash dividends on our common stock. Our Series A Redeemable Convertible Preferred Stock accrues dividends at 12.5% annually. We currently intend to retain earnings, if any, to support our business strategy and do not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the sole discretion of our board of directors after taking into account various factors, including restrictions on our ability to pay dividends, our financial condition, operating results, capital requirements and any plans for expansion. Our revolving credit facility, the indenture governing our Second-priority Senior Secured Notes, and the note purchase agreement governing our senior subordinated notes contain certain negative covenants that restrict our ability to declare dividends. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Debt and Other Obligations.”

Securities Authorized for Issuance Under Equity Compensation Plans. The following table provides information about the securities authorized for issuance under our equity compensation plans as of December 31, 2008:

	Equity Compensation Plan Information
	(a)	(b)		(c)
				Number of
	Number of			Securities
	securities	Weighted-		remaining available
	to be issued	average		for future issuance
	upon exercise	exercise price		under equity
	of outstanding	of outstanding		compensation plans
	options,	Options,		(excluding securities
	warrants	warrants		reflected in
Plan category	and rights (1)	and rights		column (a))
Equity compensation plans approved by security holders (2)	160,435	$	.01	4,565
Equity compensation plans not approved by security holders	-		-	-
Total	160,435	$	.01	4,565

(1) Includes 160,435 shares of restricted stock issued under the 2004 restricted stock plan.
(2) In March 2009, the Company filed a Fourth Amendment and Restated Certificate of Incorporation which 1,685,000 shares of common stock were authorized, of which 10,000 shares are designated Preferred Stock, $.001 par value per share (the “Preferred Stock”), 1,500,000 shares are designated Common Stock, $.001 par value per share (the “Common Stock”), and 175,000 shares are designated Class B Common Stock, $.001 par value per share (the “Class B Common Stock”).

Unregistered Sales of Equity Securities. During the year ended December 31, 2008, we sold 160,364 restricted shares of Class B Common Stock at a purchase price of $.01 per share pursuant to the 2004 Restricted Stock Plan to certain members of management. The shares are subject to certain contractual limitations, including provisions regarding forfeiture and disposition, as provided in each executive’s restricted stock purchase agreement and the 2004 Restricted Stock Plan. The restricted period ends upon the occurrence of certain events or the lapse of time. The sale of the Class B Common Stock was made pursuant to the exemption set forth in Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering, and regulations promulgated thereunder.

In August of 2008, we authorized an additional 65,000 shares of Class B Common Stock. In September 2008, we filed a Third Amended and Restated Certificate of Incorporation, which authorized 1,365,000 shares of capital stock with a par value of $0.001. 1,190,000 shares were designated Class A Common Stock, 10,000 were designated Preferred Stock, of which 5,100 were designated as Series A Convertible Preferred Stock, and 165,000 were designated Class B Common Stock. All issued shares of common stock are entitled to vote on a one share/one vote basis.

ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA

The following selected consolidated historical financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this Form 10-K. The selected historical consolidated financial and other data presented below for the fiscal years ended December 31, 2006, 2007 and 2008 have been derived from our audited consolidated financial statements.

		Predecessor		Period From
	Period From			January 1,
		January 1		(Inception) to
	To March 2,			December 31,			For the Year Ended December 31,
		2004(1)			2004(2)			2005			2006			2007			2008
Consolidated Statement of Operations
Operating revenues (7)	$	17.4		$	173.4		$	377.4		$	401.9		$	391.9		$	388.6
Cost of service (7)		11.4			130.9			289.2			310.1			302.8			287.1
Selling, general and administrative expenses		3.6			27.5			48.5			52.4			58.4			59.5
Depreciation and amortization		1.6			13.2			23.9			30.3			37.1			34.4
Non-cash impairment of assets		0.3			50.6			-			-			-			-
Other operating expenses (3)		5.3			5.6			0.6			-			0.6			0.2
Income (loss) from operations		(4.8	)		(54.4	)		15.3			9.1			(7.0	)		7.4
Other Income Expense:
Transaction expenses and other charges (4)		(5.4	)		(1.0	)		-			-			-			-
Interest and other expenses, net		(2.2	)		(14.0	)		(26.6	)		(27.8	)		(31.5	)		(41.9	)
Loss from continuing operations before income taxes		(12.4	)		(69.4	)		(11.3	)		(18.7	)		(38.5	)		(34.5	)
Income tax expense (benefit)		(2.6	)		(12.7	)		(2.2	)		1.4			1.9			(0.5	)
Net loss		(9.8	)		(56.7	)		(9.1	)		(20.1	)		(40.4	)		(34.0	)
Accrued dividends on preferred stock		-			-			-			-			-			(1.4	)
Net loss available to common stockholders		(9.8	)		(56.7	)		(9.1	)		(20.1	)		(40.4	)		(35.4	)
Other Financial Data:
Total direct provisioning revenues (7)	$	9.6		$	120.9		$	303.3		$	341.2		$	338.7		$	333.6
Total wholesale services revenues (7)		7.8			52.5			74.1			60.7			45.2			29.9
Offender management software		-			-			-			-			7.9			25.1

	Predecessor			Period From
	Period From			January 1,
		January 1		(Inception) to
	To March 2,			December 31,			For the Year Ended December 31,
		2004(1)			2004(2)			2005			2006			2007			2008
Other Data:
Deficiency of earnings to fixed charges	$	9.8		$	56.7		$	9.1		$	20.1		$	40.4		$	35.4
Consolidated Cash Flow Data:
Cash flows from operating activities	$	(3.8	)	$	(1.8	)	$	29.8		$	19.1		$	20.5		$	17.4
Cash flows from investing activities		(0.6	)		(213.1	)		(26.3	)		(27.1	)		(64.0	)		(17.0	)
Cash flows from financing activities (5)		(0.9	)		216.7			(2.8	)		6.0			46.5			1.1
Capital Expenditures		0.6			12.4			26.3			27.2			21.4			17.0
Balance Sheet Data (End of Period)
Cash and cash equivalents and restricted cash	$	17.6		$	3.2		$	4.0		$	2.0		$	3.6		$	8.2
Total current assets (6)		45.7			78.1			80.7			76.4			62.9			61.6
Net property and equipment		20.0			36.2			43.9			46.4			40.8			35.4
Total assets		74.7			272.1			266.9			259.6			292.1			259.0
Total long-term debt (including current portion)		18.3			189.9			198.0			210.6			263.3			288.3
Stockholders’ equity (deficit)	$	25.4		$	(22.8	)	$	(31.9	)	$	(51.9	)	$	(88.9	)	$	(128.8	)

(1)	This column presents the data for T-Netix (Predecessor) for the 62-day period from January 1, 2004 to March 2, 2004, prior to our acquisition of T-Netix on March 3, 2004
(2)	This column does not include information for T-Netix (Predecessor) for the period from January 1, 2004 to March 2, 2004 prior to our acquisition of T-Netix on March 3, 2004, or information for Evercom for the period from January 1, 2004 to September 8, 2004, prior to our acquisition of Evercom on September 9, 2004
(3)	Gain on sale of assets, compensation expense on employee options, severance and restructuring costs.
(4)	Represents one-time transaction expenses related to Securus’ purchase of T-Netix on March 3, 2004, and Securus’ purchase of Evercom on September 9, 2004
(5)	The 2007 amount reflects $40 million of indebtedness incurred through the issuance of additional Second-priority Senior Secured Notes in connection with our acquisition of Syscon
(6)	Current assets decreased in 2007 from 2006, primarily as a result of a decline in receivables due to a significant increase in prepaid revenues as a percentage of total revenues, coupled with a decline in overall Direct and Wholesale revenues
(7)	Includes reclassification of certain amounts in prior years to conform with current period presentation. No impact on operating income (loss), net loss, cash flows or the financial position of the Company for the prior periods presented.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with our historical consolidated financial statements and related notes, our audited consolidated financial data and related notes and other financial information included elsewhere in this Form 10-K.

Overview

Our core business consists of installing, operating, servicing and maintaining sophisticated call processing systems in correctional facilities and providing related services. We enter into multi-year agreements (generally three to five years) directly with the correctional facilities in which we serve as the exclusive provider of telecommunications services to inmates. In exchange for the exclusive service rights, we pay a negotiated commission to the correctional facility based upon revenues generated by actual inmate telephone use. In addition, on larger contracts we may partner with other telecommunications companies in which we provide our equipment and, as needed, back office support including validation, billing and collections services, and charge a fee for such services. Based on the particular needs of the corrections industry and the requirements of the individual correctional facility, we also sell platforms and specialized equipment and services such as law enforcement management systems, call activity reporting and call blocking.

On June 29, 2007, we acquired all of the outstanding capital stock of Syscon Holdings Ltd., a British Columbia company, and certain of its affiliates. Syscon is an enterprise software development company for the correctional facility industry. Syscon’s core product is a sophisticated and comprehensive software system utilized by correctional facilities and law enforcement agencies for complete offender management. Syscon’s system provides correctional facilities with the ability to manage and monitor inmate parole and probation activity and development at a sophisticated level.

Certain amounts in the prior periods’ consolidated financial statements have been reclassified to conform to the current period presentation. We believe this reclassification will result in a clearer presentation of our results of operations. As a result, we have revised our Management’s Discussion and Analysis of Financial Condition and Results of Operations for prior periods to reflect this reclassification.

Revenues

We derived approximately 86% of our revenues for the years ended December 31, 2007 and 2008, respectively, from our direct operation of inmate telecommunication systems and the provision of related services located in correctional facilities within 44 states, including the District of Columbia. We enter into multi-year agreements under direct or “prime” contracts with the correctional facilities, pursuant to which we serve as the exclusive provider of telecommunications services to inmates within each facility. In exchange for the exclusive service rights, we pay a commission to the correctional facility based upon inmate telephone use. Our commission rates averaged approximately 45% and 44% of direct call provisioning revenues for the years ended December 31, 2007 and 2008, respectively. We install and generally retain ownership of the telephones and the associated equipment and provide additional services tailored to the specialized needs of the corrections industry and to the requirements of each individual correctional facility, such as call activity recording and call blocking. In our direct call provisioning business, we earn the full retail value of the call and pay corresponding line charges and commissions. As a result, our direct call provisioning business gross profit dollars are higher, but our gross profit percentage is lower than in our wholesale services business.

We derived approximately 2% and 6% of our revenues from our offender management software business for the years ended December 31, 2007 and December 31, 2008, respectively. Offender management systems are platforms that allow facilities managers and law enforcement personnel to analyze data to reduce costs, prevent and solve crimes and facilitate rehabilitation through a single user interface. Revenue related to the Offender Management software is recognized under Statement of Position 97-2, Software Revenue Recognition, as amended. Revenue is recognized using the residual method when the fair value of vendor specific objective evidence (“VSOE”) of the undelivered element is determined. If the VSOE of fair value cannot be determined for any undelivered element or any undelivered element is

essential to the functionality of the delivered element, revenue is deferred until such criteria are met or recognized as the last element is delivered. Under the residual method, the fair value of the undelivered elements is deferred and the difference between the total arrangement fee and the amount recorded as deferred revenue for the undelivered elements is recognized as revenue related to the delivered elements. We believe that we have the most functionally complete offender management system available on the market. Our offender management software business complements the direct call provisioning business.

We derived approximately 12% and 8% of our revenues for the years ended December 31, 2007 and 2008, respectively, from the wholesale services business. We derive this revenue through sale of equipment or providing telecommunication services to other telecommunications companies as customers or service partners.

The solutions business within wholesale services consists of providing validation, uncollectible account management and billing services. In this business, accounts receivable generated from calls placed by inmates in correctional facilities are typically purchased from the third party inmate telecommunication providers and we accept responsibility for call validation, uncollectible accounts, and billing and collections costs. However, all purchased receivables must be processed and validated through our risk management system prior to allowing the call to be completed and also must be billed through our proprietary billing systems. Revenues from our solutions services equal the difference between the face value of the receivables purchased and the amount we pay our solutions partners for the discounted accounts receivable. Because revenues associated with our solutions business represent only a percentage of the face value of the receivables purchased, the associated billing and collection fees and uncollectible account expense represent a much higher percentage of revenues as compared to our direct call provisioning business. In the solutions business, we do not bear any of the costs of facility commissions, equipment, line charges or direct sales charges, but bear the risk of unbillable and uncollectible accounts receivable.

The telecommunications business within wholesale services provides equipment, security enhanced call processing, call validation, and service and support through the telecommunications providers, rather than directly to the facility. Although our revenues for services to telecommunications service providers are lower than in our direct call provisioning business, where we provide the service to the facility directly and receive the retail value of the call, we do not incur all the additional capital costs related to these larger contracts that can require up-front or guaranteed commission payments. Our gross margin percentage for providing telecommunications services is higher than the margin for our direct call provisioning business because we do not incur commissions, transport costs or risk of collection. We also sell equipment, typically consisting of our inmate calling system, to a limited number of telecommunication services providers.

In our direct call provisioning and solutions businesses, we accumulate call activity data from our various installations and bill our revenues related to this call activity primarily through direct billing agreements with LEC billing agents, or in some cases through billing aggregators. We also receive payment on a prepaid basis for a significant portion of our services and record deferred revenue until the prepaid balances are used. In each case, we recognize revenue when the calls are completed and record the related telecommunication costs for validating, transmitting, billing and collection, bad debt, and line and long-distance charges, along with commissions payable to the facilities. In our telecommunications services business, our service partner bills the called party and we either share the revenues with our service partner or receive a prescribed fee for each call completed. We also charge fees for additional services such as customer support and advanced validation.

Cost of Services

Our principal cost of service for our direct call provisioning business consists of commissions paid to correctional facilities, which are typically expressed as a percentage of either gross or net direct call provisioning revenues and are typically fixed for the term of the agreements with the facilities. Our cost of service for direct call provisioning also includes (1) bad debt expense, consisting of unbillable and uncollectible accounts; (2) billing and collection charges; (3) telecommunication costs such as telephone

line access, long distance and other charges; (4) field operations and maintenance costs for service on our installed base of inmate telephones; and (5) selling, general, and administrative costs. We pay monthly line and usage charges to RBOCs and other LECs for interconnection to the local network for local calls, which are computed on a flat monthly charge plus, for certain LECs, a per message or per minute usage rate based on the time and duration of the call. We also pay fees to RBOCs and other LECs and long distance carriers based on usage for long distance calls. Third-party billing charges consist of payments to LECs and other billing service providers for billing and collecting revenues from called parties. Customer service costs represent either in-house or contracted customer service representatives who handle questions and concerns and take payments from billed parties.

Cost of service associated with our offender management software business primarily includes salaries and related costs of employees and contractors that provide technological services to develop, customize or enhance the software for our clients.

Cost of service for our wholesale service business includes billing and collection, call validation, bad debt expense and service costs for correctional facilities, including salaries and related personnel expenses, and inmate calling systems repair and maintenance expenses.

Facility Commissions. In our direct call provisioning business, we pay a facility commission typically based on a percentage of our billed revenues from such facility. Commissions are set at the beginning of each facility contract. Commission rates are one of the primary bases of competition for obtaining and retaining facility contracts.

Bad Debt. We account for bad debt as a direct cost of providing telecommunications services. We accrue the related telecommunications cost charges along with an allowance for unbillable and uncollectible calls, based on historical experience. Charges for inmate telephone calls on a collect basis are considered unbillable in cases when there is no billing address for the telephone number called, or uncollectible when the billed party is unable or unwilling to pay for the call. We use a proprietary, specialized billing and bad-debt management system to integrate our billing with our call blocking, validation, and customer inquiry procedures. We seek to manage our higher risk revenues by proactively requiring certain billed parties to prepay collect calls or be directly billed by us. This system utilizes multi-variable algorithms to minimize bad debt expense by adjusting our credit policies and billing. For example, when unemployment rates are high, we may decrease credit to less creditworthy-billed parties or require them to purchase prepaid calling time in order to receive inmate calls. Bad debt tends to rise as the economy worsens, and is subject to numerous factors, some of which may not be known. To the extent our bad debt management system overcompensates for bad debt exposure by limiting credit to billed parties, our revenues and profitability may decline as fewer calls are permitted to be made. We expect that as a result of the current economic recession in the U.S., that either our revenues from marginal billed parties will decline or our bad debt expense will rise or a combination of both will occur. However, we have tightened our credit policy to reduce our risk of loss from bad debts. Consequently, billed minutes, revenues and operating income have been negatively impacted in 2008 by our credit policy actions and we expect that trend to continue in 2009.

Field Operations and Maintenance Costs. Field operations and maintenance costs consist of service administration costs for correctional facilities. These costs include salaries and related personnel expenses, communication costs, and inmate calling systems repair and maintenance expenses.

SG&A. SG&A expenses consist of corporate overhead and selling expenses, including accounting, marketing, legal, regulatory, and research and development costs.

Industry Trends

The corrections industry, which includes the inmate calling and offender management software markets, is and can be expected to remain highly competitive. We compete directly with numerous other suppliers of inmate call processing systems and other corrections-related products (including our own wholesale service provider customers) that market their products to our same customer base. We provide

our wholesale products and services to inmate telecommunications service providers, such as Global Tel*Link, Embarq, AT&T, and FSH Communications. For the year ended December 31, 2008, 8%, of our total revenues were generated from contracts with wholesale service providers.

Large industry participants have been exiting the inmate telecommunications industry since 2005, and we have seen a steady decrease in our wholesale services volumes as AT&T has gradually exited the inmate telecommunications market. We also experienced a decline in our wholesale services revenues and profits associated with our customer, Global Tel*Link, and expect revenues and profits from this customer will continue to decline.

However, we believe that the departure of large industry participants from the direct call provisioning business has presented significant opportunities for us and other independent providers. Contracts to service the facilities are subject to competitive bidding, and as we seek to secure inmate telecommunications contracts with larger county and state departments of corrections, we may be required to provide multi-million dollars in up front payments, surety bonds or guaranteed commissions, as well as incur the cost of equipment and similar costs.To successfully compete for large county and state departments of corrections contracts without committing significant capital resources, we have entered into a wholesale services partnering arrangement with Embarq. Through this arrangement, we will install, operate and maintain a telecommunications network for the Texas Department of Criminal Justice, one of the largest state prison systems in the country, and expect to recognize up to $100 million in wholesale services revenues over the life of this 7 year contract with a potential 4 additional option years. We may continue to bid on other large county and state department of corrections contracts with Embarq.

The following table sets forth, for the years ended 2006, 2007 and 2008, respectively, our results of operations (in thousands).

		2006					2007						2008
Revenues
Direct call provisioning	$	341,237		85	%	$		338,703		86	%	$		333,564		86	%
Offender management software		-		-				7,933		2				25,137		6
Wholesale services		60,660		15				45,214		12				29,902		8
Total revenues		401,897		100				391,850		100				388,603		100
Expenses
Cost of service		310,099		77				302,763		77				287,104		74
Selling, general and administrative expenses		52,387		13				58,420		15				59,507		15
Restructuring costs		-		-				614		-				224		-
Depreciation and amortization		30,258		8				37,048		10				34,400		9
Operating income (loss)		9,153		2				(6,995)		(2	)			7,368		2
Interest and other expenses, net		27,811		7				31,487		8				41,896		11
Loss from continuing operations before income taxes		(18,658	)	(5	)			(38,482	)	(10	)			(34,528	)	(9	)
Income tax expense (benefit)		1,461		-				1,922		-				(509	)	-
Net loss		(20,119	)	(5	)			(40,404	)	(10	)			(34,019	)	(9	)
Accrued dividends on preferred stock		-						-						(1,351	)	-
Net loss available to common stockholders	$	(20,119	)	(5	)%	$		(40,404	)	(10	)%	$		(35,370	)	(9	)%

Variances in the results of our operations (in thousands) are as follows:

		Total					Total
		Variance					Variance
		Between the					Between the
		Years Ended					Years Ended
		December 31,		%			December 31,		%
		2006 and 2007		Change			2007 and 2008		Change
Revenues
Direct call provisioning	$	(2,534	)	(0.7	)%	$	(5,139	)	(1.5	)%
Offender management software		7,933		100.0			17,204		216.9
Wholesale services		(15,446	)	(25.5	)		(15,312	)	(33.9	)
Total revenue		(10,047	)	(2.5	)		(3,247	)	(0.8	)
Total cost of service		(7,336	)	(2.4	)		(15,659	)	(5.2	)
Selling, general and administrative expenses		6,033		11.5			1,087		1.9
Restructuring costs		614		100			(390	)	(63.5	)
Depreciation and amortization		6,790		22.4			(2,648	)	(7.1	)
Total operating costs and expenses		6,101		1.6			(17,610	)	(4.4	)
Operating income (loss)	$	(16,148	)	(176.4	)%	$	14,363		205.3	%

Results of Operations for the Year Ended December 31, 2008 Compared to December 31, 2007

Revenues

Compared to the year ended December 31, 2007, consolidated revenues decreased for the year ended December 31, 2008 by $3.2 million, or 0.8 %, to $388.6 million. The primary components of the decrease in revenues are discussed below:

Direct call provisioning revenues decreased $5.1 million, or 1.5%, to $333.6 million. This resulted from a decrease of $20 million due primarily to the loss of direct business contracts with several departments of corrections that expired during the second half of 2007, combined with the lower revenues due to the worsening economy, which caused us to tighten credit controls in an effort to reduce our bad debt exposure. In addition, in 2008 we sought to improve our margins in bidding for new state and county contracts, which resulted in the loss of some contracts that did not meet acceptable profitability standards. We expect to continue to monitor contracts coming up for renewal on the same basis. The decrease in revenue was partially offset by $14.9 million of revenues from department of corrections and mega-county contracts won from competitors, net of accounts not renewed. Large accounts installed in 2008 generated $7.3 million in 2008, and are expected to generate $16 million annually over the term of the contracts. It is likely we may continue to see a reduction in direct call provisioning revenues in 2009 because of higher unemployment rates caused by the economic recession and a corresponding tightening of our credit policies.

Offender management software revenues increased $17.2 million or 216.9% to $25.1 million primarily due to only two quarters of operations in 2007 compared to a full year in 2008. The majority of our offender management revenues are currently associated with our ongoing implementation of our software for Her Majesty’s Prison Service in the United Kingdom, through a sub-contracting agreement with Electronic Data Systems, Inc. We expect to have consistent revenues from this contract through the first quarter of 2009 when the implementation phase is expected to be completed. Additionally, we will seek to generate revenues from new contracts in the United States and extend our work in the United Kingdom and Australia. In connection with the Syscon acquisition, we valued Syscon’s existing customer contracts and related deferred revenues at fair value, which impacted the amount of revenue and profit we recognized. As a result, for the years ended December 31, 2008 and 2007, respectively, our offender

management software revenues and operating profit were $3.5 million and $1.4 million lower than would have been reported had no acquisition occurred, representing the current period amortization of contracts acquired, as required by purchase accounting.

Wholesale services revenues decreased by $15.3 million, or 33.9%, primarily due to terminations of service by AT&T and Global Tel*Link as their underlying facility contracts expire. We expect wholesale services revenues to decline in 2009 as these contracts continue to expire. However, revenues from this segment are expected to stabilize because of the installation of the Texas Department of Criminal Justice facilities, which are scheduled to be fully installed by the end of the third quarter of 2009. We expect to generate approximately $8.0 million in revenues in 2009 and up to $100 million in wholesale services revenues over the life of this 7 year contract with 4 additional option years.

Cost of Service. Total cost of service for the year ended December 31, 2008 decreased by $15.7 million over cost of service for the year ended December 31, 2007, or 5.2%, to $287.1 million. A comparison of the components of our business segment gross margins is provided below (dollars in thousands):

		Year Ended December 31,
	2007				2008
Direct Call Provisioning
Revenue	$	338,703			$	333,564
Cost of service		267,456	79.0	%		255,345	76.6	%
Segment gross margin	$	71,247	21.0	%	$	78,219	23.4	%
Offender Management Software
Revenue	$	7,933			$	25,137
Cost of service		6,110	77.0	%		13,540	53.9	%
Segment gross margin	$	1,823	23.0	%	$	11,597	46.1	%
Wholesale Services
Revenue	$	45,214			$	29,902
Cost of service		29,197	64.6	%		18,219	60.9	%
Segment gross margin	$	16,017	35.4	%	$	11,683	39.1	%

Cost of service in our direct call provisioning segment decreased as a percentage of revenue to 76.6% from 79.0% due to lower bad debt, commission and field operations expenses, offset slightly by higher billing and collection fees and network costs. Bad debt expense declined 31.5%, from 11.2 % to 7.8% as a percentage of direct call provisioning revenues, as a result of our shift to selling products on our prepaid platforms, further tightening of our credit policies due to the deteriorating economy, and the impact of a one-time write-off of $1.7 million in 2007 related to complications arising from our billing system conversion. Historically, our bad debt has been highly correlated to unemployment rates; however, we have developed statistical methods to identify high risk customers who we require to prepay for services. In 2007, approximately 35% of our direct provision revenues were prepaid, while 46% of our direct provisioning revenues were prepaid in 2008. Field operations expense declined $0.9 million year over year due to efficiencies gained from our packet-based architecture, and we expect to leverage further cost efficiencies in 2009 through network optimization and other initiatives that we believe will reduce our cost structure over the long term. With the current economic recession and increasing unemployment rates, it is possible that bad debt results could rapidly deteriorate. Because our bad debt visibility is delayed by six to nine months, on average, risk exists that we will incur future write-offs and that our bad debt will increase.

Cost of service in our offender management software segment as a percentage of revenue decreased to 53.9 % from 77% mainly due to more efficient utilization of personnel in 2008. Cost of service for the offender software segment primarily represents salaries and related costs of employees and contractors who provide technological services to develop, customize or enhance the software for our clients. Time incurred for research and development or administrative activities by these employees is classified as SG&A expense in 2008.

Cost of service in our wholesale services segment as a percentage of our revenue decreased to 60.9% from 64.6% as a result of our bad debt savings initiatives discussed above. Cost of service is a more volatile component of wholesale services relative to our direct call provisioning business because most of the cost is comprised of bad debt expense. Therefore, a rise in unemployment rates may cause a significant erosion of wholesale profitability should bad debt results deteriorate. The wholesale services cost structure will include a higher mix of field service costs in 2009 because of the implementation of the Texas Department of Criminal Justice sites.

SG&A. SG&A expenses of $59.5 million were $1.1 million, or 1.9%, higher than the year ended December 31, 2007. The increase was due primarily to $6.3 million in additional SG&A expenses in our offender management software segment as 2007 results included only two quarters of Syscon expenses compared to a full reporting year in 2008. Additionally, we incurred $1.2 million related to the reorganization of the executive team of the Company. These increases were offset by a decrease of approximately $1.0 million related to one-time costs incurred in 2007 for bonuses tied to the closing of the Syscon acquisition, severance and death benefits paid to the family of an executive and lease exit costs. Legal fees were lower in 2008 as a result of settling several intellectual property lawsuits during the third quarter of 2008. Proceeds from the intellectual property settlements were recorded against SG&A costs, as we had incurred substantial legal and other professional service fees related to these settlements in SG&A expense since the fourth quarter of 2006. We expect our legal expenses to continue to decline in 2009 because of the settlement of these matters. In the third quarter of 2008 we implemented cost cutting initiatives which lowered administrative costs by approximately $0.7 million during the last six months of 2008 and will further reduce SG&A costs in 2009.

Restructuring Costs. During 2008, we incurred $0.2 million related to the realignment of our field service organization because of efficiencies gained from our packet-based architecture, which we began to install in 2006 and will continue to install as customer contracts are renewed. In 2007, restructuring charges of $0.6 million were incurred related to the consolidation of our customer care function into the Dallas office, comprised of $0.2 million of severance expense and $0.4 million of facility exit costs for the Selma, Alabama location.

Depreciation and Amortization Expenses. Depreciation and amortization expenses were $34.4 million for the year ended December 31, 2008, a decrease of $2.6 million or 7.1% over the year ended December 31, 2007. The decrease is primarily attributable to lower amortization of intangibles related to the Evercom acquisition that became fully amortized in 2007. This was partially offset by an increase in amortization of new software development and purchases and four quarters of depreciation and amortization related to Syscon verses two quarters in 2007.

Interest and Other Expenses, net. Interest and other expenses, net, of $41.9 million for the year ended December 31, 2008, increased by $10.4 million or 33.1% over the year ended December 31, 2007. The increase relates primarily to the increasing principal on the Senior Subordinated Notes due to interest being paid-in-kind and interest expense on the $40 million 11% Second-priority Senior Secured Notes due 2011 issued on June 29, 2007. Additionally, we experienced a foreign exchange transaction loss of $3.8 million during the year ended December 31, 2008 compared to a gain of $1.5 million in 2007.

Income Tax Expense. We had an income tax benefit of $0.5 million for the year ended December 31, 2008 and an expense $1.9 million for the year ended December 31, 2007. In 2007, we generated a tax expense as a result of changes in the deferred tax balances. In 2008, a tax benefit of $2.5 million was recorded related to foreign operations, offset by $2.0 million in expense as a result of changes in deferred tax liabilities in the United States.

Accrued Dividends on Redeemable Preferred Stock. Dividends accrue on the Series A Redeemable Preferred Stock issued in December 2007. Each share of the preferred stock has a stated value of $2,000 and accrues dividends annually at 12.5% of the stated value. As of December 31, 2008, the Company had accrued dividends of $1.3 million for the Series A Preferred Stock.

Results of Operations for the Year Ended December 31, 2007 Compared to December 31, 2006

Total Revenues. Compared to the year ended December 31, 2006, consolidated revenues decreased for the year ended December 31, 2007 by $10.0 million, or 2.5%, to $391.9 million. The primary components of the decrease in revenues are discussed below:

Direct call provisioning revenues decreased $2.5 million, or 0.7%, to $338.7 million primarily resulting from a decrease of $8.4 million due to the loss of direct business contracts with several departments of corrections that expired during the second half of 2007, combined with the impact of a worsening economy, which has caused us to implement tighter credit controls in an effort to reduce our bad debt exposure. The decrease in revenue was offset by an increase of $5.3 million in new direct department of corrections contracts won from competitors. We were awarded the State of Arizona and Cook County, Illinois in late 2007 and the installation of these accounts began in the second quarter of 2008. Together, they are estimated at $18 million of annual revenue. We were awarded the State of Florida Department of Corrections direct provisioning account in early 2007. After a delay due to an ongoing protest of the award by several competitors, we began installing this account in October of 2007 and completed installation in December 2007.

Offender management software revenues of $7.9 million are now part of our consolidated results of operations as a result of the acquisition of Syscon on June 29, 2007. As required by Financial Accounting Standards Board Statement No. 141, Emerging Issues Task Force Issue No. 01-13, and related rules, Syscon’s balance sheet reflects the fair values of assets and liabilities on the acquisition date. Consequently, we adjusted Syscon’s existing customer contracts and related deferred revenues to fair value, which will decrease the amount of booked revenue and profit that we will be able to recognize prospectively. As a result, during the period from June 29, 2007 through December 31, 2007, our reported revenue and operating profit for offender management software were $1.4 million lower than would have been reported had no acquisition occurred, representing the current period amortization of the fair value of contracts acquired. The majority of our revenues for offender management software are currently associated with our ongoing implementation of our software for Her Majesty’s Prison Service in the United Kingdom, through a sub-contracting agreement with Electronic Data Systems, Inc. Revenues from this contract declined in the fourth quarter from the previous quarter by several million dollars as a result of the United Kingdom’s desire to conduct a budgetary review.

Wholesale services revenues decreased by $15.4 million, or 25.5 %, to $45.2 million primarily due to terminations of solutions service by Global Tel*Link as the underlying facility contracts expired. Wholesale services revenues are expected to continue to decline in the future because Global Tel*Link has indicated that it intends to eliminate our services the underlying contracts expire. Telecommunications services revenues also decreased primarily as a result of the accounts that we did not retain upon contract renewal or accounts that converted to direct provisioning revenue. We have not retained a significant amount of our telecommunications services contracts upon renewal as a result of our strategy to focus on growing our direct provisioning business. The departures of the former AT&T and Verizon from the inmate telecommunications market contributed to the decline.

Cost of Service. Total cost of service for the year ended December 31, 2007 decreased by $7.3 million over cost of service for the year ended December 31, 2006, or 2.4%, to $302.8 million. The decrease was due primarily to a decline in our operating revenues. Operating costs are a substantially higher component of revenues in the direct call provisioning, solutions services, and offender management software businesses than in the telecommunications services and equipment sales businesses.

Cost of service in our direct provisioning business increased as a percentage of revenue as a result of an increase in commission expenses due to competitive market forces. This was offset by declining long distance costs and bad debt expenses due to cost savings initiatives, tighter credit policies and other bad debt savings initiatives started in 2007. Bad debt expense improved over the prior year even though it was negatively impacted by approximately $1.7 million of write-offs associated with complications of our billing system conversion, although we received a $0.5 million insurance settlement related to our losses from Hurricane Katrina in 2006. In 2007, we also benefited from a one-time $0.8 million excise tax refund

that reduced our cost of service. Before considering the prevailing economy, we expect total cost of service as a percentage of revenue to decline in 2008 as we achieve operating efficiencies through our new packet-based architecture, which will continue to be rolled out over the next several years. We also expect to further benefit from cost savings in 2008 as our tighter credit policies, network optimization and other initiatives will decrease our cost structure over the long term. Historically, our bad debt has been highly correlated to unemployment rates. We have developed statistical methods to identify high risk customers who we require to prepay. For 2007, approximately 35% of our direct provisioning revenues were prepaid, and this percentage grew to approximately 39% in the fourth quarter of 2007.

Cost of service in our offender management software segment as a percentage of revenue is 77.0 % and primarily represents salaries and related costs of employees and contractors, who provide technological services to develop, customize or enhance the software for our clients.

Cost of service in our wholesale services segment as a percentage of revenue decreased from 69.1% to 64.6% as a result of our bad debt savings initiatives related to our solutions segment and the shift in profitability of the remaining accounts in service and the relative profitability of those accounts deinstalled over the last year in our telecommunications segment. Cost of service is a more volatile component of solutions services relative to our other business units because most of the cost is comprised of bad debt expense. As noted above, with the recent economic downturn, bad debt may increase in the future. Cost of service in our equipment sales and other segment decreased as a percentage of revenue due to the variable profitability arising from declining sales volumes.

SG&A. SG&A expenses of $58.4 million were $6.0 million, or 11.5%, higher than the year ended December 31, 2006. The increase was due primarily to (a) incremental Syscon SG&A of $2.6 million, (b) $1.0 million of excise taxes representing gross receipts taxes that were not able to be passed on to consumers, which related primarily to our interim contract with the State of Pennsylvania, (c) $0.9 million higher legal fees related to various lawsuits, (d) $0.5 million of bonuses related to the closing of the Syscon acquisition, (e) $0.5 million higher software maintenance costs related to our new packet-based architecture, (f) a $0.5 million settlement of a dispute with a former telecommunications service partner relating to prior years, (g) $0.3 million of personnel costs associated with severance and death benefits to the family of an executive, (h) $0.2 million in lease exit costs to close a warehouse, and (i) higher personnel-related costs due to rising healthcare costs and cost of living increases. These increases were partially offset by a $2.1 million lower employee bonus accrual impacting the fourth quarter. We also spent $0.8 million for Sarbanes Oxley cost in 2007.

In the fourth quarter, SG&A was $12.8 million, which included $1.3 million of Syscon SG&A. The $12.8 million included a $0.6 million unusual excise tax charge. However, legal fees were only $0.7 million in the fourth quarter after averaging $1.9 million per quarter for the first three quarters of 2007. The fourth quarter of 2007 also reflected a $2.1 million reversal of employee bonuses.

Restructuring Costs. Restructuring charges of $0.6 million were incurred during the second quarter of 2007 related to the consolidation of our internal customer care function into the Dallas office, comprised of $0.2 million of severance expense and $0.4 million of facility exit costs for our Selma, Alabama location.

Depreciation and Amortization Expenses. Depreciation and amortization expenses were $37.0 million for the year ended December 31, 2007 and increased $6.8 million over the year ended December 31, 2006. The increase was attributable to depreciation and amortization related to additions to property and equipment and intangible assets and a change in the estimated useful life of certain telecommunications equipment related to our new packet-based architecture. The change in the useful life increased depreciation expense by $1.9 million in 2007. Additionally, 2007 depreciation and amortization includes $1.9 million related to Syscon operations associated primarily with the write-up of Syscon’s assets to fair market value as of the acquisition date.

Interest and Other Expenses, net. Interest and other expenses, net, of $31.5 million for the year ended December 31, 2007 increased by $3.7 million over the year ended December 31, 2006. The increase relates primarily to the increasing principal on the Senior Subordinated Notes due to interest being paid-in-kind

and interest expense on the $40 million 11% Second-priority Senior Secured Notes due 2011 issued on June 29, 2007, offset by foreign exchange transaction gains of $1.5 million.

Income Tax Expense. We had income tax expense of $1.5 million and $1.9 million for the years ended December 31, 2006 and December 31, 2007, respectively. We can generate tax expense despite operating losses principally due to changes in deferred tax balances.

Liquidity and Capital Resources

General

Our principal liquidity requirements are to service and repay debt and meet our capital expenditure and operating needs. Our ability to make payments on and to refinance indebtedness, and to fund planned capital expenditures will depend on our ability to generate cash in the future and our ability to maintain compliance with covenants in our credit facilities, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we cannot meet our covenants, debt service and repayment obligations, we would be in default under the terms of the agreements governing our debt, which would allow the lenders under our credit facilities to declare all borrowings outstanding to be due and payable, which would in turn, trigger an event of default under the indenture agreement and the agreement governing our senior subordinated debt. In the event that cash in excess of the amounts generated from on-going business operations and available under the credit facilities or through equity contributions from stockholders is required to fund operations, we may be required to reduce or eliminate discretionary selling, general and administrative costs, and sell or close certain operations.

As of December 31, 2008, we had $293.0 million in total debt outstanding before considering $2.4 million of original issue discount on our Second-Priority Senior Secured Notes and $2.3 million of fair value attributable to warrants issued in connection with our Senior Subordinated debt financing, both of which are reflected as discounts to outstanding long-term debt in our condensed consolidated financial statements (see additional information on our long and short-term debt under "Debt and Other Obligations" below). As of December 31, 2008, we had advances of $16.5 million outstanding under our working capital facility (See Note 5) and a total stockholders’ deficit of $128.8 million.

In September of 2008, we entered into a new revolving credit facility that extended the maturity of our revolver and also provided for greater availability than our previous credit facility. As of March 25, 2009, we had unused capacity of $11.1 million under our new facility.

Cash Flows

The following table provides our cash flow data for the years ended December 31, 2006, 2007 and 2008 (in thousands):

		For the Year Ended December 31,
		2006			2007			2008
Net cash provided by operating activities	$	19,080		$	20,459		$	17,406
Net cash used in investing activities	$	(27,126	)	$	(64,000	)	$	(17,046	)
Net cash provided by financing activities	$	5,974		$	46,506		$	1,094

Net cash provided by operating activities was $19.1 million, $20.5 million, and $17.4 million for the years ended December 31, 2006, December 31, 2007 and December 31, 2008, respectively. Net cash provided by operating activities of $17.4 million consisted of operating income of $41.8 million before considering non-cash expenses, such as depreciation and amortization of $34.4 million, offset by $2.2 million of working capital use and $22.2 million of cash interest. In 2007, we generated a working capital benefit of $9.1 million arising from a billing system change, which drove an increase in prepaid revenues. In 2008, we continued to improve prepaid revenue as a percentage of total revenue although at a lower rate

than in 2007. Additionally, lower wholesale services volumes caused the payable to our partners to decline in 2008.

Net cash used in investing activities was $27.1 million, $64.0 million and $17.0 million for the years ended December 31, 2006, 2007 and 2008, respectively. The $17.0 million used in 2008 represents capital expenditures for equipment and intangibles principally to maintain and grow the direct call provisioning business. In 2007, we utilized $43.7 million in connection with the acquisition of Syscon with the remainder of the $64.0 million associated with capital expenditures mainly related to the direct call provisioning business. The decline in capital spending in 2008 was principally due to a reduction in signing bonuses offered on newly acquired or renewed direct contracts.

Net cash provided by financing activities was $6.0 million, $46.5 million and $1.1 million for the years ended December 31, 2006, 2007 and 2008, respectively. In 2008, $11.5 million in net advances on the revolver funded cash used to pay outstanding checks and repay a loan to Syscon’s former stockholder. The decline in financing activities from 2007 is due to the issuance of $40.0 million of notes to fund the Syscon acquisition. Additionally, Syscon’s former stockholder left $5.0 million of cash in Syscon’s bank accounts upon the closing of the Syscon acquisition, which was used to fund Syscon’s operations, this amount was repaid in 2008. As of March 25, 2009, there was $18.9 million of borrowings under the revolving credit facility.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future, which to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current and expected level of operations, we believe our cash flow from operations, available cash and available borrowings under our $30.0 million revolving credit facility will be adequate to make required capital expenditures, service our indebtedness and meet our other working capital needs for at least twelve months from our balance sheet dated December 31, 2008. We cannot assure you, however, that our available sources of cash will be sufficient to enable us to make such capital expenditures, service our indebtedness or to fund our other working capital needs. Further, in the event we wish to make additional acquisitions, we may need to seek additional financing.

Debt and other Obligations

Revolving Credit Facility — On September 30, 2008, we entered into a senior credit agreement with new lenders (the “New Credit Agreement”) to refinance our existing revolving credit facility. The New Credit Agreement provides us with a $10 million letter of credit facility and a revolving facility of up to the lesser of (i) $30 million and (ii) 125% of our consolidated EBITDA (as defined in the New Credit Agreement) for the preceding 12 months, less the face amount of outstanding letters of credit. The New Credit Facility expires on June 9, 2011. Advances bear interest at an annual rate of our option equal to one of the following: (a) LIBOR plus 4.0%, or (b) a rate equal to the Base Rate plus 3.0%. The Base Rate is the greater of (i) 5%, (ii) the Federal Funds rate plus 0.5%, or (iii) the prime rate (as defined in the New Credit Agreement). Interest is payable in arrears on the first day of each month. The unused availability under the New Credit Agreement are subject to a fee based on a per annum rate of 0.375% due monthly. Borrowings under the New Credit Agreement are secured by a first lien on substantially all of our and certain of our subsidiaries’ assets. As of December 31, 2008, our borrowing availability under the New Credit Agreement was $13.5 million.

Second-priority Senior Secured Notes — We have $194.0 million of the 11% Second-priority Senior Secured Notes outstanding. These notes were issued at a discount of $4.5 million, or 97.651% of face value. The Senior Secured Notes are secured by a second lien on substantially all of our and certain of the subsidiaries’ assets other than accounts receivable, inventory and real property.

All $194.0 million of principal is due September 9, 2011. To the extent we generate excess cash flow (as defined in the indenture) in any calendar year, we are required by the Senior Secured Notes to offer to repay principal equal to 75% of such excess cash flow at a rate of 102.750% of face value in 2009. No excess cash flow payment was due for the year ended December 31, 2008, because the Excess Cash Flow

Amount (as defined in the Indenture) greater than $5.0 million was not generated. In the event we determine that the Excess Cash Flow Amount is likely to exceed $5 million in 2009, we may purchase Senior Secured Notes in the open market, by negotiated private transactions or otherwise, to reduce the aggregate Excess Cash Flow Amount to less than $5 million. We and our affiliates may from time to time seek to retire or purchase our outstanding debt, including the Notes, through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.Interest is payable semiannually on March 1 and September 1. The effective interest rate is 11.4% on the Second-priority Senior Secured Notes.

The fair values associated with our Senior Secured Notes were quoted as of December 31, 2008, at a trading price of $53.25 and $65.50, a 37.6% and 22.0% decrease from the quoted values at December 31, 2007. We believe the decrease in value is a reflection of our highly levered position amid the current credit market crisis and deepening recession.

Senior Subordinated Notes — We have outstanding $82.5 million of Senior Subordinated Notes unsecured and subordinate to the revolving credit facility, that bear interest at an annual rate of 17%. Interest is payable at the end of each calendar quarter, or, as restricted by our revolving credit facility, is paid-in-kind by adding accrued interest to the principal balance of the Senior Subordinated Notes. All outstanding principal, including interest paid-in-kind, is due on September 9, 2014 and a mandatory prepayment equal to $20.0 million plus 50% of all outstanding interest paid-in-kind is due on September 9, 2013. In connection with the issuance of the Senior Subordinated Notes, we issued warrants to acquire 51 shares of its common stock at an exercise price of $10 per share to the Senior Subordinated Noteholders. As a result, we discounted the face value of the Senior Subordinated Notes by $2.9 million representing the estimated fair value of the warrants at the time of issuance. During the year ended December 31, 2008, $12.6 million of paid-in-kind interest was added to the principal balance of the Senior Subordinated Notes. The effective interest rate is 18.62% on the Senior Subordinated Notes. In order to enter into additional financing to complete the Syscon acquisition in 2007, we incurred a non-cash consent fee of $0.4 million payable to the holders of the Senior Subordinated Notes, which was added to the principal balance.

All of our domestic subsidiaries and certain of our foreign subsidiaries (the “Subsidiary Guarantors”) are jointly and severably liable for the working capital facility, Senior Subordinated Notes and Second-priority Senior Secured Notes. The Subsidiary Guarantors are wholly-owned. We have not included separate financial statements of our subsidiaries because (a) our aggregate assets, liabilities, earnings and equity are presented on a consolidated basis, and (b) we believe that separate financial statements and other disclosures concerning subsidiaries are not material to investors.

Our credit facilities contain financial and operating covenants that require the maintenance of certain financial ratios, including specified fixed interest coverage ratios, maintenance of minimum levels of operating cash flows and maximum capital expenditure limitations. These covenants also limit our ability to incur additional indebtedness, make certain payments including dividends to shareholders, invest and divest company assets, and sell or otherwise dispose of capital stock. In the event that we fail to comply with the covenants and restrictions, as specified in the credit agreements, we may be in default, at which time payment of the long term debt and unpaid interest may be accelerated and become immediately due and payable. As of December 31, 2008, we were in compliance with all covenants in our credit facilities.

Capital Requirements

As of December 31, 2008, our contractual obligations and commitments on an aggregate basis are as follows:

	Payments by Period
		2009		2010		2011		2012		2013		Thereafter
Long-term debt (1)	$	-	$	-	$	210,511	$	-	$	41,242	$	41,242
Unrecognized tax benefits		-		-		-		-		-		668
Operating leases		3,644		2,434		1,867		1,627		1,395		1,769
Minimum commission payments		5,648		3,203		447		336		86		-
Minimum purchase guarantees		4,002		2,087		155		-		-		-
Total contractual cash obligations and commitments	$	13,294	$	7,724	$	212,980	$	1,963	$	42,723	$	43,679

(1)

Does not include any amounts that may be drawn under our new credit agreement, which expires on June 9, 2011, or accrued interest under our long-term debt. Assumes no repurchases of second-priority senior secured notes or senior subordinated notes during such period whether or not mandatory.

Critical Accounting Policies

A “critical accounting policy” is one that is both important to the portrayal of a company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our financial statements prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The process of preparing financial statements in conformity with GAAP requires us to use estimates and assumptions to determine certain of our assets, liabilities, revenues and expenses. We base these determinations upon the best information available to us during the period in which we are accounting for our results. Our estimates and assumptions could change materially as conditions within and beyond our control change or as further information becomes available. Further, these estimates and assumptions are affected by management’s application of accounting policies. Changes in our estimates are recorded in the period the change occurs. Our critical accounting policies include, among others:

•	Revenue recognition and bad debt reserve estimates;

•	goodwill and other intangible assets;

•	accounting for income taxes; and

•	acquisition-related assets and liabilities.

The following is a discussion of our critical accounting policies and the related management estimates and assumptions necessary for determining the value of related assets or liabilities.

Revenue Recognition and Bad Debt Reserve Estimates

Revenues related to collect and prepaid calling services generated by the direct call provisioning segment are recognized during the period in which the calls are made. In addition, during the same period, we accrue the related telecommunication costs for validating, transmitting, billing and collection, and line and long distance charges, along with commissions payable to the facilities and allowances for unbillable and uncollectible calls, based on historical experience.

Revenues related to the wholesale services segments are recognized in the period in which the calls are processed through the billing system, or when equipment and software is sold. During the same period, we accrue the related telecommunications costs for validating, transmitting, and billing and collection costs, along with allowances for unbillable and uncollectible calls, as applicable, based on historical experience.

We apply Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenue Gross as a Principal versus net as an Agent. Based on this consensus, all call revenues related to the wholesale services segment are presented in the statement of operations at the net amount. For records processed through our billing system, this is the amount charged to the end user customer less the amount paid to the inmate telecommunication provider.

Revenues related to the Offender Management software is recognized under Statement of Position 97-2, Software Revenue Recognition, as amended. Revenue is recognized when the fair value of vendor specific objective evidence (“VSOE”) is determined. If the VSOE of fair value cannot be determined for any undelivered element or any undelivered element is essential to the functionality of the delivered element, revenue is deferred until such criteria are met or recognized as the last element is delivered. Under the residual method, the fair value of the undelivered elements is deferred and the difference between the total arrangement fee and the amount recorded as deferred revenue for the undelivered elements is recognized as revenue related to the delivered elements.

Services related to the implementation, customization, and modification of software are not separable and are essential to the functionality for the customer. Accordingly, we account for the combined upfront software license fee and customization revenue under contract accounting, recognizing revenue and related costs using the percentage-of-completion method in accordance with AICPA Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. The percentage of completion is calculated using hours incurred to date compared to total estimated hours to complete the project. Our estimates are based upon the knowledge and experience of project managers and other personnel, who review each project to assess the contract’s schedule, performance, technical matters and estimated hours to complete. When the total cost estimate exceeds revenue, the estimated project loss is recognized immediately. Support contracts, which require our ongoing involvement, are billed in advance and recorded as deferred revenue and amortized over the term of the contract, typically one year.

In evaluating the collectibility of our trade receivables, we assess a number of factors including historical cash reserves held by our LEC billing agents, collection rates with our billing agents and a specific customer’s ability to meet the financial obligations to us, as well as general factors, such as the length of time the receivables are past due and historical collection experience. Based on these assessments, we record reserves for uncollectibles to reduce the related receivables to the amount we ultimately expect to collect from our customers.

If circumstances related to specific customers change or economic conditions worsen such that our past collection experience is no longer relevant, our estimate of the recoverability of our trade receivables could be further reduced or increased from the levels provided for in our financial statements. Because the majority of our receivables are collected through our LEC billing agents and such agents typically do not

provide us with visibility as to collection results for an average six to nine month period, our bad debt reserves are estimated and may be subject to substantial variation.

Goodwill and Other Intangible Assets

The calculation of amortization expense is based on the cost and estimated economic useful lives of the underlying intangible assets, intellectual property assets and capitalized computer software, and patent license rights. Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. We review our unamortized intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the estimated useful life has been reduced. We estimate the future cash flows expected to result from operations, and if the sum of the expected undiscounted future cash flows is less than the carrying amount of the intangible asset, we recognize an impairment loss by reducing the unamortized cost of the long-lived asset to its estimated fair value.

Accounting for Income Taxes

We recognize deferred tax assets and liabilities for the expected future tax consequences of transactions and events. Under this method, deferred tax assets and liabilities are determined based on the

difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. If necessary, deferred tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount of the valuation allowance.

Acquisition Related Assets and Liabilities

Accounting for the acquisition of a business as a purchase transaction requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The most difficult estimations of individual fair values are those involving long-lived assets, such as properties, plant and equipment and intangible assets. We use all available information to make these fair value determinations and, for major business acquisitions, engage an independent valuation specialist to assist in the fair value determination of the acquired long-lived assets. Due to inherent subjectivity in determining the estimated fair value of long-lived assets and the significance of the business acquisitions that we have completed, we believe that the recording of acquired assets and liabilities is a critical accounting policy.

Financial Reporting Changes

See Note 1, paragraph (x) of the Consolidated Financial Statements for information about recent accounting pronouncements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to market rate risk for changes in interest rates related to our revolving line of credit. Interest expense on our floating rate debt will increase more than expected if interest rates rise. Our $30.0 million revolving line of credit bears an interest rate equal to one of the following, at our option: (a) LIBOR plus 4.0%, or (b) a rate equal to the Base Rate plus 3.0%. The Base Rate is the greater of (i) 5%, (ii) the Federal Funds rate plus 0.5%, or (iii) the prime rate (as defined in the Credit Agreement). The effect of a 10% fluctuation in the interest rate on our revolving line of credit would have had a negligible impact on our interest expense for the twelve months ended December 31, 2007 and 2008. Approximately 90% of outstanding debt at December 31, 2008, is fixed-rate debt. While changes in interest rates impact the fair value of this debt, there is no impact on net earnings and cash flows.

We are exposed to foreign currency exchange rates on the earnings, cash flows and financial position of our international operations. We are not able to project the possible effect of these fluctuations on translated amounts or future earnings due to our constantly changing exposure to various currencies, the fact that all foreign currencies do not react in the same manner in relation to the U.S. dollar and each other, and the number of currencies involved. Our most significant exposure is to the British pound.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Securus Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Securus Technologies, Inc. and subsidiaries as of December 31, 2007 and 2008, and the related consolidated statements of operations, stockholders’ deficit and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 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 Securus Technologies, Inc. and subsidiaries as of December 31, 2007 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 7 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007 and as discussed in Note 1, the Company adopted the provisions of Statement of Financial Accounting Standards No.123(R), Share-Based Payment, on January 1, 2006.

KPMG LLP

Dallas, Texas

March 27, 2009

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts)

	December 31,
	2007			2008
ASSETS
Cash and cash equivalents	$	2,072		$	6,576
Restricted cash		1,535			1,599
Accounts receivable, net		50,788			45,316
Prepaid expenses		5,437			6,116
Current deferred income taxes		3,034			1,973
Total current assets		62,866			61,580
Property and equipment, net		40,797			35,364
Intangibles and other assets, net		119,427			98,550
Goodwill		69,035			63,468
Total assets	$	292,125		$	258,962

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Accounts payable	$	28,161		$	14,743
Due to related party		1,000			-
Accrued liabilities		40,188			44,371
Deferred revenue and customer advances		16,674			15,069
Current deferred income taxes		1,261			817
Total current liabilities		87,284			75,000
Deferred income taxes		15,352			10,893
Due to related party, net		3,510			-
Long-term debt		263,276			288,341
Other long-term liabilities		1,593			2,238
Total liabilities		371,015			376,472
Commitments and contingencies

Series A redeemable convertible preferred stock, $2,000 stated value, total redemption value $10,200 and $11,489 at December 31, 2007 and December 31, 2008; 5,100 shares authorized and outstanding at December 31, 2007 and 2008.		9,971			11,321

Stockholders’ deficit:
Common stock, $0.001 stated value; 1,290,000 and 1,355,000 shares authorized at December 31, 2007 and 2008; 677 and 161,037 shares issued and outstanding at December 31, 2007 and 2008, respectively.		7			8
Additional paid-in capital		35,620			34,304
Accumulated other comprehensive income (loss)		1,935			(2,701)
Accumulated deficit		(126,423	)		(160,442	)
Total stockholders’ deficit		(88,861	)		(128,831	)
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit	$	292,125		$	258,962

See accompanying notes to consolidated financial statements.

SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2006, 2007 and 2008

(Amounts in thousands)

	For the Year Ended December 31,
		2006			2007			2008
Revenue:
Direct call provisioning	$	341,237		$	338,703		$	333,564
Offender management software		-			7,933			25,137
Wholesale services		60,660			45,214			29,902
Total revenue		401,897			391,850			388,603
Cost of service (exclusive of depreciation and amortization shown separately below):
Direct call provisioning, exclusive of bad debt expense		227,375			229,680			229,456
Direct call provisioning bad debt expense		40,830			37,776			25,889
Offender management software expense		-			6,110			13,540
Wholesale services expense		41,894			29,197			18,219
Total cost of service		310,099			302,763			287,104
Selling, general and administrative expenses		52,387			58,420			59,507
Restructuring costs		-			614			224
Depreciation and amortization		30,258			37,048			34,400
Total operating costs and expenses		392,744			398,845			381,235
Operating income (loss)		9,153			(6,995	)		7,368
Interest and other expenses, net		27,811			31,487			41,896
Loss before income taxes		(18,658	)		(38,482	)		(34,528	)
Income tax expense (benefit)		1,461			1,922			(509	)
Net loss		(20,119	)		(40,404	)		(34,019	)
Accrued dividends on redeemable convertible
preferred stock		-			-			(1,351	)
Net loss available to common stockholders	$	(20,119	)	$	(40,404	)	$	(35,370	)

See accompanying notes to consolidated financial statements.

SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

AND COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2006, 2007 and 2008

(Amounts in thousands, except share amounts)

												Accumulated
						Additional						Other			Total
	Common					Paid-In			Accumulated			Comprehensive			Stockholders’
	Shares			Amount		Capital			Deficit			Income (Loss)			Deficit
Balance at December 31, 2005		597		$	5	$	34,027		$	(65,900	)	$	-		$	(31,868	)
Restricted stock grants		13			1		-			-			-			1
Stock based compensation		-			-		113			-			-			113
Net loss		-			-		-			(20,119	)		-			(20,119	)
Balance at December 31, 2006		610		$	6	$	34,140		$	(86,019	)	$	-		$	(51,873	)
Issuance of common stock in conjunction with Syscon acquisition		45		$	1	$	1,413		$	-		$	-		$	1,414
Stock based compensation		-			-		67			-			-			67
Exercise of warrants		14			-		-			-			-			-
Restricted stock grants		11			-		-			-			-			-
Forfeitures of restricted stock		(3	)		-		-			-			-			-
Foreign currency translation		-			-		-			-			1,935			1,935
Net loss		-			-		-			(40,404	)		-			(40,404	)
Total comprehensive loss																(38,469	)
Balance at December 31, 2007		677		$	7	$	35,620		$	(126,423	)	$	1,935		$	(88,861	)
Stock based compensation		-			-		35			-			-			35
Restricted stock grants		160,364			1		-			-			-			1
Forfeitures of restricted stock		(2	)		-			-		-			-			-
Purchase of common stock		(2	)		-		-			-			-			-
Accrued dividends on preferred stock		-			-		(1,351	)		-				-		(1,351	)
Foreign currency translation		-			-		-			-			(4,636	)		(4,636	)
Net loss		-			-		-			(34,019	)		-			(34,019	)
Total comprehensive loss																(38,655	)
Balance at December 31, 2008		161,037		$	8	$	34,304		$	(160,442)		$	(2,701	)	$	(128,831	)

See accompanying notes to consolidated financial statements.

SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2006, 2007 and 2008

(Amounts in thousands)

	For the Year Ended
		2006			2007			2008
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:
Net loss from continuing operations	$	(20,119	)	$	(40,404	)	$	(34,019	)
Adjustments to reconcile net loss to net cash provided by operating activities from continuing operations:
Depreciation and amortization		30,258			37,048			34,400
Amortization of fair value of contracts acquired		-			1,360			3,489
Deferred income taxes		1,123			922			(2,365	)
Conversion of interest paid “in kind” to secured subordinated notes		9,011			10,678			12,650
Amortization of deferred financing costs and debt discounts		1,550			2,251			3,542
Other operating activities, net		(241)			169			(25)
Changes in operating assets and liabilities, net of effects of acquisitions:
Restricted cash		(65	)		(74	)		(68	)
Accounts receivable		(994	)		20,459			3,813
Prepaid expenses and other current assets		596			191			(862	)
Other assets		(727	)		376			654
Accounts payable		(6,630	)		(11,251	)		(9,057	)
Accrued liabilities		5,318			(1,266	)		5,254
Net cash provided by operating activities from continuing operations	$	19,080		$	20,459		$	17,406
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment and intangible assets	$	(27,176	)	$	(21,356	)	$	(17,046	)
Cash consideration paid for acquired business		-			(43,717	)		-
Dividends received from unconsolidated affiliate		50			-			-
Proceeds from sale of unconsolidated affiliate		-			985			-
Property insurance proceeds		-			88			-
Net cash used in investing activities	$	(27,126	)	$	(64,000	)	$	(17,046	)

See accompanying notes to consolidated financial statements.

SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

For the Years Ended December 31, 2006, 2007 and 2008

(Amounts in thousands)

		For the Year Ended December 31,
		2006			2007			2008
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of second-priority senior secured notes	$	-		$	39,060		$	-
Cash overdraft		2,856			(3,958	)		(4,151	)
Net advances on revolving credit facility		3,225			1,775			11,511
Debt issuance costs		-			(4,853	)		(1,757	)
Proceeds (payments) related to loan payable to related party, net		-			4,510			(4,510	)
Payments on other debt		(108	)		-			-
Proceeds from issuance of common stock		1			1			1
Proceeds from issuance of Series A preferred stock		-			10,200			-
Series A preferred stock issuance costs		-			(229	)		-
Net cash provided by financing activities	$	5,974		$	46,506		$	1,094
Effect of exchange rates on cash and cash equivalents		-			(1,451	)		3,050
Increase (decrease) in cash and equivalents	$	(2,072	)	$	1,514		$	4,504
Cash and cash equivalents at beginning of period		2,630			558			2,072
Cash and cash equivalents at end of period	$	558		$	2,072		$	6,576
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest	$	17,483		$	18,715		$	22,207
Income taxes	$	266		$	239		$	846
NONCASH FINANCING AND INVESTING ACTIVITIES:
Non-cash consent fee	$	-		$	400		$	-
Leasehold improvements	$	-		$	-		$	710

See accompanying notes to consolidated financial statements.

SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Securus Technologies, Inc. and its subsidiaries (the “Company” or “we”) provide inmate telecommunications services to correctional facilities operated by city, county, state and federal authorities and other types of confinement facilities in 44 states. The Company was incorporated in Delaware on January 12, 2004, and effective March 3, 2004 and September 9, 2004, acquired all of the outstanding equity interests of T-Netix, Inc. (“T-Netix”) and Evercom Holdings, Inc. (“Evercom”), respectively. On June 29, 2007, the Company acquired, as further discussed in Note 2, Syscon Holdings, Ltd, and certain of its affiliates (“Syscon”), which provides offender management software to more than 500 correctional facilities and probation offices in the United States, Canada, the United Kingdom and Australia.

(a) Basis of Presentation

During the prior periods presented, the Company had four reportable segments: Direct Call Provisioning, Solutions Services, Telecommunications Services, and Equipment Sales. In 2008, the Company combined the Solutions Services, Telecommunications Services, and Equipment Sales segments into the Wholesale Services segment as these were the determinants for how management makes operating decisions, assesses performance and allocates resources. These three segments demonstrate similar economic characteristics and are similar in the nature, class of customer, distribution methods, and regulatory environment for their products and services. As of December 31, 2008, the Company has three reportable segments Direct Call Provisioning, Offender Management Software, and Wholesale Services. In accordance with SFAS No. 131, segment disclosure forprior periods segment data were reclassified to conform to the 2008 presentation.

In the Direct Call Provisioning segment, the Company bills call revenue to the end users through major local exchange carriers (“LECs”) or through third-party billing services for smaller volume LECs. The Company performs ongoing customer credit evaluations and maintains allowances for unbillable and uncollectible amounts based on historical experience. Also a significant amount of our Direct Call Provisioning revenues are paid for on a prepaid basis. Deferred revenue is recorded for customer prepayments prior to usage.

In June 2007, the Company acquired Syscon and added the Offender Management Software segment. In this segment, the Company provides platform systems that allow facility managers and law enforcement personnel to analyze data to reduce costs prevent and solve crimes and facilitate rehabilitation through a single user interface. The system provides correctional facilities and law enforcement with the ability to manage and monitor inmate parole and probation activity and development at a sophisticated level. The Company generates revenues through license fees, software implementation and consulting fees, and software maintenance and support.

In the Wholesale Services segment, the Company provides solutions services, telecommunications services and equipment sales.

The solutions business within wholesale services consists of providing validation, uncollectible account management and billing services. In this business, accounts receivable generated from calls placed by inmates in correctional facilities are typically purchased from the third party inmate telecommunication providers at a discount from their face value and we accept responsibility for call validation, uncollectible accounts, and billing and collections costs. However, all purchased receivables must be processed and validated through our risk management system prior to allowing the call to be completed and also must be billed through our proprietary billing systems. Revenues from our solutions services equal the difference between the face value of the receivables purchased and the amount we pay our solutions partners for the discounted accounts receivable. Because revenues associated with our solutions business represent only a percentage of the face value of the receivables purchased, the associated billing and collection fees and uncollectible account expense represent a much higher percentage of revenues as compared to our direct

call provisioning business. In the solutions business, we do not bear any of the costs of facility commissions, equipment, line charges or direct sales charges, but bear the risk of unbillable and uncollectible accounts receivable.

The telecommunications business provides equipment, security enhanced call processing, call validation, and service and support through the telecommunications providers, rather than directly to the facility. Although our revenues for services to telecommunications service providers are lower than in our direct call provisioning business, where we provide the service to the facility directly and receive the retail value of the call, we do not incur all the additional capital costs related to these larger contracts that can require up-front or guaranteed commission payments. Our gross margin percentage for providing telecommunications services is higher than the margin for our direct call provisioning business because we do not incur commissions, transport costs or risk of collection. We also sell equipment, typically consisting of our inmate calling system, to a limited number of telecommunication services providers

(b)

Reclassification

Certain amounts in the prior periods’ consolidated financial statements have been reclassified to conform to the current period presentation. This reclassification had no impact on operating income (loss), net loss, cash flows or the financial position of the Company for the prior periods presented.

(c) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Securus Technologies, Inc. and its wholly-owned subsidiaries, T-Netix, Inc., Evercom Holdings, Inc., and Syscon Holdings, Ltd.. All significant intercompany accounts and transactions have been eliminated in consolidation.

(d) Liquidity

The Company’s principal liquidity requirements are to service and repay debt and meet the Company’s capital expenditure and operating needs. The Company’s ability to make payments on and to refinance indebtedness, and to fund planned capital expenditures will depend on the Company’s ability to generate cash in the future and its ability to maintain compliance with covenants in it’s credit facilities, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company’s control. If we cannot meet our covenants, debt service and repayment obligations, we would be in default under the terms of the agreements governing our debt, which would allow the lenders under our credit facilities to declare all borrowings outstanding to be due and payable, which would in turn, trigger an event of default under the indenture agreement and the agreement governing our senior subordinated debt. In the event that cash in excess of the amounts generated from on-going business operations and available under the credit facilities or through equity contributions from stockholders is required to fund operations, the Company may be required to reduce or eliminate discretionary selling, general and administrative costs, and sell or close certain operations.

(e) Accounting Estimates

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 reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates include the valuation allowances for receivables, the recoverability of property and equipment, goodwill, intangible and other assets, and deferred income taxes.

Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

In the first quarter of 2007, the Company reduced its estimate of the useful life of certain telecommunications equipment to reflect the installation, over the next several years, of the Company’s new packet-based architecture. The change in the depreciation period increased net loss by approximately $1.9 million and $1.4 million for the years ended December 31, 2007 and December 31, 2008, respectively.

(f) Risks and Uncertainties

The Company generated approximately 20% of its revenues from its five largest customers during the year ended December 31, 2008. If the Company loses one or more significant customers, revenues and our ability to comply with our debt covenants could be adversely affected.

The majority of our offender management revenues are currently associated with our ongoing implementation of our software for Her Majesty’s Prison Service in the United Kingdom, through a sub-contracting agreement with Electronic Data Systems, Inc. We expect to have consistent revenues from this contract through the first quarter of 2009 when the implementation phase is expected to be completed, however, we will need to generate new contracts to compensate for the loss of this revenue.

(g) Cash and Cash Equivalents and Restricted Cash

Cash equivalents consist of highly liquid investments, such as certificates of deposits, money market funds and short term treasury instruments, with original maturities of 90 days or less. Additionally, restricted cash accounts represent amounts established for the benefit of certain customers in the event the Company does not perform under the provisions of the respective underlying contract with these customers. Restricted cash was $1.5 million and $1.6 million at December 31, 2007 and December 31, 2008, respectively.

(h) Trade Accounts Receivable

Trade accounts receivable are recorded at the invoice amount and do not bear interest. The majority of trade accounts receivable represent amounts billed or that will be billed for calls placed through our telephone systems. The majority of these receivables are billed using various LECs or third-party billing services and are reported net of an allowance for unbillable and uncollectible calls for estimated chargebacks to be made by the LECs and clearinghouses. The Company maintains an allowance for doubtful accounts for estimated losses resulting from a customer’s inability to make payments on accounts and it is net of amounts held by the LECs for estimated charge backs. The Company analyzes the collectibility of a majority of its accounts receivables based on a 12-month average of historical collections. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. Our policy is to write-off accounts after 180 days from invoice date, or after all collection efforts have failed.

The following table includes the activity related to our allowance for doubtful accounts (in thousands):

	For the Year Ended December 31,
		2006			2007			2008
Balance beginning of period	$	19,402		$	15,045		$	11,506
Opening balance of acquired business		-			115			-
Additions charged to expense		62,091			52,062			33,094
Accounts written-off		(66,448	)		(55,716	)		(39,420	)
Balance at end of period	$	15,045		$	11,506		$	5,180

(i) Fair Value of Financial Instruments

Statement of Financial Accounting Standards (“SFAS”) No. 107, Disclosure about Fair Value of Financial Instruments, requires certain disclosures regarding the fair value of financial instruments. Cash and cash equivalents, receivables, accounts payable, and accrued liabilities approximate fair value due to their short maturities. Carrying amounts and estimated fair value of debt are presented in Note 5.

(j) Concentrations of Credit Risk

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The Company’s revenues are primarily concentrated in the United States in the telecommunications industry. The Company had trade accounts receivable from two customers that comprised 38.5% (two telecommunications companies) of all trade accounts receivable at December 31, 2008. The Company does not require collateral on accounts receivable balances and provides allowances for potential credit losses.

The Company has significant revenue contracts denominated in US dollars and UK pounds. Syscon uses the Canadian dollar as its functional currency. Fluctuations in exchange rates between these currencies and the Canadian dollar could have a material effect on the business, financial condition and results of operations. The Company has not entered into any derivative contracts to mitigate the impact of foreign currency fluctuations.

(k) Property and Equipment

Property and equipment is stated at cost and includes costs necessary to place such property and equipment in service. Major renewals and improvements that extend an asset’s useful life are capitalized, while repairs and maintenance are charged to operations as incurred. Construction in progress represents the cost of material purchases and construction costs for telecommunications hardware systems in various stages of completion.

Depreciation is computed by the straight-line basis using estimated useful lives of 3 to 5 years for telecommunications equipment, office and computer equipment and furniture and fixtures. No depreciation is recorded on construction in progress until the asset is placed in service.

(l) Goodwill and Intangible and Other Assets

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. Intangible and other assets include acquired operating contracts and customer agreements, capitalized computer software, patents and license rights, patent application costs, trademarks, trade names and other intellectual property, capitalized loan costs, deposits and long-term prepayments and other intangible assets. The Company capitalizes interest costs associated with internally developed software based on the effective interest rate on aggregate borrowings. The Company capitalized interest in the amount of $0.2 million for each of the years ended December 31, 2006, 2007 and 2008, respectively. The Company capitalizes contract acquisition costs representing up-front payments required by customers as part of the competitive process to award a contract. These capitalized costs are included in operating contracts and customer agreements within the balance sheet caption “Intangibles and other assets, net” and are commonly referred to as signing bonuses in the industry.

We perform an annual impairment test of goodwill and other intangible assets with indefinite useful lives as of the last day of each fiscal year in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. This test is a two-step process and requires goodwill to be allocated to the Company’s reporting units. We define our reporting units to be the same as the reportable segments (see Note 6). In the first step, the fair value of the reporting unit is compared with the carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying value, a goodwill impairment may exist and the second step of the test is performed. In the second step, the implied fair value of the goodwill is compared with the carrying value of the goodwill. An impairment loss is recognized to the extent that the carrying value of the goodwill exceeds the implied fair value of the goodwill. We recognize an impairment loss by reducing the carrying value of the asset to its estimated fair value.

Amortization is computed on the straight-line basis over 3 to 12 years for operating contracts and customer agreements and patents and license rights. The weighted average amortization period for all of the intangible assets as of the year ended December 31, 2008, subject to amortization, is nine years. Amortization expense was $16.5 million, $18.9 million and $16.7 million for the years ended December 31, 2006, 2007 and 2008, respectively.

(m) Impairment of Long-Lived Assets

In accordance with SFAS No. 144, long-lived assets, such as property, equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

(n) Investments in Affiliated Companies

Beginning with our adoption of SFAS No. 142, the excess of cost of the stock of those affiliates over our share of their net assets at the acquisition date was recognized as goodwill and is not being amortized. The Company would recognize a loss when there is a loss in value in the equity method investment, which is other than a temporary decline.

Investment in the common stock of Accudata Technologies, Inc. (“Accudata”), an affiliated company owned 50% by us, was accounted for by the equity method, and was included in the consolidated balance sheet as “Intangibles and other assets, net” at December 31, 2006. Equity income was recognized in the results of operations of $0.4 million and a loss of $0.1 million for the years ended December 31, 2006 and December 31, 2007, respectively, and was included in the consolidated statements of operations as “Interest and other expenses, net”.

On August 9, 2007, Accudata purchased our 50% interest in its preferred stock for $1.0 million. In connection with the sale of its stock, the Company agreed to continue to conduct business at market rates with Accudata for at least thirty-six months. Minimum monthly payments to Accudata for validation services are $85,000 for the first twelve months, $56,667 for the second twelve months, and $28,333 for the third twelve months. The Company has paid Accudata $1.3 million of the $2.0 million commitment as of December 31, 2008.

(o) 401(k) Plan

The Company sponsors a 401(k) savings plan for the benefit of eligible full-time employees. This plan is a qualified benefit plan in accordance with the Employee Retirement Income Security Act (“ERISA”). Employees participating in the plan can generally make contributions to the plan of up to 15% of their compensation. The plan provides for the Company to make discretionary matching contributions of up to 50% of an eligible employee’s contribution for the first 6%. Matching contributions and plan expenses were $0.5 million, $0.6 million, and $0.7 million for the years ended December 31, 2006, 2007 and 2008, respectively.

(p) Income Taxes

The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the results of operations in the period that includes the enactment date.

(q) Appointment of Principal Officers

On June 11, 2008, the Company entered into an agreement with Mr. Richard A. Smith to appoint him as the Chief Executive Officer and elect him as a member of the Company’s Board of Directors, effective on June 23, 2008. Mr. Smith’s employment agreement extends through July 1, 2012 and provided a grant of 57,072.61 shares of Class B Common Stock, subject to the vesting requirements in his restricted stock agreement. Mr. Richard Falcone resigned as Chief Executive Officer on June 23, 2008, however, remained as Chairman of the Board of Directors until January 5, 2009, when Mr. Smith was appointed as Chairman.

On June 20, 2008, the Company entered into an agreement with Mr. William D. Markert to appoint him as Chief Financial Officer, effective June 30, 2008. Mr. Markert’s employment agreement extends through July 1, 2012 and provided a grant of 11,414.52 shares of the Company’s Class B Common Stock, subject to the vesting requirements in his restricted stock agreement.

(r) Stock-Based Compensation

The Company accounts for its restricted stock plan under the provisions of SFAS No. 123R, Share-Based Payment, which requires share-based compensation to be recognized based on the grant date estimated fair value of each award, net of estimated cancellations, over the employee’s requisite service period, which is generally the vesting period of the equity grant. The Company utilizes the modified prospective method under SFAS No. 123R which requires compensation expense to be recorded for all unvested share-based awards. The Company recorded compensation expense of approximately $0.1 million for each of the years ended December 31, 2006, 2007, and 2008 related to purchases of restricted stock by certain executives and members of the board of directors (See Note 9).

(s) Revenue Recognition

Revenues related to collect and prepaid calling services generated by the direct call provisioning segment are recognized during the period in which the calls are made. In addition, during the same period, the Company records the related telecommunication costs for validating, transmitting, billing and collection, and line and long distance charges, along with commissions payable to the facilities and allowances for unbillable and uncollectible calls, based on historical experience.

Revenues related to the wholesale services segment are recognized in the period in which the calls are processed through the billing system, or when equipment and software is sold. During the same period, the Company records the related telecommunications costs for validating, transmitting, and billing and collection costs, along with allowances for unbillable and uncollectible calls, as applicable, based on historical experience.

The Company applies Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenue Gross as a Principal versus net as an Agent. Based on this consensus, all call revenues related to the wholesale services segment are presented in the statement of operations at the net amount. For records processed through the billing system, this is the amount charged to the end user customer less the amount paid to the inmate telecommunication provider.

Revenues related to the Offender Management software are recognized under Statement of Position 97-2, Software Revenue Recognition, as amended. Revenue is recognized using the residual method when the fair value of vendor specific objective evidence (“VSOE”) of the undelivered elements is determined. If the VSOE of fair value cannot be determined for any undelivered element or any undelivered element is essential to the functionality of the delivered element, the arrangement fee is deferred until such criteria are met or recognized as the last element is delivered. Under the residual method, the fair value of the undelivered elements is recorded as deferred and the difference between the total arrangement fee and the amount recorded as deferred revenue for the undelivered elements is recognized as revenue related to the delivered elements.

Services related to the implementation, customization, and modification of software are not separable and are essential to the functionality for the customer. Accordingly, the Company accounts for the

combined upfront software license fee and customization revenue under contract accounting, recognizing revenue and related costs using the percentage-of-completion method in accordance with AICPA Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. The percentage of completion is calculated using hours incurred to date compared to total estimated hours to complete the project. The Company’s estimates are based upon the knowledge and experience of its project managers and other personnel, who review each project at each reporting date to assess the contracts schedule, performance, technical matters and estimated hours to complete. When the total cost estimate exceeds revenue, the estimated project loss is recognized immediately. Support contracts, which require our ongoing involvement, are billed in advance and recorded as deferred revenue and amortized to revenue over the terms of the contract, typically one year.

The Company applied EITF Issue No. 00-21, Revenue Arrangement with Multiple Deliverables Income, for patent settlements and other contracts during 2008. The Company accounts for multiple deliverables by vendor for arrangements under which it will perform multiple revenue-generating activities. In an arrangement with multiple deliverables, the delivered items are considered a separate unit of accounting. These arrangements are evaluated to ensure they add standalone value to the customer, there is objective and reliable evidence of the fair value of the undelivered items, and the arrangements include a general right of return relative to the delivered items and the delivery of the undelivered items is probable and substantially controlled by the vendor. The arrangement considerations are then allocated to the separate units of accounting based on the relative fair value.

(t) Foreign Currency Translation and Transaction Gains and Losses

Assets and liabilities of a non-U.S. subsidiary whose functional currency is not the U.S. dollar are translated at current exchange rates. Revenue and expense accounts are translated using an average rate for the period. Translation gains and losses are not included in determining net income (loss), but are reflected in the comprehensive income (loss) component of shareholders’ deficit.

The Company has transactions in functional currencies other than its functional currency. Transaction gains and losses are recorded in the consolidated statement of operations relating to the recurring remeasurement and settlement of such transactions. Included in “Interest and other expenses, net” on the Company’s consolidated statement of operations was a $1.5 million gain and $3.8 million loss related to foreign currency transactions for December 31, 2007 and 2008, respectively. There were no such transactions in 2006.

(u) Comprehensive Income/Loss

SFAS No. 130, Reporting Comprehensive Income, requires that certain items such as foreign currency translation adjustments be presented as separate components of shareholders’ equity. Total comprehensive loss for the year ended December 31, 2006, December 31, 2007 and December 31, 2008 was $20.1 million, $38.5 million, and $38.7 million, respectively. Other comprehensive income or loss includes a $1.9 million foreign currency translation gain and $4.6 million foreign currency translation loss in 2007 and 2008, respectively. No other comprehensive income or loss was recorded in 2006.

(v) Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal fees related to loss contingencies are expensed as services are received.

(w) Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“ FASB”) issued SFAS No. 157, Fair Value Measurement (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements. This statement does not require any new fair value measurements; rather, it applies whenever other accounting pronouncements require or permit fair value measurements. SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes

the inputs used to measure fair value. These tiers include: Level 1 (defined as observable inputs such as quoted market prices in active markets); Level 2 (defined as inputs other than quoted prices in active markets that are either directly or indirectly observable); and Level 3 (defined as unobservable inputs in which little or no market data exists). The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The Company adopted the provisions of SFAS No. 157 on January 1, 2008 for financial assets and liabilities. Adoption of the standard for financial assets and liabilities did not impact the Company’s accounting measurements, but is ultimately expected to result in additional disclosures for both financial and nonfinancial assets and liabilities. In February 2008, the FASB issued Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis. The Company will be required to adopt SFAS No. 157 in the first quarter of 2009 for nonfinancial assets and nonfinancial liabilities. Management does not expect the application of SFAS No. 157 in relation to nonfinancial assets and liabilities to have a material impact on the Company’s results of operations and financial position.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS No. 141R”), which requires the acquiring entity in a business combination to recognize the full fair value of the assets acquired, liabilities assumed and any noncontrolling interest as of the acquisition date, the immediate expense recognition of transaction costs, and accounting for restructuring plans separately from the business combination. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Acquisitions accounted for as a business combination that are completed January 1, 2009 and thereafter will be impacted by this new standard.

(2) MERGERS AND ACQUISITIONS

On June 29, 2007, the Company acquired all of the outstanding capital stock of Syscon pursuant to a Stock Purchase Agreement dated April 11, 2007 (“Purchase Agreement”). The initial consideration for Syscon’s capital stock was $41 million in cash and 45.6 shares of Securus common stock, subject to a working capital adjustment. In addition, the Company agreed to pay up to an additional $7 million after each of the first three 12 month periods after the closing date if Syscon’s revenues exceeded certain thresholds and the former stockholder remained an employee. In November 2008, the Company entered into a new agreement with Syscon’s former stockholder which amended certain provisions of the Purchase Agreement. The amendment deletes and terminates the earn-out consideration payable under the Syscon Purchase Agreement and shortens by six months the former stockholder’s period of non-competition. Pursuant to the new agreement, the former stockholder’s employment agreement with Syscon was terminated and Syscon entered into a consulting agreement with a company controlled by the former stockholder. The consulting agreement covers certain management and advisory and other services to be provided over a period of three years, for which Syscon will pay a total of approximately $1,090,000 in fees.

Pursuant to the Purchase Agreement, Syscon’s previous stockholder left approximately $5.0 million of cash in Syscon’s bank accounts upon the closing of the Syscon acquisition. The Company agreed to repay Syscon’s former stockholder as Syscon generated Net Cash Flow (as defined in the Purchase Agreement). Approximately $0.4 million was paid in 2007, and the remainder was paid during 2008.

The acquisition of Syscon was accounted for as a purchase in accordance with SFAS No. 141, Business Combinations. Under the purchase method of accounting, the total purchase price was allocated to the assets acquired and liabilities assumed of Syscon based on their respective fair values. An allocation of the purchase costs was made for major categories of assets and liabilities in the consolidated balance sheet based on estimates of fair values reflecting valuations prepared by third-party appraisers. The value of intangible assets was determined using a discounted net cash flow approach. The fair value of the common stock Securus issued to Syscon’s previous shareholder was estimated using the option-pricing method, whereby the fair value of stock is modeled as a series of call options, representing the present value of the

expected future returns to shareholders. Under this method, each class of stock is modeled with a distinct claim on the shareholders' equity value in Securus, creating three call options with various liquidation preference values that represent significant milestones for our shareholders. The value of these three call options are then calculated utilizing the Black-Scholes option pricing model.

The total purchase price for Syscon was $45.1 million, as shown below, and has been allocated as follows (in thousands):

Purchase Price Calculation:
Payment for tendered shares	$	41,000
Costs incurred related to the acquisition		2,717
Value of common stock		1,414
	$	45,131
Allocation of Purchase Price:
Accounts receivable, net	$	5,981
Prepaid expenses and other assets		1,606
Property and equipment		886
Goodwill		28,948
Intangibles		25,728
Accounts payable		(511	)
Accrued expenses		(2,398	)
Deferred revenue		(6,350	)
Net deferred tax liability		(8,759	)
Total Allocation	$	45,131

The following unaudited pro forma combined amounts give effect to the acquisition of Syscon as if the acquisition had occurred on January 1, 2006. The pro forma amounts do not purport to be indicative of what would have occurred had the acquisition been made as of the beginning of the period or of results which may occur in the future.

		For the Year Ended
		December 31,			December 31,
		2006			2007
Total revenue	$	422,715		$	403,540
Net loss	$	(29,498	)	$	(44,959	)

(3) BALANCE SHEET COMPONENTS

Accounts receivables, net consist of the following at December 31 (in thousands):

	2007			2008
Accounts receivable, net:
Trade accounts receivable	$	59,684		$	49,282
Advanced commissions receivable		2,347			847
Other receivables		263			367
		62,294			50,496
Less: Allowance for doubtful accounts		(11,506	)		(5,180	)
	$	50,788		$	45,316

At December 31, 2007 and December 31, 2008, the Company had advanced commissions to certain facilities totaling, $2.3 million and $0.8 million, respectively, which are recoverable from such facilities as a reduction of earned commissions for specified monthly amounts. Amounts included in accounts receivable represent the estimated recoverable amounts during the next fiscal year.

Direct call provisioning bad debt expense for the year ended December 31, 2006 was $40.8 million or 12.0% of direct call provisioning revenue of $341.2 million. For the year ended December 31, 2007, direct call provisioning bad debt expense was $37.8 million or 11.2% of direct call provisioning revenue of $338.7 million. Direct call provisioning bad debt expense for the year ended December 31, 2008 was $25.9 million or 7.8% of direct call provisioning revenue of $333.6 million.

Property and equipment, net consists of the following at December 31 (in thousands):

	2007			2008
Property and equipment, net:
Telecommunications equipment	$	58,302		$	60,291
Leasehold improvements		3,555			3,860
Construction in progress		4,639			3,348
Office equipment		15,721			19,215
		82,217			86,714
Less: Accumulated depreciation and amortization		(41,420	)		(51,350	)
	$	40,797		$	35,364

Intangibles and other assets, net consist of the following at December 31 (in thousands):

	2007
	Gross							Weighted
	Carrying		Accumulated					Average
	Value		Amortization			Net		Life
Patents and trademarks	$	25,240	$	(6,952	)	$	18,288	10.2
Deferred financing costs		14,275		(3,585	)		10,690	6.1
Capitalized software development costs		23,900		(11,021	)		12,879	3.9
Custom software development costs		8,115		(406	)		7,709	10.0
Acquired contract rights		99,098		(32,997	)		66,101	9.5
Deposits and long-term prepayments		2,089		-			2,089	-
Non-compete and employment agreements		1,909		(238	)		1,671	4.6
	$	174,626	$	(55,199	)	$	119,427

	2008
	Gross							Weighted
	Carrying		Accumulated					Average
	Value		Amortization			Net		Life
Patents and trademarks	$	24,129	$	(8,351	)	$	15,778	9.8
Deferred financing costs		15,308		(5,499	)		9,809	5.8
Capitalized software development costs		25,964		(13,495	)		12,469	4.5
Custom software development costs		6,698		(1,060	)		5,638	10.0
Acquired contract rights		96,714		(44,645	)		52,069	9.9
Deposits and long-term prepayments		1,846		-			1,846	-
Non-compete and employment agreements		1,540		(599	)		941	4.3
	$	172,199	$	(73,649	)	$	98,550

At December 31, 2007 and December 31, 2008, the carrying amount of trademarks assigned to patents and trademarks that were not subject to amortization was $2.8 million.

Amortization of intangibles and other assets for the year ended December 31, 2006 was $17.5 million (of which $1.0 million was included in interest expense). Amortization of intangibles and other assets for the year ended December 31, 2007 was $21.8 million (of which $1.5 million was included in interest expense and $1.4 million was amortized against revenue). Amortization of intangibles and other assets for the year ended December 31, 2008 was $22.7 million (of which $2.5 million was included in interest expense and $3.5 million was amortized against revenue). Estimated amortization expense related to intangibles, excluding deferred financing costs, the acquired Syscon in-process operating contracts and other assets, as of December 31, 2008 and for each of the next five years through December 31, 2013 and thereafter is summarized as follows (in thousands):

Year Ended December 31:
2009	$	16,769
2010		15,164
2011		13,203
2012		9,122
2013		7,695
Thereafter		22,137
	$	84,090

The fair value of Syscon’s in-process operating contracts and customer agreements acquired of $5.2 million are being amortized against revenue over the remaining life of the contracts using the percentage of completion method of accounting in accordance with EITF 01-3, Accounting in a Business Combination for Deferred Revenue of an Acquiree, and are estimated to be fully amortized in the first quarter of 2009. At December 31, 2008, less than $0.1 million remained to be amortized. The fair value represents the remaining amount to be billed under the acquired contractual obligations reduced by the estimated direct and indirect costs to complete and an allowance for the normal profit margin related to the activities to be performed.

Accrued liabilities consist of the following at December 31 (in thousands):

	2007		2008
Accrued liabilities:
Accrued expenses	$	24,849	$	26,433
Accrued compensation		5,507		6,287
Accrued severance and facility exit costs		321		207
Accrued taxes		2,240		4,187
Accrued interest and other		7,271		7,257
	$	40,188	$	44,371

During 2007, the Company incurred restructuring charges of $0.6 million related to the consolidation of our internal customer care function into the Dallas office, comprised of $0.2 million of severance expense and $0.4 million of facility exit costs for our Selma, Alabama location. All of the severance expenses were paid during the second quarter of 2007.

The Company incurred restructuring charges of $0.2 million during the first quarter of 2008 related to the realignment of our field service organization because of efficiencies gained from our packet-based architecture, which we began to install in 2006 and will continue to install as customer contracts are renewed. In July 2008, the Company entered into a separation agreement with an executive. In accordance with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefits Pension Plans and for Termination Benefits, the Company accrued and paid $0.2 million in severance costs to this executive in 2008.

Accrued severance and exit costs consist of the following (in thousands):

	Severance &			Leased Facility
	Related Costs			& Other Costs			Total
Balance at December 31, 2006		-			111			111
Additions		216			398			614
Payments		(216	)		(188	)		(404	)
Balance at December 31, 2007	$	-		$	321		$	321
Additions		446			-			446
Payments		(446	)		(114	)		(560	)
Balance at December 31, 2008	$	-		$	207		$	207

(4) GOODWILL

The Company performed annual impairment tests as of each balance sheet date. No impairment was recorded as a result of the testing performed at December 31, 2006, 2007 and 2008.

Goodwill allocated to our reportable segments is summarized as follows (in thousands):

				Offender
		Direct Call		Management
		Provisioning		Software			Total
Balance at December 31, 2006	$	37,936	$	-		$	37,936
Goodwill allocation in connection with Syscon acquisition		-		28,948			28,948
Foreign currency translation		-		2,151			2,151
Balance at December 31, 2007		37,936		31,099			69,035
Foreign currency translation		-		(5,567	)		(5,567	)
Balance at December 31, 2008	$	37,936	$	25,532		$	63,468

(5) DEBT

Debt consists of the following at December 31 (in thousands):

	2007			2008
Revolving credit facility	$	5,000		$	16,511
Second-priority senior secured notes		194,000			194,000
Senior subordinated notes		69,834			82,484
		268,834			292,995
Less unamortized discount on senior secured notes and senior subordinated notes		(5,558	)		(4,654	)
		263,276			288,341
Less current portion of long-term debt		-			-
	$	263,276		$	288,341

Revolving Credit Facility — On September 30, 2008, the Company and certain of its subsidiaries entered into a senior credit agreement with a new lending institution and the other lenders party thereto (the “New Credit Agreement”) to refinance its existing revolving credit facility. The New Credit Agreement provides the Company with a $10 million letter of credit facility and a revolving facility of up to the lesser of (i) $30 million and (ii) 125% of the Company’s consolidated EBITDA (as defined in the New Credit Agreement) for the preceding 12 months less the face amount of outstanding letters of credit. The New Credit Agreement expires on June 9, 2011. Advances bear interest at an annual rate of our option equal to

one of the following: (a) LIBOR plus 4.0%, or (b) a rate equal to the Base Rate plus 3.0%. The Base Rate is the greater of (i) 5%, (ii) the Federal Funds rate plus 0.5%, or (iii) the prime rate (as defined in the New Credit Agreement), which was 3.25% as of December 31, 2008. Interest is payable in arrears on the first day of each month. The unused availability under the New Credit Agreement is subject to a fee based on a per annum rate of 0.375% due monthly. Borrowings under the New Credit Agreement are secured by

Securus Technologies, Inc. 10-K