##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q

|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
| 
|  |  | or                                                                                          
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2003

Commission file number 0-25016



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T-NETIX, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                       |  |                                         
|------------------------------------------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                                                               |  | 84-1037352                              
|(State or Other Jurisdiction of
    Incorporation)                                                     |  | (I.R.S. Employer
    Identification No.)
|                                                                                                      
|2155 Chenault Drive, Suite 410
    Carrollton, Texas 75006(Address of principal executive
    offices) |  | 75006(Zip Code)                         

Registrants telephone number, including
area code:

(972) 241-1535




---

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 and 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 þ          No o

Indicate the number of shares outstanding of each
of the issuers classes of common stock, as of the latest
practical date.

|                                 |  |                                
|-------------------------------- |  | -------------------------------
|Class                            |  | Outstanding at October 27, 2003
|                                 |  |                                
|Common stock, $0.01 stated value |  | 15,052,210                     



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TABLE OF CONTENTS



|                                           |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                    
|                                           | Item 1. Financial Statements                                                                 
|                                           | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                           | Item 3. Quantitative and Qualitative Disclosure About Market Risk                            
|                                           | Item 4. Controls and Procedures                                                              
|PART II OTHER INFORMATION                 
|                                           | Item 1. Legal Proceedings                                                                    
|                                           | Item 2. Changes in Securities and Use of Proceeds                                            
|                                           | Item 3. Defaults upon Senior Securities                                                      
|                                           | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                           | Item 5. Other Information                                                                    
|                                           | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                
|INDEX TO EXHIBITS                         
|EX-31.1 Certification of CEO - Section 302
|EX-31.2 Certification of CFO - Section 302
|EX-32.1 Certification of CEO - Section 906
|EX-32.2 Certification of CFO - Section 906



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##### Table of Contents



FORM 10-Q CROSS REFERENCE INDEX

|                                  |  |                                                                                           |    |      |    | 
|--------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                  |  |                                                                                           |    | Page
|                                  |  |                                                                                           |    |     
|PART I  FINANCIAL
    INFORMATION
|Item 1                            |  | Condensed Financial Statements (Unaudited)                                                |    |      | 3  | 
|Item 2                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 18 | 
|Item 3                            |  | Quantitative and Qualitative Disclosure About
    Market Risk                             |    |      | 29 | 
|Item 4                            |  | Controls and Procedures                                                                   |    |      | 29 | 
|PART II  OTHER
    INFORMATION   
|Item 1                            |  | Legal Proceedings                                                                         |    |      | 30 | 
|Item 2                            |  | Changes in Securities and Use of Proceeds                                                 |    |      | 31 | 
|Item 3                            |  | Defaults Upon Senior Securities                                                           |    |      | 31 | 
|Item 4                            |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 31 | 
|Item 5                            |  | Other Information                                                                         |    |      | 32 | 
|Item 6                            |  | Exhibits and Reports on Form 8-K                                                          |    |      | 32 | 
|Signatures                        |  |                                                                                           | 33 |     
|Index to Exhibits                 |  |                                                                                           | 34 |     

1



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##### Table of Contents






PART I






|        |                     
|------- | --------------------
|Item 1. | Financial Statements

INDEX TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                                    |  |  |   | 
|----------------------------------------------------------------------------------------------------------------------------------- |  |  | - | 
|Condensed Consolidated Balance Sheets as of
    September 30, 2003 (Unaudited) and December 31, 2002                                |  |  | 3 | 
|Condensed Consolidated Statements of Operations
    for the Three and Nine Months Ended September 30, 2003 and
    2002 (Unaudited) |  |  | 4 | 
|Condensed Consolidated Statements of Cash Flows
    for the Nine Months Ended September 30, 2003 and 2002
    (Unaudited)           |  |  | 5 | 
|Notes to Condensed Consolidated Financial
    Statements (Unaudited)                                                                |  |  | 6 | 

2



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE
SHEETS

(Amounts in Thousands, Except Per Share and
Share Amounts)


|                                                        |                                                                                                                                                                               |                            |        |              |        |   |        |         |        | 
|------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------------ | ------ | - | ------ | ------- | ------ | 
|                                                        |                                                                                                                                                                               | September 30,              |        |             
|                                                        |                                                                                                                                                                               | 2003                       |        | December 31,
|                                                        |                                                                                                                                                                               | (Unaudited)                |        | 2002        
|                                                        |                                                                                                                                                                               |                            |        |             
|ASSETS                                                 
|Cash and cash equivalents                               |                                                                                                                                                                               | $                          | 20,837 |              |        | $ | 6,554  |        
|Accounts receivable, net (note 2)                       |                                                                                                                                                                               |                            | 17,134 |              |        |   | 20,038 |        
|Prepaid expenses                                        |                                                                                                                                                                               |                            | 1,729  |              |        |   | 1,608  |        
|Inventories                                             |                                                                                                                                                                               |                            | 1,187  |              |        |   | 1,424  |        
|                                                        |                                                                                                                                                                               |                            |        |              |        |   |        |        
|                                                        |                                                                                                                                                                               | Total current assets       |        |              | 40,887 |   |        |         | 29,624 | 
|Property and equipment, net (note 2)                    |                                                                                                                                                                               |                            | 22,731 |              |        |   | 25,342 |        
|Goodwill, net                                           |                                                                                                                                                                               |                            | 2,245  |              |        |   | 2,245  |        
|Deferred tax asset, net                                 |                                                                                                                                                                               |                            | 1,395  |              |        |   | 2,297  |        
|Assets held for sale                                    |                                                                                                                                                                               |                            | 285    |              |        |   | 937    |        
|Intangible and other assets, net (note 2)               |                                                                                                                                                                               |                            | 5,609  |              |        |   | 6,212  |        
|                                                        |                                                                                                                                                                               |                            |        |              |        |   |        |        
|                                                        |                                                                                                                                                                               | Total assets               |        | $            | 73,152 |   |        | $       | 66,657 | 
|                                                        |                                                                                                                                                                               |                            |        |              |        |   |        |        
|                                                       
|LIABILITIES AND STOCKHOLDERS
    EQUITY               
|Liabilities:                                            |                                                                                                                                                                               |                            |        |              |        |   |        |        
|                                                        | Accounts payable                                                                                                                                                              |                            | $      | 10,855       |        |   | $      | 11,070  |       
|                                                        | Accrued liabilities (note 2)                                                                                                                                                  |                            |        | 7,466        |        |   |        | 5,742   |       
|                                                        | Current portion of long-term debt (note 3)                                                                                                                                    |                            |        | 3,565        |        |   |        | 3,694   |       
|                                                        |                                                                                                                                                                               |                            |        |              |        |   |        |        
|                                                        |                                                                                                                                                                               | Total current liabilities  |        |              | 21,886 |   |        |         | 20,506 | 
|                                                        | Long-term debt (note 3)                                                                                                                                                       |                            |        | 16,507       |        |   |        | 19,091  |       
|                                                        |                                                                                                                                                                               |                            |        |              |        |   |        |        
|                                                        |                                                                                                                                                                               | Total liabilities          |        |              | 38,393 |   |        |         | 39,597 | 
|Commitments and contingencies Stockholders
    equity: |                                                                                                                                                                               |                            |        |              |        |   |        |        
|                                                        | Preferred stock, $.01 stated value,
    10,000,000 shares authorized; no shares issued or
    outstanding at September 30, 2003 and December 31,
    2002, respectively       |                            |        |             |        |   |        |        |       
|                                                        | Common stock, $.01 stated value,
    70,000,000 shares authorized; 15,052,210 shares issued
    and outstanding at September 30, 2003 and December 31,
    2002, respectively |                            |        | 150          |        |   |        | 150     |       
|                                                        | Additional paid-in capital                                                                                                                                                    |                            |        | 43,986       |        |   |        | 42,334  |       
|                                                        | Accumulated other comprehensive income (loss)                                                                                                                                 |                            |        | (105         | )      |   |        |        |       
|                                                        | Accumulated deficit                                                                                                                                                           |                            |        | (9,272       | )      |   |        | (15,424 | )     
|                                                        |                                                                                                                                                                               |                            |        |              |        |   |        |        
|                                                        |                                                                                                                                                                               | Total stockholders equity |        |              | 34,759 |   |        |         | 27,060 | 
|                                                        |                                                                                                                                                                               |                            |        |              |        |   |        |        
|Total liabilities and stockholders equity              |                                                                                                                                                                               | $                          | 73,152 |              |        | $ | 66,657 |        
|                                                        |                                                                                                                                                                               |                            |        |              |        |   |        |        

See accompanying notes to unaudited condensed
consolidated financial statements.

3



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(Amounts in Thousands, Except Per Share
Amounts)


(Unaudited)


|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |        |        |        | 
|--------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ---------------------------------- | ------------- | ------ | ------ | ---- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | 
|                                                          |                                                                                         |                                                             |                                    |              
|                                                          |                                                                                         | Three Months                                                |                                    | Nine Months  
|                                                          |                                                                                         | Ended                                                       |                                    | Ended        
|                                                          |                                                                                         | September 30,                                               |                                    | September 30,
|                                                          |                                                                                         |                                                             |                                    |              
|                                                          |                                                                                         | 2003                                                        |                                    | 2002          |        | 2003   |      | 2002  
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |       
|Revenue:                                                  |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          | Telecommunication services                                                              |                                                             | $                                  | 12,542        |        |        | $    | 14,222 |        |        | $      | 38,847 |        |        | $      | 44,719 |       
|                                                          | Direct call provisioning                                                                |                                                             |                                    | 12,781        |        |        |      | 12,736 |        |        |        | 43,235 |        |        |        | 34,954 |       
|                                                          | Equipment sales and other                                                               |                                                             |                                    | 2,579         |        |        |      | 4,710  |        |        |        | 6,913  |        |        |        | 8,127  |       
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         |                                                             | Total revenue                      |               |        | 27,902 |      |        |        | 31,668 |        |        |        | 88,995 |        |        |        | 87,800 | 
|Operating costs and expenses:                             |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          | Operating costs (exclusive of depreciation and
    amortization shown separately below) |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         | Telecommunications services                                 |                                    |               | 5,078  |        |      |        | 6,270  |        |        |        | 15,056 |        |        |        | 17,142 |       
|                                                          |                                                                                         | Direct call provisioning, exclusive of bad debt
    expense |                                    |               | 9,804  |        |      |        | 8,623  |        |        |        | 29,958 |        |        |        | 23,638 |       
|                                                          |                                                                                         | Direct call provisioning  bad debt
    expense             |                                    |               | 2,409  |        |      |        | 3,503  |        |        |        | 10,017 |        |        |        | 9,570  |       
|                                                          |                                                                                         | Cost of equipment sold and other                            |                                    |               | 1,266  |        |      |        | 939    |        |        |        | 2,888  |        |        |        | 2,532  |       
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         |                                                             | Total operating costs              |               |        | 18,557 |      |        |        | 19,335 |        |        |        | 57,919 |        |        |        | 52,882 | 
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         |                                                             | Gross margin                       |               |        | 9,345  |      |        |        | 12,333 |        |        |        | 31,076 |        |        |        | 34,918 | 
|                                                          | Selling, general and administrative                                                     |                                                             |                                    | 6,522         |        |        |      | 6,649  |        |        |        | 17,449 |        |        |        | 17,288 |       
|                                                          | Research and development                                                                |                                                             |                                    | 995           |        |        |      | 799    |        |        |        | 2,648  |        |        |        | 2,320  |       
|                                                          | Impairment of assets held for sale                                                      |                                                             |                                    | 653           |        |        |      |       |        |        |        | 653    |        |        |        |       |       
|                                                          | Depreciation and amortization                                                           |                                                             |                                    | 2,918         |        |        |      | 3,267  |        |        |        | 8,884  |        |        |        | 8,678  |       
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         |                                                             | Total operating costs and expenses |               |        | 29,645 |      |        |        | 30,050 |        |        |        | 87,553 |        |        |        | 81,168 | 
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         |                                                             | Operating income (loss)            |               |        | (1,743 | )    |        |        | 1,618  |        |        |        | 1,442  |        |        |        | 6,632  | 
|Patent litigation settlement, net of expenses             |                                                                                         |                                                             | 11,549                             |               |        |        | (205 | )      |        |        | 9,935  |        |        |        | (1,501 | )     
|Interest and other expenses, net                          |                                                                                         |                                                             | (802                               | )             |        |        | (897 | )      |        |        | (2,627 | )      |        |        | (1,823 | )     
|Gain on sale of assets                                    |                                                                                         |                                                             | 254                                |               |        |        |     |        |        |        | 286    |        |        |        | 36     |       
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|Income from continuing operations before income
    taxes |                                                                                         |                                                             | 9,258                              |               |        |        | 516  |        |        |        | 9,036  |        |        |        | 3,344  |       
|Income tax expense                                        |                                                                                         |                                                             | (2,726                             | )             |        |        |     |        |        |        | (2,884 | )      |        |        | (180   | )     
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          | Net income from continuing operations                                                   |                                                             |                                    | 6,532         |        |        |      | 516    |        |        |        | 6,152  |        |        |        | 3,164  |       
|Net loss from discontinued operations                     |                                                                                         |                                                             |                                   |               |        |        | (182 | )      |        |        |       |        |        |        | (615   | )     
|Gain on sale of discontinued operations                   |                                                                                         |                                                             |                                   |               |        |        | 308  |        |        |        |       |        |        |        | 308    |       
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|Income (loss) from discontinued operations                |                                                                                         |                                                             |                                   |               |        |        | 126  |        |        |        |       |        |        |        | (307   | )     
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|Net income applicable to common shareholders              |                                                                                         | $                                                           | 6,532                              |               |        | $      | 642  |        |        | $      | 6,152  |        |        | $      | 2,857  |       
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          | Income per common share from continuing operations                                      |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         | Basic                                                       |                                    | $             | 0.43   |        |      | $      | 0.03   |        |        | $      | 0.41   |        |        | $      | 0.21   |       
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         | Diluted                                                     |                                    | $             | 0.43   |        |      | $      | 0.03   |        |        | $      | 0.40   |        |        | $      | 0.21   |       
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          | Income (loss) per common share from discontinued
    operations                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         | Basic                                                       |                                    | $             |       |        |      | $      | 0.01   |        |        | $      |       |        |        | $      | (0.02  | )     
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         | Diluted                                                     |                                    | $             |       |        |      | $      | 0.01   |        |        | $      |       |        |        | $      | (0.02  | )     
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          | Income per common share applicable to common
    shareholders                           |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         | Basic                                                       |                                    | $             | 0.43   |        |      | $      | 0.04   |        |        | $      | 0.41   |        |        | $      | 0.19   |       
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         | Diluted                                                     |                                    | $             | 0.43   |        |      | $      | 0.04   |        |        | $      | 0.40   |        |        | $      | 0.19   |       
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          | Shares used in computing net income (loss) per
    common share                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         | Basic                                                       |                                    |               | 15,052 |        |      |        | 15,049 |        |        |        | 15,052 |        |        |        | 15,038 |       
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       
|                                                          |                                                                                         | Diluted                                                     |                                    |               | 15,347 |        |      |        | 15,359 |        |        |        | 15,293 |        |        |        | 15,434 |       
|                                                          |                                                                                         |                                                             |                                    |               |        |        |      |        |        |        |        |        |        |        |        |       

See accompanying notes to unaudited condensed
consolidated financial statements.

4



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(Amounts in Thousands, Except Per Share and
Share Amounts)


(Unaudited)


|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |        |       |         |        |  
|------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------- | ------------------------------------------------------------------ | ------ | ------ | ------ | ------ | ----- | ------- | ------ | -
|                                                                                |                                                                                                                         |                                                          
|                                                                                |                                                                                                                         | Nine Months Ended                                        
|                                                                                |                                                                                                                         | September 30,                                            
|                                                                                |                                                                                                                         |                                                          
|                                                                                |                                                                                                                         | 2003                                                      |                                   | 2002                                                              
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                   
|Cash flows from operating activities:                                           |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|                                                                                | Net income from continuing operations                                                                                   |                                                           | $                                 | 6,152                                                              |        |        | $      | 3,164  |      
|                                                                                | Adjustments to reconcile net income (loss) to net
    cash provided by operating activities from continuing operations: |                                                           |                                   |                                                                    |        |        |        |        |      
|                                                                                |                                                                                                                         | Depreciation and amortization                             |                                   |                                                                    | 8,884  |        |        |        | 8,678 |        
|                                                                                |                                                                                                                         | Impairment of assets held for sale                        |                                   |                                                                    | 653    |        |        |        |      |        
|                                                                                |                                                                                                                         | Bad debt expense                                          |                                   |                                                                    | 10,047 |        |        |        | 9,663 |        
|                                                                                |                                                                                                                         | Deferred taxes                                            |                                   |                                                                    | 2,554  |        |        |        |      |        
|                                                                                |                                                                                                                         | Gain on the sale of assets                                |                                   |                                                                    | (286   | )      |        |        | (344  | )      
|                                                                                |                                                                                                                         | Equity income from unconsolidated subsidiary              |                                   |                                                                    | (22    | )      |        |        |      |        
|                                                                                |                                                                                                                         | Accretion of discount on subordinated promissory
    note |                                   |                                                                    | 62     |        |        |        |      |        
|                                                                                |                                                                                                                         | Changes in operating assets and liabilities:              |                                   |                                                                    |        |        |        |        |       |        
|                                                                                |                                                                                                                         |                                                           | Accounts receivable               |                                                                    |        | (7,143 | )      |        |       | (14,671 | )     
|                                                                                |                                                                                                                         |                                                           | Prepaid expenses                  |                                                                    |        | (121   | )      |        |       | (1,102  | )     
|                                                                                |                                                                                                                         |                                                           | Inventories                       |                                                                    |        | 237    |        |        |       | (190    | )     
|                                                                                |                                                                                                                         |                                                           | Intangibles and other assets      |                                                                    |        | 530    |        |        |       | (668    | )     
|                                                                                |                                                                                                                         |                                                           | Loss on write-down of investments |                                                                    |        |       |        |        |       | 158     |       
|                                                                                |                                                                                                                         |                                                           | Accounts payable                  |                                                                    |        | (215   | )      |        |       | (1,631  | )     
|                                                                                |                                                                                                                         |                                                           | Accrued liabilities               |                                                                    |        | 1,620  |        |        |       | 3,515   |       
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|                                                                                |                                                                                                                         |                                                           |                                   | Cash provided by operating activities of
    continuing operations |        |        | 22,952 |        |       |         | 6,572  |  
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|Cash used in investing activities:                                              |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|                                                                                | Purchase of property and equipment                                                                                      |                                                           |                                   | (5,613                                                             | )      |        |        | (5,029 | )    
|                                                                                | Proceeds from sale of assets                                                                                            |                                                           |                                   | 532                                                                |        |        |        | 638    |      
|                                                                                | Investment in unconsolidated subsidiaries                                                                               |                                                           |                                   | (812                                                               | )      |        |        |       |      
|                                                                                | Other investing activities                                                                                              |                                                           |                                   |                                                                   |        |        |        | (325   | )    
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|                                                                                |                                                                                                                         |                                                           |                                   | Cash used in investing activities of continuing
    operations     |        |        | (5,893 | )      |       |         | (4,716 | )
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|Cash flows from financing activities:                                           |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|                                                                                | Net payments on line of credit                                                                                          |                                                           |                                   |                                                                   |        |        |        | (1,849 | )    
|                                                                                | Payments on senior secured term note                                                                                    |                                                           |                                   | (2,625                                                             | )      |        |        |       |      
|                                                                                | Payments on other debt                                                                                                  |                                                           |                                   | (151                                                               | )      |        |        | (237   | )    
|                                                                                | Common stock issued for cash under Employee Stock
    Option Plan                                                       |                                                           |                                   |                                                                   |        |        |        | 15     |      
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|                                                                                |                                                                                                                         |                                                           |                                   | Cash used in financing activities of continuing
    operations     |        |        | (2,776 | )      |       |         | (2,071 | )
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|Cash used by discontinued operations                                            |                                                                                                                         |                                                           |                                  |                                                                    |        |        | (307   | )     
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|Net increase (decrease) in cash and cash
    equivalents                        |                                                                                                                         |                                                           | 14,283                            |                                                                    |        |        | (522   | )     
|Cash and cash equivalents at beginning of period                                |                                                                                                                         |                                                           | 6,554                             |                                                                    |        |        | 995    |       
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|Cash and cash equivalents at end of period                                      |                                                                                                                         | $                                                         | 20,837                            |                                                                    |        | $      | 473    |       
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|Supplemental Disclosures:                                                       |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|                                                                                | Cash paid during the period for:                                                                                        |                                                           |                                   |                                                                    |        |        |        |        |      
|                                                                                |                                                                                                                         | Interest                                                  |                                   | $                                                                  | 1,640  |        |        | $      | 1,861 |        
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|                                                                                |                                                                                                                         | Income taxes                                              |                                   | $                                                                  | 204    |        |        | $      | 144   |        
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|Note received in exchange of assets                                             |                                                                                                                         | $                                                         |                                  |                                                                    |        | $      | 91     |       
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|Assets received in exchange for note                                            |                                                                                                                         | $                                                         |                                  |                                                                    |        | $      | 300    |       
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|Common stock received in exchange for assets                                    |                                                                                                                         | $                                                         |                                  |                                                                    |        | $      | 278    |       
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       
|Deferred taxes used for stock options charged to
    additional paid-in capital |                                                                                                                         | $                                                         | 1,652                             |                                                                    |        | $      |       |       
|                                                                                |                                                                                                                         |                                                           |                                   |                                                                    |        |        |        |       

See accompanying notes to unaudited condensed
consolidated financial statements.

5



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)


(1) Summary of Significant Accounting
Policies



| |                                   
| | ----------------------------------
| | Unaudited Financial
    Statements

The accompanying unaudited consolidated financial
statements reflect all adjustments which, in the opinion of
management, are necessary to reflect a fair presentation of the
financial position and results of operations of T-NETIX, Inc.
and subsidiaries (the Company) for the interim
periods presented. All adjustments, in the opinion of
management, are of a normal and recurring nature. Some
adjustments involve estimates, which may require revision in
subsequent interim periods or at year-end. The financial
statements have been presented in accordance with generally
accepted accounting principles. Refer to notes to consolidated
financial statements, which appear in the 2002 Annual Report on
Form 10-K for the Companys accounting polices, which
are pertinent to these statements.



| |             
| | ------------
| | Acquisitions

In March 2003 the Company acquired a 50%
preferred stock interest in a newly formed company, Accudata
Technologies, Inc. (Accudata). Of the
$0.8 million invested in Accudata, $0.5 million went
to the purchase out of a Chapter XI bankruptcy proceeding
of substantially all of the assets (in essence the ongoing
business) of Revenue Communications, Inc. With such purchase,
Accudata became one of only twelve active telephone line
information databases (LIDB) in the United States
where important customer information is stored and maintained,
including telephone number, service provider and collect call
preferences. The investment in Accudata is presented under the
equity method of accounting and such investment is included in
Intangibles and other assets, net at
September 30, 2003. Equity in the results of operations was
a negligible loss and income of $0.1 million for the three
and nine months ended September 30, 2003, respectively,
which is included in Interest and other expenses,
net.

In June 2002, the Company purchased substantially
all of the assets of ACT Telecom, Inc., a Houston, Texas based
prepaid calling platform provider and wholly-owned subsidiary of
ClearMediaOne, Inc. Assets included a telecommunication switch,
prepaid calling platform and associated software. The purchase
price was approximately $0.7 million, including
$0.3 million in cash and the issuance of a
$0.4 million note due and payable on or before June 2003.
The purchase price was allocated to property and equipment
($0.6 million) and intangibles and other assets
($0.1 million). The note was paid in full in November 2002.



| |                        
| | -----------------------
| | Income Per Common Share

Income per common share are presented in
accordance with the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share
(SFAS 128). Basic income per share excludes
dilution for common stock equivalents and is computed by
dividing income or loss available to common shareholders by the
weighted average number of common shares outstanding during the
period. Diluted income per share reflect the potential dilution
that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.

6



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a reconciliation of the
numerators and denominators of the basic and diluted earnings
per share computations (in thousands):

|             |                                                 |                    |   |                   |     |      |   |        |     |  |   |        |     |  |   |        |     | 
|------------ | ----------------------------------------------- | ------------------ | - | ----------------- | --- | ---- | - | ------ | --- |  | - | ------ | --- |  | - | ------ | --- | 
|             |                                                 |                    |   |                  
|             |                                                 | Three Months Ended |   | Nine Months Ended
|             |                                                 | September 30,      |   | September 30,    
|             |                                                 |                    |   |                  
|             |                                                 | 2003               |   | 2002              |     | 2003 |   | 2002  
|             |                                                 |                    |   |                   |     |      |   |       
|Numerator:   |                                                 |                    |   |                   |     |      |   |        |     |  |   |        |     |  |   |       
|             | Net income applicable to common shareholders    |                    | $ | 6,532             |     |      | $ | 642    |     |  | $ | 6,152  |     |  | $ | 2,857  |    
|             |                                                 |                    |   |                   |     |      |   |        |     |  |   |        |     |  |   |       
|Denominator: |                                                 |                    |   |                   |     |      |   |        |     |  |   |        |     |  |   |       
|             | Denominator for basic income per common share   |                    |   | 15,052            |     |      |   | 15,049 |     |  |   | 15,052 |     |  |   | 15,038 |    
|             | Effect of dilutive securities:                  |                    |   |                   |     |      |   |        |     |  |   |        |     |  |   |        |    
|             |                                                 | Stock options      |   |                   | 109 |      |   |        | 277 |  |   |        | 55  |  |   |        | 366 | 
|             |                                                 | Warrants           |   |                   | 186 |      |   |        | 33  |  |   |        | 186 |  |   |        | 30  | 
|             |                                                 |                    |   |                   |     |      |   |        |     |  |   |        |     |  |   |       
|             | Denominator for diluted income per common share |                    |   | 15,347            |     |      |   | 15,359 |     |  |   | 15,293 |     |  |   | 15,434 |    
|             |                                                 |                    |   |                   |     |      |   |        |     |  |   |        |     |  |   |       

The calculation of diluted net income (loss) per
common share for the three and nine months ended
September 30, 2003 does not include 3,072,000 and
3,139,000, respectively, of potentially dilutive securities,
including common stock options and warrants, as their effect
would be anti-dilutive. For the three and nine months ended
September 30, 2002, common stock equivalents of 1,920,000
and 1,722,000, respectively, were not included in the diluted
earnings per share calculation, as their effect would be
anti-dilutive.



| |                   
| | ------------------
| | Stock Compensation

The Company uses the intrinsic-value method as
provided by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees in
accounting for its stock option plans and provides pro forma
disclosure of the compensation expense determined under the fair
value provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. Accordingly, the
Company did not recognize compensation expense upon the issuance
of its stock options because the option terms were fixed and the
exercise price equaled the market price of the Companys
common stock on the date of grant.

7



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table displays the effect on net
earnings and earnings per share had the fair value method been
applied during each period presented (in thousands):

|                                                               |                                                                        |               |       |                   |      |      |     |      |      |   |       |      |      |   |       |        |      | 
|-------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------- | ----- | ----------------- | ---- | ---- | --- | ---- | ---- | - | ----- | ---- | ---- | - | ----- | ------ | ---- | 
|                                                               |                                                                        |               |       |                   |      |     
|                                                               |                                                                        | Three Months  |       |                  
|                                                               |                                                                        | Ended         |       | Nine Months Ended
|                                                               |                                                                        | September 30, |       | September 30,    
|                                                               |                                                                        |               |       |                  
|                                                               |                                                                        | 2003          |       | 2002              |      | 2003 |     | 2002
|                                                               |                                                                        |               |       |                   |      |      |     |     
|Net income applicable to common shareholders, as
    reported: |                                                                        | $             | 6,532 |                   |      | $    | 642 |      |      | $ | 6,152 |      |      | $ | 2,857 |       
|                                                               | Less: Stock-based compensation excluded from
    reported net earnings |               |       | (282              | )    |      |     | (488 | )    |   |       | (884 | )    |   |       | (1,515 | )   
|                                                               |                                                                        |               |       |                   |      |      |     |      |      |   |       |      |      |   |       |       
|Pro forma net income applicable to common
    shareholders     |                                                                        | $             | 6,250 |                   |      | $    | 154 |      |      | $ | 5,268 |      |      | $ | 1,342 |       
|                                                               |                                                                        |               |       |                   |      |      |     |      |      |   |       |      |      |   |       |       
|Net income per common share:                                   |                                                                        |               |       |                   |      |      |     |      |      |   |       |      |      |   |       |       
|                                                               | As reported:                                                           |               |       |                   |      |      |     |      |      |   |       |      |      |   |       |        |     
|                                                               |                                                                        | Basic         |       | $                 | 0.43 |      |     | $    | 0.04 |   |       | $    | 0.41 |   |       | $      | 0.19 | 
|                                                               |                                                                        | Diluted       |       | $                 | 0.43 |      |     | $    | 0.04 |   |       | $    | 0.40 |   |       | $      | 0.19 | 
|                                                               | Pro forma:                                                             |               |       |                   |      |      |     |      |      |   |       |      |      |   |       |        |     
|                                                               |                                                                        | Basic         |       | $                 | 0.42 |      |     | $    | 0.01 |   |       | $    | 0.35 |   |       | $      | 0.09 | 
|                                                               |                                                                        | Diluted       |       | $                 | 0.41 |      |     | $    | 0.01 |   |       | $    | 0.34 |   |       | $      | 0.09 | 

The per share weighted-average fair value of
stock options issued by the Company during 2003 and 2002 was
$2.05 and $2.81, respectively, on the dates of grant using the
Black-Scholes option-pricing model. The following
weighted-average assumptions were used to determine the fair
value of stock options granted:

|                             |  |      |            |      |  |  |            | 
|---------------------------- |  | ---- | ---------- | ---- |  |  | ---------- | 
|                             |  | 2003 |            | 2002
|                             |  |      |            |     
|Dividend yield               |  |      |           |      |  |  |           | 
|Expected volatility          |  |      | 81.9%      |      |  |  | 80.9%      | 
|Average expected option life |  |      | 5.0  years |      |  |  | 4.9  years | 
|Risk free interest rate      |  |      | 2.8%       |      |  |  | 2.9%       | 

The Black-Scholes option-pricing model was
developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In
addition, option-pricing models require the input of highly
subjective assumptions, including expected stock price
volatility. Because the Companys employee stock options
have characteristics significantly different from those of
traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate.



| |                     
| | --------------------
| | Comprehensive Income

SFAS No. 130, Reporting
Comprehensive Income, requires that certain items such as
foreign currency translation adjustments and unrealized gains
and losses on certain derivative instruments classified as a
hedge be presented as separate components of shareholders
equity. Total comprehensive income for the nine months ended
September 30, 2003 and September 30, 2002 was
approximately $6.0 million and $2.9 million,
respectively. Total comprehensive income for the three months
ended September 30, 2003 and September 30, 2002 was
approximately $6.5 million and $0.6 million,
respectively.



| |                                              
| | ---------------------------------------------
| | Recently Issued Accounting
    Pronouncements

In August 2001, the FASB issued
SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement addresses the financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable

8



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and reported as a
liability. This statement is effective for fiscal years
beginning after June 15, 2002. The adoption of this
statement, effective January 1, 2003, had no material
impact upon the Companys financial position or results of
operations.

In May 2002, the FASB issued
SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. Under the provisions of
SFAS No. 145, gains and losses from the early
extinguishment of debt are no longer classified as an
extraordinary item, net of income taxes, but are included in the
determination of pretax earnings. The effective date for
SFAS No. 145 is for fiscal years beginning after
May 15, 2002, with early application encouraged. The
adoption of this statement, effective January 1, 2003, had
no material impact upon the Companys financial position or
results of operations.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146
addresses accounting and reporting for costs associated with
exit or disposal activities by requiring that a liability for a
cost associated with an exit or disposal activity be recognized
and measured at fair value only when the liability is incurred.
SFAS No. 146 also nullifies EITF Issue 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The provisions of
SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of FASB Statement No. 123. This Statement amends
No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
for a voluntary change to the fair value method of accounting
for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications
are included in the notes to these consolidated financial
statements.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 also requires that a liability be
recorded in the guarantors balance sheet upon issuance of
certain guarantees. FIN 45 also requires disclosure about
certain guarantees that an entity has issued. The Company has
implemented the disclosure requirements required by FIN 45,
which were effective for fiscal years ending after
December 15, 2002. The Company will apply the recognition
provisions of FIN 45 prospectively to guarantees issued
after December 31, 2002. The adoption of this statement had
no material effect upon the Companys financial position or
results of operations.

In January 2003, FASB issued FIN 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN 46 requires
certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46
is effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company
does not expect FIN 46 to have a material effect on its
financial position or results of operations.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for
classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity.
SFAS No. 150 is effective for all financial
instruments created or

9



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning
after June 15, 2003. The Company does not expect the
adoption of SFAS No. 150 to have a material impact on
its financial position or results of operations.

In November 2002, the Emerging Issues Task Force
(EITF) reached a consensus on EITF 00-21,
Revenue Arrangements with Multiple Deliverables,
related to the timing of revenue recognition for arrangements in
which goods or services or both are delivered separately in a
bundled sales arrangement. The EITF requires that when the
deliverables included in this type of arrangement meet certain
criteria they should be accounted for separately as separate
units of accounting. This may result in a difference in the
timing of revenue recognition but will not result in a change in
the total amount of revenue recognized in a bundled sales
arrangement. The allocation of revenue to the separate
deliverables is based on the relative fair value of each item.
If the fair value is not available for the delivered items then
the residual method must be used. This method requires that the
amount allocated to the undelivered items in the arrangement is
their full fair value. This would result in the discount, if
any, being allocated to the delivered items. This consensus is
effective prospectively for arrangements entered into in fiscal
periods beginning after June 15, 2003. EITF 00-21 did not
have an impact upon initial adoption and is not expected to have
a material impact on its ongoing results of operations,
financial position or cash flows.



| |                 
| | ----------------
| | Reclassification

Certain amounts in the 2002 financial statements
have been reclassified to conform to the 2003 presentation.

(2) Balance Sheet Components

Accounts receivable consist of the following (in
thousands):

|                          |                                     |                                       |        |              |        |   |        |        |        |  
|------------------------- | ----------------------------------- | ------------------------------------- | ------ | ------------ | ------ | - | ------ | ------ | ------ | -
|                          |                                     | September 30,                         |        | December 31,
|                          |                                     | 2003                                  |        | 2002        
|                          |                                     |                                       |        |             
|Accounts receivable, net: |                                     |                                       |        |              |        |   |        |       
|                          | Trade accounts receivable           |                                       | $      | 10,751       |        |   | $      | 11,375 |       
|                          | Direct call provisioning receivable |                                       |        | 9,912        |        |   |        | 13,015 |       
|                          | Other receivables                   |                                       |        | 111          |        |   |        | 131    |       
|                          |                                     |                                       |        |              |        |   |        |       
|                          |                                     |                                       | 20,774 |              |        |   | 24,521 |       
|                          |                                     | Less: Allowance for doubtful accounts |        |              | (3,640 | ) |        |        | (4,483 | )
|                          |                                     |                                       |        |              |        |   |        |       
|                          |                                     | $                                     | 17,134 |              |        | $ | 20,038 |       
|                          |                                     |                                       |        |              |        |   |        |       

Bad debt expense for the three months ended
September 30, 2003, was $2.4 million or 19% of direct
call provisioning revenue of $12.8 million. For the
comparative three month period ended September 30, 2002,
bad debt expense totaled $3.5 million, or 28% of the
$12.7 million in direct call provisioning revenue. Bad debt
expense was $10.0 million or 23% of direct call
provisioning revenue of $43.2 million for the nine months
ended September 30, 2003. For the comparative nine month
period ended September 30, 2002, bad debt expense totaled
$9.6 million, or 27% of the $35.0 million in direct
call provisioning revenue.

10



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Property and equipment consist of the following
(in thousands):

|                             |                              |                                                 |        |              |         |   |        |        |         |  
|---------------------------- | ---------------------------- | ----------------------------------------------- | ------ | ------------ | ------- | - | ------ | ------ | ------- | -
|                             |                              | September 30,                                   |        | December 31,
|                             |                              | 2003                                            |        | 2002        
|                             |                              |                                                 |        |             
|Property and equipment, net: |                              |                                                 |        |              |         |   |        |       
|                             | Telecommunications equipment |                                                 | $      | 66,131       |         |   | $      | 72,589 |        
|                             | Construction in progress     |                                                 |        | 2,355        |         |   |        | 3,009  |        
|                             | Office equipment             |                                                 |        | 17,063       |         |   |        | 14,333 |        
|                             |                              |                                                 |        |              |         |   |        |       
|                             |                              |                                                 | 85,549 |              |         |   | 89,931 |       
|                             |                              | Less: Accumulated depreciation and amortization |        |              | (62,818 | ) |        |        | (64,589 | )
|                             |                              |                                                 |        |              |         |   |        |       
|                             |                              | $                                               | 22,731 |              |         | $ | 25,342 |       
|                             |                              |                                                 |        |              |         |   |        |       

Intangible and other assets consist of the
following (in thousands):

|                                  |                                           |                                |        |              |        |   |        |       |        |  
|--------------------------------- | ----------------------------------------- | ------------------------------ | ------ | ------------ | ------ | - | ------ | ----- | ------ | -
|                                  |                                           | September 30,                  |        | December 31,
|                                  |                                           | 2003                           |        | 2002        
|                                  |                                           |                                |        |             
|Intangible and other assets, net: |                                           |                                |        |              |        |   |        |      
|                                  | Purchased technology assets               |                                | $      | 2,487        |        |   | $      | 2,487 |       
|                                  | Capitalized software development costs    |                                |        | 1,872        |        |   |        | 1,843 |       
|                                  | Acquired software technologies            |                                |        | 420          |        |   |        | 420   |       
|                                  | Acquired contract rights                  |                                |        | 1,391        |        |   |        | 1,391 |       
|                                  | Deferred financing costs                  |                                |        | 1,432        |        |   |        | 1,986 |       
|                                  | Patent defense and application costs      |                                |        | 2,935        |        |   |        | 2,914 |       
|                                  | Investment in unconsolidated subsidiaries |                                |        | 835          |        |   |        | 10    |       
|                                  | Deposits and long-term prepayments        |                                |        | 583          |        |   |        | 435   |       
|                                  | Other                                     |                                |        | 155          |        |   |        | 599   |       
|                                  |                                           |                                |        |              |        |   |        |      
|                                  |                                           |                                | 12,110 |              |        |   | 12,085 |      
|                                  |                                           | Less: Accumulated amortization |        |              | (6,501 | ) |        |       | (5,873 | )
|                                  |                                           |                                |        |              |        |   |        |      
|                                  |                                           | $                              | 5,609  |              |        | $ | 6,212  |      
|                                  |                                           |                                |        |              |        |   |        |      

Accrued liabilities consist of the following (in
thousands):

|                     |                                        |               |       |              |  |   |       |       | 
|-------------------- | -------------------------------------- | ------------- | ----- | ------------ |  | - | ----- | ----- | 
|                     |                                        | September 30, |       | December 31,
|                     |                                        | 2003          |       | 2002        
|                     |                                        |               |       |             
|Accrued liabilities: |                                        |               |       |              |  |   |       |      
|                     | Deferred revenue and customer advances |               | $     | 2,178        |  |   | $     | 2,431 | 
|                     | Compensation related                   |               |       | 3,746        |  |   |       | 2,040 | 
|                     | Other                                  |               |       | 1,542        |  |   |       | 1,271 | 
|                     |                                        |               |       |              |  |   |       |      
|                     |                                        | $             | 7,466 |              |  | $ | 5,742 |      
|                     |                                        |               |       |              |  |   |       |      

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(3) Debt

Debt consists of the following (in thousands):

|      |                                     |                      |        |              |        |   |        |        |        |  
|----- | ----------------------------------- | -------------------- | ------ | ------------ | ------ | - | ------ | ------ | ------ | -
|      |                                     | September 30,        |        | December 31,
|      |                                     | 2003                 |        | 2002        
|      |                                     |                      |        |             
|Debt: |                                     |                      |        |              |        |   |        |       
|      | Senior secured term note            |                      | $      | 11,375       |        |   | $      | 14,000 |       
|      | Senior subordinated promissory note |                      |        | 9,000        |        |   |        | 9,000  |       
|      | Other                               |                      |        | 99           |        |   |        | 250    |       
|      |                                     |                      |        |              |        |   |        |       
|      |                                     |                      | 20,474 |              |        |   | 23,250 |       
|      | Less: Unamortized debt discount     |                      |        | (402         | )      |   |        | (465   | )     
|      |                                     |                      |        |              |        |   |        |       
|      | Total Debt                          |                      | $      | 20,072       |        |   | $      | 22,785 |       
|      |                                     | Less current portion |        |              | (3,565 | ) |        |        | (3,694 | )
|      |                                     |                      |        |              |        |   |        |       
|      |                                     | Non current portion  |        | $            | 16,507 |   |        | $      | 19,091 |  
|      |                                     |                      |        |              |        |   |        |       

Future debt maturities for each of the next five
years are summarized as follows (in thousands):

|                         |      |                       |   |       |        | 
|------------------------ | ---- | --------------------- | - | ----- | ------ | 
|Year ending December 31: |      |                       |   |      
|                         | 2003 |                       | $ | 875   |       
|                         | 2004 |                       |   | 3,500 |       
|                         | 2005 |                       |   | 3,500 |       
|                         | 2006 |                       |   | 3,500 |       
|                         | 2007 |                       |   |      |       
|                         |      |                       |   |      
|                         |      | Total debt maturities |   | $     | 11,375 | 
|                         |      |                       |   |      

In September 1999, the Company entered into a
Senior Secured Revolving Credit Facility (the Credit
Facility) with its commercial bank. The Credit Facility
provided for maximum credit of $40 million subject to
limitations based on certain financial covenants. In April 2001,
the Companys lenders extended the maturity date on its
credit agreement to March 31, 2002. The maximum available
borrowings on the facility was reduced to $30 million and
interest was set at prime rate plus 1.25% effective
March 31, 2001 increasing by 0.25% each quarter thereafter
on June 30, September 30 and December 31, 2001.
In addition, monthly payments of $0.2 million on the term
loan commenced in April 2001. In March 2002, the maturity date
of the Credit Facility was extended to June 30, 2002. In
April 2002, the Company obtained a further commitment from the
bank to extend this facility to January 2003. Within the terms
of the March and April 2002 extensions, maximum available
borrowing from the facility was reduced to $21.8 million,
consisting of a $7.8 million term portion and a
$14.0 million line of credit. Interest was set at prime
plus 2.25%, effective March 31, 2002. In addition, monthly
payments of $0.2 million on the term loan were set to
continue through November 2002, when the Company obtained new
financing (see below).

The Company issued a subordinated note payable of
$3.8 million, due April 30, 2001, to a director and
significant shareholder of the Company (the Subordinated
Note Payable). The note, repaid when the Company obtained
new financing (see below), bore interest at prime rate plus one
percent every six months. The lender received warrants,
immediately exercisable, to purchase 25,000 shares of
common stock at an exercise price of $6.05 per share for a
period of five years. This note was extended in April 2001 to
April 2002 at which time the lender received additional
warrants, immediately exercisable, to purchase
25,000 shares of common stock at an exercise price of
$2.75 per share for a period of five years. In March 2002,
this note was extended to July 2002. In April 2002 this note was
extended to February 2003 to facilitate the refinancing of

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the Companys overall financing structure.
Additional warrants to purchase 18,223 shares of common
stock at an exercise price of $2.75, on the previous terms, were
issued related to this extension. The estimated fair value of
the stock purchase warrants, calculated using the Black-Scholes
model, was recorded as deferred financing fees and amortized
over the term of the debt.

In November 2002, the Company obtained new
financing (the New Credit Facility). Net proceeds of this
New Credit Facility were utilized to repay in full the existing
Credit Facility and the Subordinated Note Payable. As of
September 30, 2003, the New Credit Facility provides for
maximum credit availability of $28.4 million, subject to
limitations based on certain financial covenants, and consists
of a $11.4 million Senior Secured Term Loan, a
$9.0 million Senior Subordinated Promissory Note and a
Revolving Credit Facility with an availability of up to
$8.0 million. At September 30, 2003, the Company had
no borrowings outstanding under the Revolving Credit Facility.

The Senior Secured Term Loan bears interest at
LIBOR plus 6.0%, with 13 equal quarterly principal installment
payments remaining through December 2006. Effective
March 31, 2003, the Company entered into an interest rate
swap agreement which effectively converts this variable rate
debt to a fixed rate. (See Note 6 Interest Rate
Swap of Notes to Condensed Consolidated Financial
Statements.) Due in 2008, the Senior Subordinated
Promissory Note bears interest at a fixed rate of 13%, payable
on a quarterly basis, with an additional 4.75% of interest
payable in kind. In addition, the lender received detachable
stock purchase warrants, which are immediately exercisable, to
purchase 186,792 shares of common stock at an exercise
price of $0.01 per share. The expiration date of these
warrants is November 2010. The estimated fair value of the stock
purchase warrants, calculated using the Black-Scholes model, was
recorded as a debt discount and is being amortized over the term
of the Senior Subordinated Promissory Note. Availability under
the Revolving Credit Facility is based on the lesser of eligible
accounts receivable or a calculated maximum leverage ratio.
Interest on the Revolving Credit Facility is set at prime plus
3.5% with a 0.75% annual commitment fee assessed on the unused
portion of this Facility.

The New Credit Facility is collateralized by
substantially all of the assets of the Company. Under the terms
of the New Credit Facility, the Company is required to maintain
certain financial ratios and other financial covenants. These
ratios include a debt to four-quarter rolling earnings before
interest, taxes and depreciation and amortization
(EBITDA) ratio, a ratio of EBITDA less capital expenditures
to fixed charges (interest, taxes and scheduled debt service
payments), and a minimum capitalization ratio. The Company was
in compliance with all such requirements at September 30,
2003. The Agreement also places limits on the amount of
additional indebtedness the Company can incur.

(4) Discontinued Operations and Assets
Held for Sale

In August 2001, the Company formalized the
decision to offer for sale its voice verification business unit,
which includes the SpeakEZ voice verification products, and
operations were substantially curtailed in November 2001.
Accordingly, related operating results have been reported as
discontinued operations. The financial information for the
discontinued speaker verification operations is as follows (in
thousands):

|                                        |  |               |   |               |  |      |      |      |  |   |   |  |  |   |      |  
|--------------------------------------- |  | ------------- | - | ------------- |  | ---- | ---- | ---- |  | - | - |  |  | - | ---- | -
|                                        |  |               |   |              
|                                        |  | Three Months  |   | Nine Months  
|                                        |  | Ended         |   | Ended        
|                                        |  | September 30, |   | September 30,
|                                        |  |               |   |              
|                                        |  | 2003          |   | 2002          |  | 2003 |      | 2002
|                                        |  |               |   |               |  |      |      |     
|Revenue                                 |  | $             |  |               |  | $    |     |      |  | $ |  |  |  | $ | 101  |  
|Operating loss                          |  |               |  |               |  |      | (182 | )    |  |   |  |  |  |   | (615 | )
|Gain on the sale of discontinued assets |  |               |  |               |  |      | 308  |      |  |   |  |  |  |   | 308  |  
|Net income (loss)                       |  |               |  |               |  |      | 126  |      |  |   |  |  |  |   | (307 | )

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In July 2002, the Company completed the sale of
the SpeakEZ voice verification assets to SpeechWorks
International, Inc. (SpeechWorks) for
$0.4 million cash and 134,360 shares of SpeechWorks
common stock valued at $0.3 million at the time of the
transaction, (both cash and stock being subject to a 10% escrow
provision) and recognized a gain on the sale of discontinued
operations of $0.3 million. In addition, SpeechWorks will
pay the Company an earn-out fee based on the sale over the next
two years of future SpeechWorks products incorporating the
SpeakEZ technology. As part of the sales agreement, the Company
retained the right to utilize the speech recognition technology
in the corrections industry. SpeechWorks stock (net of the
escrow) received by the Company was subsequently sold in
July 2003 with net proceeds to the Company of approximately
$0.5 million resulting in a gain of approximately
$0.3 million.

During the fourth quarter of 2002, the Company
recorded a $1.1 million impairment charge to an asset
relating to a prepaid contract for call validation query
services that was then in legal dispute between the Company and
Illuminet. The $1.1 million impairment charge recorded
during the fourth quarter of 2002 reduced the carrying value of
the asset to $0.9 million, or the expected value to be
realized through sale, net of any selling expenses, of the
Companys rights under the contract, which is the likely
course of action for the Company with respect to this asset. In
September 2003 a preliminary settlement of this legal dispute
was reached, pending definitive documents (See Part II
Other Information, Item 1. Legal Proceedings). As a result
of the terms of this preliminary settlement, the Company further
reduced the value of the query transport service agreement to
$0.3 million in September 2003. For the nine months ended
September 30, 2003 and the year ended December 31,
2002, the prepaid validation asset has been classified as an
Asset Held for Sale.

(5) Segment Information 
Continuing Operations

In 2002 and 2003, the Company had three
reportable segments: the Telecommunications Services, Direct
Call Provisioning and Equipment Sales segments (i.e., the
Corrections Division). Through its Corrections Division, the
Company provides inmate telecommunication products and services
for correctional facilities, including security enhanced call
processing, call validation and billing services for inmate
calling. Depending upon the contractual relationship at the site
and the type of customer, the Company provides these products
and services through service agreements with other
telecommunications service providers, including Verizon,
AT&T, SBC Communications, Sprint and Qwest (i.e.,
Telecommunications Services segment) and through direct
contracts between the Company and correctional facilities (i.e.,
Direct Call Provisioning segment). In addition, primarily
through its subsidiary TELEQUIP Labs, the Company sells inmate
call processing systems to certain telecommunication providers
(i.e., Equipment Sales segment).

Formerly, the Company reported two additional
business segments: the Internet Services and SpeakEZ Voice
Verification divisions. Through its Internet Service Division,
the Company provided interLATA Internet services to Qwest
customers through a master service agreement, the Qwest
Agreement. Effective November 2001, substantially all
services and associated revenue under this agreement ceased due
to the expiration of this contract. The SpeakEZ Voice Print
technology is proprietary software that compares the speech
pattern of a current speaker with a stored digital voiceprint of
the authorized person to confirm or reject claimed identity. In
August 2001, the Company formalized its decision to offer
for sale its voice verification business unit and substantially
curtailed operations in November 2001. Accordingly, related
operating results of this business unit have been reported as
discontinued operations in the condensed consolidated financial
statements. Segment reporting has been conformed to correspond
to the current presentation. As described in

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 4 of Notes to the Condensed
Consolidated Financial Statements, the Company completed
the sale of SpeakEZ assets in July 2002.

The Company evaluates performance of each segment
based on operating income (loss). Total assets are the assets
owned by or allocated to each segment. Assets included in the
Corporate and Other column include all assets not
specifically allocated to a segment. There are no intersegment
sales. The Companys reportable segments are specific
business units that offer different products and services and
have varying operating costs associated with such products. The
accounting policies of the reportable segments are the same as
those described in the summary of significant accounting
policies.

Segment information for the three months ended
September 30, 2003 is as follows (in thousands):

|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | ----------------- | ------ | ------------ |  | ------------- | ------ | --------- |  | ----- | ----- |  |  | - | ------ | - |  | - | ------ | -
|                                                                  |  | Telecommunication |        | Direct Call  |  | Equipment     |        | Corporate |  |      
|                                                                  |  | Services          |        | Provisioning |  | Sales & Other |        | and Other |  | Total
|                                                                  |  |                   |        |              |  |               |        |           |  |      
|Revenue from external customers                                   |  | $                 | 12,542 |              |  | $             | 12,781 |           |  | $     | 2,579 |  |  | $ |       |   |  | $ | 27,902 |  
|Gross margin                                                      |  |                   | 7,464  |              |  |               | 568    |           |  |       | 1,313 |  |  |   |       |   |  |   | 9,345  |  
|Depreciation and amortization                                     |  |                   | 746    |              |  |               | 574    |           |  |       | 33    |  |  |   | 1,565  |   |  |   | 2,918  |  
|Other operating costs and expenses                                |  |                   |       |              |  |               |       |           |  |       | 360   |  |  |   | 7,810  |   |  |   | 8,170  |  
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   |        |  
|Operating income (loss)                                           |  |                   | 6,718  |              |  |               | (6     | )         |  |       | 920   |  |  |   | (9,375 | ) |  |   | (1,743 | )
|Patent litigation, net of expenses                                |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   | 11,549 |  
|Interest and other expenses, net                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   | (548   | )
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   |        |  
|Segment earnings from continuing operations
    before income tax |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  | $ | 9,258  |  
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   |        |  
|Total assets                                                      |  | $                 | 13,044 |              |  | $             | 14,375 |           |  | $     | 5,702 |  |  | $ | 40,031 |   |  | $ | 73,152 |  
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   |        |  

Segment information for the three months ended
September 30, 2002 is as follows (in thousands):

|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | ----------------- | ------ | ------------ |  | ------------- | ------ | --------- |  | ----- | ----- |  |  | - | ------ | - |  | - | ------ | -
|                                                                  |  | Telecommunication |        | Direct Call  |  | Equipment     |        | Corporate |  |      
|                                                                  |  | Services          |        | Provisioning |  | Sales & Other |        | and Other |  | Total
|                                                                  |  |                   |        |              |  |               |        |           |  |      
|Revenue from external customers                                   |  | $                 | 14,222 |              |  | $             | 12,736 |           |  | $     | 4,710 |  |  | $ |       |   |  | $ | 31,668 |  
|Gross margin                                                      |  |                   | 7,952  |              |  |               | 610    |           |  |       | 3,771 |  |  |   |       |   |  |   | 12,333 |  
|Depreciation and amortization                                     |  |                   | 873    |              |  |               | 631    |           |  |       | 60    |  |  |   | 1,703  |   |  |   | 3,267  |  
|Other operating costs and expenses                                |  |                   |       |              |  |               |       |           |  |       | 775   |  |  |   | 6,673  |   |  |   | 7,448  |  
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   |        |  
|Operating income (loss)                                           |  |                   | 7,079  |              |  |               | (21    | )         |  |       | 2,936 |  |  |   | (8,376 | ) |  |   | 1,618  |  
|Patent litigation, net of expenses                                |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   | (205   | )
|Interest and other expenses, net                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   | (897   | )
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   |        |  
|Segment earnings from continuing operations
    before income tax |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  | $ | 516    |  
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   |        |  
|Total assets                                                      |  | $                 | 19,807 |              |  | $             | 16,111 |           |  | $     | 3,466 |  |  | $ | 26,883 |   |  | $ | 66,267 |  
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |        |   |  |   |        |  

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Segment information for the nine months ended
September 30, 2003 is as follows (in thousands):

|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  |   |        |  
|----------------------------------------------------------------- |  | ----------------- | ------ | ------------ |  | ------------- | ------ | --------- |  | ----- | ----- |  |  | - | ------- | - |  | - | ------ | -
|                                                                  |  | Telecommunication |        | Direct Call  |  | Equipment     |        | Corporate |  |      
|                                                                  |  | Services          |        | Provisioning |  | Sales & Other |        | and Other |  | Total
|                                                                  |  |                   |        |              |  |               |        |           |  |      
|Revenue from external customers                                   |  | $                 | 38,847 |              |  | $             | 43,235 |           |  | $     | 6,913 |  |  | $ |        |   |  | $ | 88,995 |  
|Gross margin                                                      |  |                   | 23,791 |              |  |               | 3,260  |           |  |       | 4,025 |  |  |   |        |   |  |   | 31,076 |  
|Depreciation and amortization                                     |  |                   | 2,389  |              |  |               | 1,879  |           |  |       | 99    |  |  |   | 4,517   |   |  |   | 8,884  |  
|Other operating costs and expenses                                |  |                   |       |              |  |               |       |           |  |       | 1,337 |  |  |   | 19,413  |   |  |   | 20,750 |  
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  |   |        |  
|Operating income (loss)                                           |  |                   | 21,402 |              |  |               | 1,381  |           |  |       | 2,589 |  |  |   | (23,930 | ) |  |   | 1,442  |  
|Patent litigation, net of expenses                                |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  |   | 9,935  |  
|Interest and other expenses, net                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  |   | (2,341 | )
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  |   |        |  
|Segment earnings from continuing operations
    before income tax |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  | $ | 9,036  |  
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  |   |        |  

Segment information for the nine months ended
September 30, 2002 is as follows (in thousands):

|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  |   |        |  
|----------------------------------------------------------------- |  | ----------------- | ------ | ------------ |  | ------------- | ------ | --------- |  | ----- | ----- |  |  | - | ------- | - |  | - | ------ | -
|                                                                  |  | Telecommunication |        | Direct Call  |  | Equipment     |        | Corporate |  |      
|                                                                  |  | Services          |        | Provisioning |  | Sales & Other |        | and Other |  | Total
|                                                                  |  |                   |        |              |  |               |        |           |  |      
|Revenue from external customers                                   |  | $                 | 44,719 |              |  | $             | 34,954 |           |  | $     | 8,127 |  |  | $ |        |   |  | $ | 87,800 |  
|Gross margin                                                      |  |                   | 27,577 |              |  |               | 1,746  |           |  |       | 5,595 |  |  |   |        |   |  |   | 34,918 |  
|Depreciation and amortization                                     |  |                   | 2,795  |              |  |               | 1,691  |           |  |       | 184   |  |  |   | 4,008   |   |  |   | 8,678  |  
|Other operating costs and expenses                                |  |                   |       |              |  |               |       |           |  |       | 1,782 |  |  |   | 17,826  |   |  |   | 19,608 |  
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  |   |        |  
|Operating income (loss)                                           |  |                   | 24,782 |              |  |               | 55     |           |  |       | 3,629 |  |  |   | (21,834 | ) |  |   | 6,632  |  
|Patent litigation, net of expenses                                |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  |   | (1,501 | )
|Interest and other expenses, net                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  |   | (1,787 | )
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  |   |        |  
|Segment earnings from continuing operations
    before income tax |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  | $ | 3,344  |  
|                                                                  |  |                   |        |              |  |               |        |           |  |       |       |  |  |   |         |   |  |   |        |  

There was no intersegment revenue for the three
and nine months ending September 30, 2003 and the
comparable 2002 period. Consolidated total assets included
intercompany borrowing eliminations of approximately
$1.5 million as of September 30, 2003.

(6) Interest Rate Swap

Since the interest rate on the Senior Secured
Term Loan outstanding under the New Credit Facility is variable,
the Company is exposed to variability in interest payments due
to changes in interest rates. Management believes it is prudent
to limit variability of its interest payments. To meet this
objective, on March 31, 2003, the Company entered into an
interest rate swap agreement which effectively converted the
$11.4 million of variable rate debt outstanding under the
New Credit Facility to a fixed rate. Under the terms of this
interest rate swap agreement, the notional amount of the swap
coincides with the maturity schedule of the Senior Secured Term
Loan and has an expiration date of September 2006. On a
quarterly basis, the Company will receive variable interest rate
payments based on 90 day LIBOR and make fixed interest rate
payments of 2.4%, thereby creating the equivalent of fixed rate
debt. The net effect of this agreement is to lock the effective
interest rate on the Senior Secured Term Loan at 8.4% through
its maturity in 2006.

The Company has designated the interest rate swap
as a cash flow hedge in accordance with the requirements of
SFAS No. 133, Accounting for Derivatives and
Hedging Activities and its amendments. Any gain or loss is
recorded as interest expense in the same period or periods that
the hedged transaction affects earnings. At September 30,
2003, the fair value of the interest rate swap, with quarterly
settlements

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

through September 2006, was a liability of
approximately $0.1 million with the offset recorded in
other comprehensive income. The Company will assess the
valuation of the interest rate swap quarterly on a go forward
basis. The Company does not enter into derivative instruments
for any other purpose than cash flow hedging purposes and does
not intend to speculate using derivative instruments.

(7) Contingencies

The Company is involved in various claims and
legal actions in the ordinary course of business. In the opinion
of management, these matters will not have a material impact on
the financial condition, liquidity, or results of operations of
the Company.

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

For a comprehensive understanding of the
Companys financial condition and performance, this
discussion should be considered in the context of the condensed
consolidated financial statements and accompanying notes and
other information contained herein.

The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking
statements. Certain information contained in this
Managements Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this Form 10-Q
includes forward-looking statements. Important factors that
could cause actual results to differ materially from those in
the forward-looking statements include, but are not limited to,
those listed under the caption Forward Looking Statements
and Risk Factors in the Companys Form 10-K for
the year ended December 31, 2002 which may affect the
potential technological obsolescence of existing systems, the
renewal of existing site specific Corrections Division customer
contracts, the ability to retain the base of current site
specific customer contracts, the ability to perform under
contractual performance requirements, the continued relationship
with existing customers, the ability of the Companys
existing telecommunications service provider customers such as
Verizon, AT&T and SBC Communications, to win new contracts
for the Companys products and services to maintain their
market share of the inmate calling market, the effect of
economic conditions, the effect of regulation, including the
Telecommunications Act of 1996, that could affect the
Companys sales or pricing, the impact of competitive
products and pricing in the Corrections Division, the
Companys continuing ability to develop hardware and
software products, commercialization and technological
difficulties, manufacturing capacity and product supply
constraints or difficulties, and the actual purchases by current
and prospective customers under existing and expected
agreements, along with the other risks detailed therein.

The Company makes forward-looking statements in
this report and may make such statements in future filings with
the Securities and Exchange Commission. The Company also may
make forward-looking statements in press releases or other
public communications. These forward-looking statements are
subject to risks and uncertainties and include information about
the Companys expectations and possible or assumed future
results of operations. When the Company uses any of the words
believe, expect, anticipate,
estimate or similar expressions, we are making a
forward-looking statement. While the Company believes that
forward-looking statements are reasonable, the reader should not
place undue reliance in such forward-looking statements, which
speak only as of the date made.

Other factors not currently anticipated by
management may also materially and adversely affect the
Companys results of operations. Except as required by
applicable law, the Company does not undertake any obligation to
publicly release any revisions which may be made to any
forward-looking statements to reflect events or circumstances
occurring after the date of this report.



| |                     
| | --------------------
| | Corrections Division

In the Corrections Division the Company derives
revenue from three operating segments: telecommunications
services, direct call provisioning and equipment sales. Each
form of revenue has specific and varying operating costs
associated with such revenue. Selling, general and
administrative expenses, along with research and development and
depreciation and amortization are common expenses regardless of
the revenue generated.

Telecommunications services revenue is generated
under long-term contracts (generally, three to five years) with
the Companys telecommunications service provider customers
including Verizon, AT&T, SBC Communications, Qwest and
Sprint. Here, the Company provides the equipment, security
enhanced call processing, call validation, and service and
support through the provider, rather than directly to the
facility. The provider does the billing and the Company either
shares the revenue with or receives a prescribed fee from the
Companys telecommunications services providers for each
call completed. The Company receives additional fees for
validating the phone numbers dialed by inmates.

The Companys Direct Call Provisioning
operating segment provides inmate calling services directly as a
telecommunications provider to correctional facilities, or
Direct Customers. In a typical arrangement, the

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Company operates under site-specific contracts,
generally for a period of two to three years. The Company
provides the equipment, security enhanced call processing, call
validation, and customer service and support directly to the
facility. The Company then uses the services of third parties to
bill the calls on the called partys local exchange carrier
bill. Direct call provisioning revenue is substantially higher
than the percentage of revenue or transaction based pricing
compensation associated with telecommunications services because
the Company receives the entire retail value of the collect
call. Due to commissions and other operating costs, including
the allowance for uncollectible accounts, the gross margin
percentage from this model is lower than our telecommunication
service arrangements.


After the initial term of the direct call
provisioning contract, the correctional facility may choose to
renew the contract with the existing provider or initiate a
formal competitive bid process. The telecommunications industry,
particularly the inmate calling market, is and can be expected
to remain highly competitive. While the Company has historically
maintained a high rate of retention of existing inmate calling
service contracts, the Company may not be able to compete
effectively with current or future competitors for these
contracts, which would have a material adverse effect on the
Companys business, operating results, and financial
condition.

The Companys Equipment Sales segment
generates revenue through the sale of its inmate calling system
(primarily the systems of the Companys wholly owned
subsidiary, TELEQUIP Labs, Inc.), and digital recording systems.
Currently, sales of inmate calling systems are generally made by
TELEQUIP to a limited number of telecommunication service
provider customers.



| |                           
| | --------------------------
| | Internet Services Division

In December 1999, the Company entered into a
master service agreement with US WEST ENTERPRISE (now named
Qwest America, Inc.) (the Qwest Agreement) to
provide interLATA Internet services to Qwest customers. The
Qwest Agreement, which commenced December 1, 1999, called
for the Company to buy, resell and process billing of Internet
bandwidth to these customers. The initial term of the Qwest
Agreement was for a minimum of sixteen months until
March 2001. Although the Qwest Agreement expired on
March 2001, the Company continued providing services under
the Qwest Agreement through October 2001. Effective
November 2001, substantially all services and associated
revenue under this agreement had ceased due to the expiration of
this contract.



| |                              
| | -----------------------------
| | Speaker Verification Division

The Company formerly reported a third business
segment, the SpeakEZ Speaker Verification division. The SpeakEZ
Voice Print technology is proprietary software that compares the
speech pattern of a current speaker with a stored digital
voiceprint of the authorized person to confirm or reject claimed
identity. In August 2001, the Company formalized its decision to
offer for sale its voice verification business unit and
substantially curtailed operations in November 2001. SpeakEZ
assets were sold in July 2002 and the Company retained a license
to use the technology in its corrections business. This
technology is currently utilized in the SECUREvoice product. Due
to the subsequent sale of the assets, related operating results
of the SpeakEZ voice verification division have been recorded as
discontinued operations in the consolidated financial
statements. See Note 4 of Notes to Condensed
Consolidated Financial Statements.

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Results of Operations for the Three months
ended September 30, 2003 Compared to September 30,
2002

The following table sets forth certain statement
of operations data as a percentage of total revenue for the
three months ended September 30, 2003 and 2002.

|          |                                               |                                                           |  |      |     |   |  |    |     |  
|--------- | --------------------------------------------- | --------------------------------------------------------- |  | ---- | --- | - |  | -- | --- | -
|          |                                               | 2003                                                      |  | 2002
|          |                                               |                                                           |  |     
|Revenue:  |                                               |                                                           |  |      |     |   |  |   
|          | Telecommunications services                   |                                                           |  | 45   | %   |   |  | 45 | %  
|          | Direct call provisioning                      |                                                           |  | 46   |     |   |  | 40 |    
|          | Equipment sales and other                     |                                                           |  | 9    |     |   |  | 15 |    
|          |                                               |                                                           |  |      |     |   |  |   
|          |                                               | Total revenue                                             |  |      | 100 |   |  |    | 100 |  
|Expenses: |                                               |                                                           |  |      |     |   |  |   
|          | Operating costs                               |                                                           |  | 67   |     |   |  | 61 |    
|          | Selling, general and administrative           |                                                           |  | 23   |     |   |  | 21 |    
|          | Research and development                      |                                                           |  | 4    |     |   |  | 3  |    
|          | Impairment of assets held for sale            |                                                           |  | 2    |     |   |  |   |    
|          | Depreciation and amortization                 |                                                           |  | 10   |     |   |  | 10 |    
|          |                                               |                                                           |  |      |     |   |  |   
|          |                                               | Operating income (loss)                                   |  |      | (6  | ) |  |    | 5   |  
|          | Patent litigation settlement, net of expenses |                                                           |  | 41   |     |   |  |   |    
|          | Interest and other expense                    |                                                           |  | (2   | )   |   |  | (3 | )  
|          | Gain on the sale of assets                    |                                                           |  |     |     |   |  |   |    
|          |                                               |                                                           |  |      |     |   |  |   
|          |                                               | Income from continuing operations before income
    taxes |  |      | 33  |   |  |    | 2   |  
|          | Income tax expense                            |                                                           |  | (10  | )   |   |  |   |    
|          |                                               |                                                           |  |      |     |   |  |   
|          |                                               | Net income from continuing operations                     |  |      | 23  |   |  |    | 2   |  
|          | Loss from discontinued operations             |                                                           |  |     |     |   |  |   |    
|          |                                               |                                                           |  |      |     |   |  |   
|          |                                               | Net Income applicable to common stock                     |  |      | 23  | % |  |    | 2   | %
|          |                                               |                                                           |  |      |     |   |  |   

Total Revenue.Total
revenue for the three months ended September 30, 2003 was
$27.9 million, a decrease of 12% from $31.7 million
for the corresponding 2002 period. This decrease was
attributable to a decrease in telecommunications services of
$1.7 million and equipment sales and other of
$2.1 million.

Telecommunications services revenue decreased 12%
to $12.5 million for the three months ended
September 30, 2003, from $14.2 million for the
corresponding prior period. This decrease was primarily due to
the transition of certain department of corrections contracts to
a direct call provisioning basis, the loss of contracts by
telecommunication service provider customers and to a decline in
call volumes related to blocking certain call attempts that
would otherwise be unbillable.

Direct call provisioning revenue increased to
$12.8 million for the three months ended September 30,
2003, from $12.7 million in the corresponding prior period.
This increase was primarily due to the awarding in the latter
six months of 2002 of several department of corrections
contracts for which the Company is provisioning comprehensive or
the long distance communication service on a direct basis,
offset partially by a decline in call volumes related to
blocking certain call attempts that would otherwise be
unbillable.

Equipment sales and other revenue declined 45% to
$2.6 million for the three month period ended
September 30, 2003 from $4.7 million in the
corresponding prior period. This decrease was primarily due to
the finalization of certain financial aspects of the Qwest
Agreement which resulted in a $2.5 million one-time payment
in 2002.

Operating costs.Total operating costs decreased 6% to
$18.3 million for the three months ended September 30,
2003 from $19.3 million in the corresponding prior period.
The decrease was primarily due to a

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decrease in telecommunication services expenses
of $1.5 million, offset partially by an increase of
$0.4 million in the cost of equipment sold and a
$0.1 million increase in direct call provisioning costs.


Operating costs of telecommunications services
primarily consist of service administration costs for
correctional facilities, including salaries and related
personnel expenses, communication costs and inmate calling
systems repair and maintenance expenses. Operating costs of
telecommunications services also includes costs associated with
call validation procedures, primarily network expenses and
database access charges. Operating costs associated with direct
call provisioning include the costs associated with telephone
line access, long distance charges, commissions paid to
correctional facilities, costs associated with uncollectible
accounts and billing charges.

The following table sets forth the operating
costs and expenses for each type of revenue as a percentage of
corresponding revenue for the three months ended
September 30, 2003 and 2002.

|                              |                                                          |      |  |      |   |  |  |    |  
|----------------------------- | -------------------------------------------------------- | ---- |  | ---- | - |  |  | -- | -
|                              |                                                          | 2003 |  | 2002
|                              |                                                          |      |  |     
|Operating costs and expenses: |                                                          |      |  |      |   |  |  |   
|                              | Telecommunications services                              |      |  | 41   | % |  |  | 44 | %
|                              | Direct call provisioning, including bad debt
    expense |      |  | 96   |   |  |  | 95 |  
|                              | Cost of equipment sold and other                         |      |  | 49   |   |  |  | 20 |  

Operating costs associated with providing
telecommunications services as a percentage of corresponding
revenue were 41% for the three months ended September 30,
2003, a decrease from 44% for the comparable 2002 period. Total
telecommunications services operating costs were
$5.1 million for the three months ended September 30,
2003 and $6.3 million for the corresponding prior period.
The decrease in costs as a percentage of applicable revenue in
2003 was due primarily to a decrease in labor and repair and
maintenance expenses, partially offset by increased call
validation costs.

Direct call provisioning costs, as a percentage
of applicable revenue, were 96% of revenue for the three months
ended September 30, 2003 compared to 95% in the comparable
2002 period. Total direct call provisioning operating costs,
including bad debt expense, were $12.2 million for the
three months ended September 30, 2003 compared to
$12.1 million for the corresponding 2002 period. The
increase in costs as a percentage of applicable revenue in 2003
was due primarily to a proportional increase in commission
expense associated with one-time settlements of commission
disputes, offset partially by a decrease in bad debt expense.
The proportional decrease in bad debt expense reflects the
Companys improved ability to block calls attempting to be
processed through Competitive Local Exchange Carriers
(CLEC) where the Company does not have billing
arrangements. The Company, beginning in the first quarter of
2002, began modifying its call handling processes to block
certain of these CLEC calls. Combined with the deployment of new
technology and techniques to control bad debt and unbillables,
the Company has been successful in reducing its unbillable call
volume and overall bad debt expense as a percentage of direct
call provisioning revenue to 19% for the three months ended
September 30, 2003 compared to 28% in the 2002 period.

Cost of equipment sold and other as a percentage
of applicable revenue increased to 49% of revenue for the three
months ended September 30, 2003 from 20% for the
corresponding prior period. Total costs of equipment sold and
other were $1.3 million for the three months ended
September 30, 2003 compared to $0.9 million for the
corresponding 2002 period. The increase in costs as a percentage
of applicable revenue was primarily due to the favorable
settlement of certain claims and liabilities associated with the
Qwest Agreement in 2002 and to a writedown of obsolete inventory
in 2003.

Selling, General and Administrative Expenses.Selling, general and administrative
expenses were $6.5 million for the three months ended
September 30, 2003 and $6.6 million in the comparable
2002 period.

Research and Development Expenses.Research and development expenses were
$1.0 million in the three months ended September 30,
2003 compared to $0.8 million for the corresponding prior
period. This increase was primarily due to an increase in
consulting services costs related to the acceleration of several
product development efforts.

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Impairment of Assets Held for Sale.During the nine months ended
September 30, 2003, the Company recorded a
$0.7 million impairment of the prepaid Illuminet validation
asset classified as an Assets Held for Sale. This
impairment was based on the terms of a preliminary settlement
reached in September 2003 of a legal dispute between the Company
and Illuminet, Inc. regarding this asset (See Part II:
Other Information, Item 1. Legal Proceedings).

Depreciation and Amortization Expenses.Depreciation and amortization expense
was $2.9 million for the three months ended
September 30, 2003, a decrease from $3.3 million for
the comparable 2002 period. Depreciation expense decreased to
$2.7 million in the three months ended September 30,
2003 compared to $3.0 million in 2002. Amortization
expenses were $0.2 million for the three months ended
September 30, 2003 compared to $0.3 million in 2002.

Patent Litigation Settlement, Net of Expenses.In September 2003, the Company reached
a settlement with Global Tel*Link Corporation regarding its
ongoing patent infringement lawsuit. The settlement included a
one-time cash payment of $12.0 million and an on-going
royalty fee over the remaining life of the Companys
patents based on the number of telephone instruments in service.
Partially offsetting this settlement were $0.5 million in
legal, professional services and license fees incurred during
the three months ended September 30, 2003. This compares to
$0.2 million in legal fees and other professional service
costs incurred in the comparable 2002 period related to this
patent litigation. Legal fees and other professional service
costs related to the patent litigation have been reclassified to
offset the settlement award in 2003. Such litigation related
costs were previously reported as selling, general and
administrative expenses.

Interest and Other Expenses.Interest and other expense was
$0.8 million for the three months ended September 30,
2003 compared to $0.9 million for the corresponding prior
period.

Income Tax Expense.Income tax expense was
$2.7 million in the three months ended September 30,
2003 due primarily to the increase in pre-tax income in 2003.

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Results of Operations for the Nine months
ended September 30, 2003 Compared to September 30,
2002

The following table sets forth certain statement
of operations data as a percentage of total revenue for the nine
months ended September 30, 2003 and 2002.

|          |                                              |                                                           |  |      |     |   |  |    |     |  
|--------- | -------------------------------------------- | --------------------------------------------------------- |  | ---- | --- | - |  | -- | --- | -
|          |                                              | 2003                                                      |  | 2002
|          |                                              |                                                           |  |     
|Revenue:  |                                              |                                                           |  |      |     |   |  |   
|          | Telecommunications services                  |                                                           |  | 44   | %   |   |  | 51 | %  
|          | Direct call provisioning                     |                                                           |  | 49   |     |   |  | 40 |    
|          | Equipment sales and other                    |                                                           |  | 7    |     |   |  | 9  |    
|          |                                              |                                                           |  |      |     |   |  |   
|          |                                              | Total revenue                                             |  |      | 100 |   |  |    | 100 |  
|Expenses: |                                              |                                                           |  |      |     |   |  |   
|          | Operating costs                              |                                                           |  | 65   |     |   |  | 60 |    
|          | Selling, general and administrative          |                                                           |  | 20   |     |   |  | 19 |    
|          | Research and development                     |                                                           |  | 3    |     |   |  | 3  |    
|          | Impairment of assets held for sale           |                                                           |  |     |     |   |  |   |    
|          | Depreciation and amortization                |                                                           |  | 10   |     |   |  | 10 |    
|          |                                              |                                                           |  |      |     |   |  |   
|          |                                              | Operating income                                          |  |      | 2   |   |  |    | 8   |  
|          | Patent litigation settlement, net of expense |                                                           |  | 11   |     |   |  | (2 | )  
|          | Interest and other expense                   |                                                           |  | (3   | )   |   |  | (2 | )  
|          | Gain on the sale of assets                   |                                                           |  |     |     |   |  |   |    
|          |                                              |                                                           |  |      |     |   |  |   
|          |                                              | Income from continuing operations before income
    taxes |  |      | 10  |   |  |    | 4   |  
|          | Income tax expense                           |                                                           |  | (3   | )   |   |  |   |    
|          |                                              |                                                           |  |      |     |   |  |   
|          |                                              | Net income from continuing operations                     |  |      | 7   |   |  |    | 4   |  
|          | Net income from discontinued operations      |                                                           |  |     |     |   |  | 1  |    
|          |                                              |                                                           |  |      |     |   |  |   
|          |                                              | Net Income applicable to common stock                     |  |      | 7   | % |  |    | 3   | %
|          |                                              |                                                           |  |      |     |   |  |   

Total Revenue.Total
revenue for the nine months ended September 30, 2003 was
$89.0 million, an increase of 1% from $87.8 million
for the corresponding 2002 period. This increase was
attributable to increases in direct call provisioning of
$8.3 million offset partially by a decrease in
telecommunications services of $5.9 million and equipment
sales and other of $1.2 million.

Telecommunications services revenue decreased 13%
to $38.8 million for the nine months ended
September 30, 2003, from $44.7 million for the
corresponding prior period. This decrease was primarily due to
the transition of certain department of corrections contracts to
a direct call provisioning basis, the loss of contracts by
telecommunication service provider customers and to a decline in
call volumes related to blocking certain call attempts that
would otherwise be unbillable.

Direct call provisioning revenue increased 20% to
$43.2 million for the nine months ended September 30,
2003, from $35.0 million in the corresponding prior period.
This increase was primarily due to the award in the latter half
of 2002 of several department of corrections contracts for which
the Company is provisioning comprehensive or long distance
communication service on a direct basis. The addition of these
sites is a result of being successful in providing competitive
bidding arrangements for contracts directly with correctional
facilities. Partially offsetting the increased call volume from
new contracts was a decline in call volumes related to blocking
certain call attempts that would otherwise be unbillable.

Equipment sales and other revenue decreased 15%
to $6.9 million for the nine month period ended
September 30, 2003 from $8.1 million in the
corresponding prior period. This decrease was primarily due to
the favorable settlement of certain financial aspects of the
Qwest Agreement which resulted in a one-time $2.5 million
payment in 2002, offset partially by increased ancillary
equipment sales and equipment upgrades to several
telecommunication service provider customers in 2003. Such
equipment sales and the sale of

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equipment through the Companys wholly-owned
subsidiary, TELEQUIP Labs, Inc. are dependent upon the timing of
sales and installations of a limited number of
telecommunications services provider customers.


Operating costs.Total operating costs increased 9% to
$57.6 million for the nine months ended September 30,
2003 from $52.7 million in the corresponding prior period.
The increase was primarily due to an increase in direct call
provisioning expenses of $6.8 million and equipment sales
and other of $0.3 million, partially offset by a decrease
in telecommunication services expenses of $2.2 million.

Operating costs of telecommunications services
primarily consist of service administration costs for
correctional facilities, including salaries and related
personnel expenses, communication costs and inmate calling
systems repair and maintenance expenses. Operating costs of
telecommunications services also includes costs associated with
call validation procedures, primarily network expenses and
database access charges. Operating costs associated with direct
call provisioning include the costs associated with telephone
line access, long distance charges, commissions paid to
correctional facilities, costs associated with uncollectible
accounts and billing charges.

The following table sets forth the operating
costs and expenses for each type of revenue as a percentage of
corresponding revenue for the nine months ended
September 30, 2003 and 2002.

|                              |                                                          |      |  |      |   |  |  |    |  
|----------------------------- | -------------------------------------------------------- | ---- |  | ---- | - |  |  | -- | -
|                              |                                                          | 2003 |  | 2002
|                              |                                                          |      |  |     
|Operating costs and expenses: |                                                          |      |  |      |   |  |  |   
|                              | Telecommunications services                              |      |  | 39   | % |  |  | 38 | %
|                              | Direct call provisioning, including bad debt
    expense |      |  | 92   |   |  |  | 95 |  
|                              | Cost of equipment sold and other                         |      |  | 42   |   |  |  | 31 |  

Operating costs associated with providing
telecommunications services as a percentage of corresponding
revenue was 39% for the nine months ended September 30,
2003 and 38% for the comparable 2002 period. Total
telecommunications services operating costs were
$15.1 million for the nine months ended September 30,
2003 compared to $17.1 million for the corresponding prior
period.

Direct call provisioning costs, as a percentage
of applicable revenue, were 92% of revenue for the nine months
ended September 30, 2003 compared to 95% in the comparable
2002 period. Due to the awarding of several department of
corrections contracts in the latter half of 2002, total direct
call provisioning operating costs, including bad debt expenses,
increased to $40.0 million for the nine months ended
September 30, 2003 from $33.2 million for the
corresponding 2002 period. The decrease in costs as a percentage
of applicable revenue in 2003 was due primarily to a
proportional decrease in bad debt expense and communication
costs. The decrease in bad debt expense reflects the
Companys improved ability to block calls attempting to be
processed through Competitive Local Exchange Carriers
(CLEC) where the Company does not have billing
arrangements. The Company, beginning in the first quarter of
2002, began modifying its call handling processes to block
certain of these CLEC calls. Combined with the deployment of new
technology and techniques to control bad debt and unbillables,
the Company has been successful in reducing its unbillable call
volume and overall bad debt expense as a percentage of
applicable revenue to 23% for the nine months ended
September 30, 2003 compared to 27% in the 2002 period.

Cost of equipment sold and other as a percentage
of applicable revenue increased to 42% of revenue for the nine
months ended September 30, 2003 from 31% for the
corresponding prior period. Total costs of equipment sold and
other were $2.9 million for the nine months ended
September 30, 2003 and $2.5 million for the
corresponding prior period. The increase in costs as a
percentage of applicable revenue was primarily due to the
favorable settlement of certain claims and liabilities
associated with the Qwest Agreement in 2002 and to a writedown
of obsolete inventory in 2003, offset partially by a change in
the revenue mix for equipment and other sales in 2003.

Selling, General and Administrative Expenses.Selling, general and administrative
expenses were $17.4 million for the nine months ended
September 30, 2003 and $17.3 million in the comparable
2002 period.

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Research and Development Expenses.Research and development expenses were
$2.6 million in the nine months ended September 30,
2003 compared to $2.3 million for the corresponding prior
period. This increase was primarily due to an increase in
consulting costs related to the acceleration of several product
development efforts.

Impairment of Assets Held for Sale.During the nine months ended
September 30, 2003, the Company recorded a
$0.7 million impairment of the prepaid Illuminet validation
asset classified as an Assets Held for Sale. This
impairment was based on the terms of a preliminary settlement
reached in September 2003 of a legal dispute regarding this
asset (See Part II: Other Information, Item 1. Legal
Proceedings).

Depreciation and Amortization Expenses.Depreciation and amortization expense
was $8.9 million for the nine months ended
September 30, 2003, an increase from $8.7 million for
the comparable 2002 period. Depreciation expense increased to
$8.3 million in the nine months ended September 30,
2003 compared to $7.9 million in 2002. Amortization
expenses were $0.6 million for the nine months ended
September 30, 2003 compared to $0.8 million in the
corresponding prior period.

Patent Litigation Settlement, Net of Expenses.In September 2003, the Company reached
a settlement with Global Tel*Link Corporation regarding its
ongoing patent infringement lawsuit. The settlement included a
one-time cash payment of $12.0 million and an on-going
royalty fee over the remaining life of the Companys
patents based on the number of telephone instruments in service.
Partially offsetting this settlement were $2.1 million in
legal, professional services and license fees incurred during
the nine months ended September 30, 2003. This compares to
$1.5 million in legal fees and other professional service
costs incurred in the comparable 2002 period related to this
patent litigation. Legal fees and other professional service
costs related to the patent litigation have been reclassified to
offset the settlement award in 2003. Such litigation related
costs were previously reported as selling, general and
administrative expenses.

Interest and Other Expenses.Interest and other expense was
$2.6 million for the nine months ended September 30,
2003 compared to $1.8 million for the corresponding prior
period. The increase in 2003 was attributable to an increase in
the average amount of indebtedness outstanding, amortization of
debt financing costs and to higher applicable interest rates
related to the New Credit Facility obtained in November 2002.

Income Tax Expense.Income tax expense was
$2.9 million in the nine months ended September 30,
2003 compared to $0.2 million for the corresponding prior
period due primarily to the increase in pre-tax income in 2003.

Liquidity and Capital Resources



| |           
| | ----------
| | Cash Flows

The Company has historically relied upon
operating cash flow, debt financing and the sale of equity
securities to fund operations and capital needs. The
Companys capital needs consist primarily of additions to
property and equipment for site telecommunication equipment,
upgrades to existing systems and to fund acquisitions.

Cash provided by continuing operations was
$23.0 million for the nine months ended September 30,
2003 compared to $6.6 million in the corresponding 2002
period. This increase was primarily due to a $9.4 million
reduction in net working capital, a $2.9 million increase
in net income from continuing operations and $12.0 million
in cash received related to the patent litigation settlement.

Net cash used in investing activity of continuing
operations was $5.9 million for the nine months ended
September 30, 2003 compared to $4.7 million in the
corresponding 2002 period. Cash used in investing activities
consisted primarily of purchases of property, plant, and
equipment of $5.6 million for the nine months ended
September 30, 2003 compared to $5.0 million in the
corresponding 2002 period. Cash used in investing activities in
the 2003 period also reflects the Companys investment in
Accudata in March 2003 of $0.8 million.

25



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##### Table of Contents



The Company believes that cash flows from
operations and availability under the New Credit Facility will
be sufficient in order to meet anticipated cash needs for new
installations of inmate call processing systems, upgrades of
existing systems, and to finance operations for at least the
next twelve months.

Cash used in financing activities of continuing
operations consisted primarily of net payments on the
Companys New Credit Facility of $2.6 million during
the nine months ended September 30, 2003 compared to net
debt payments of $1.8 million in the corresponding 2002
period.



| |                  
| | -----------------
| | Capital Resources

In September 1999, the Company entered into a
Senior Secured Revolving Credit Facility (Credit
Facility) with a commercial bank for working capital and
general corporate purposes. The Credit Facility provided maximum
credit of $40 million subject to certain financial
covenants and financial performance. In April 2001, lenders
extended the Credit Facility maturity date to March 31,
2002. The maximum available borrowing on the facility was
reduced to $30 million consisting of a $10 million
term portion and a $20 million line of credit. Interest was
set at prime rate plus 1.25% effective March 31, 2001,
increasing by 0.25% each quarter thereafter on
June 30, September 30, and December 31, 2001. In
addition, monthly payments of $0.2 million on the term loan
commenced on April 30, 2001. In March 2002 the maturity
date of the Credit Facility was extended to July 2002. In April
2002, the Company obtained a further commitment from the bank to
extend this facility to January 2003. Maximum available
borrowing from the facility was reduced to $21.8 million,
consisting of a $7.8 million term portion and a
$14.0 million line of credit. Interest was set at prime
plus 2.25%, effective March 31, 2002. In addition, monthly
payments of $0.2 million on the term loan were set to
continue through November 2002, when the Company obtained new
financing (see below).

The Company also issued a subordinated note
payable of $3.8 million, due April 30, 2001, to a
director and significant shareholder of the Company (the
Subordinated Note Payable). The note, repaid when
the Company obtained new financing (see below), bore interest at
prime rate plus one percent per annum payable every six months.
The lender received warrants, immediately exercisable, to
purchase 25,000 shares of common stock at an exercise price
of $6.05 per share for a period of five years. This note
was extended in April 2001 to April 2002, at which time the
lender received additional warrants, immediately exercisable, to
purchase 25,000 shares of common stock at an exercise price
of $2.75 per share for a period of five years. In March
2002, this note was extended to July 2002. In April 2002 this
note was extended to February 2003 to facilitate the refinancing
of the Companys overall financing structure. Additional
warrants to purchase 18,223 shares of common stock at an
exercise price of $2.75, on the previous terms, were issued
related to this extension.

In November 2002, the Company obtained new
financing (the New Credit Facility). Net proceeds of
this New Credit Facility were utilized to repay in full the
existing Credit Facility and the Subordinated Note Payable. As
of September 30, 2003, the New Credit Facility provides for
maximum credit availability of $28.4 million, subject to
limitations based on certain financial covenants, and consists
of a $11.4 million Senior Secured Term Loan, a
$9.0 million Senior Subordinated Promissory Note and a
Revolving Credit Facility with an availability of up to
$8.0 million. At September 30, 2003, the Company had
no borrowings outstanding under the Revolving Credit Facility.

The Senior Secured Term Loan bears interest at
LIBOR plus 6.0%, with 13 equal quarterly principal installment
payments remaining through December 2006. The Senior
Subordinated Promissory Note is due in 2008 and bears interest
at a fixed rate of 13%, payable on a quarterly basis, with an
additional 4.75% interest payable in kind. In addition, the
lender received detachable stock purchase warrants, which are
immediately exercisable, to purchase 186,792 shares of
common stock at an exercise price of $0.01 per share. The
expiration date of these warrants is November 2010. Availability
under the Revolving Credit Facility is based on the lesser of up
to 85% of eligible accounts receivable or a calculated maximum
leverage ratio. Interest on the Revolving Credit Facility is set
at prime plus 3.5% with a 0.75% annual commitment fee assessed
on the unused portion of this Facility.

The New Credit Facility is collateralized by
substantially all of the assets of the Company. Under the terms
of the New Credit Facility, the Company is required to maintain
certain financial ratios and other

26



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##### Table of Contents



financial covenants. These ratios include a debt
to four-quarter rolling earnings before interest, taxes and
depreciation and amortization (EBITDA) ratio, a ratio of
EBITDA less capital expenditures to fixed charges (interest,
taxes and scheduled debt service payments), and a minimum
capitalization ratio. The Agreement also places limits on the
amount of additional indebtedness the Company can incur.




| |                                            
| | -------------------------------------------
| | Contractual Obligations and
    Commitments

Set forth below is a summary of the
Companys material contractual obligations and commitments
as of September 30, 2003:

|                                              |  |                  |       |           |  |           |       |           |  |       |     |  |  |   |       |  |  |   |        | 
|--------------------------------------------- |  | ---------------- | ----- | --------- |  | --------- | ----- | --------- |  | ----- | --- |  |  | - | ----- |  |  | - | ------ | 
|                                              |  | Due In One       |       | Due In    |  | Due In    |       | Due After |  |      
|                                              |  | Year Or Less     |       | 2-3 Years |  | 4-5 Years |       | 5 Years   |  | Total
|                                              |  |                  |       |           |  |           |       |           |  |      
|                                              |  |                 
|                                              |  | ($ In thousands)
|Senior secured term note                      |  | $                | 3,500 |           |  | $         | 7,000 |           |  | $     | 875 |  |  | $ |      |  |  | $ | 11,375 | 
|Senior subordinated promissory note           |  |                  |      |           |  |           |      |           |  |       |    |  |  |   | 9,000 |  |  |   | 9,000  | 
|Operating leases                              |  |                  | 807   |           |  |           | 635   |           |  |       | 3   |  |  |   |      |  |  |   | 1,445  | 
|Capital lease and other                       |  |                  | 65    |           |  |           | 34    |           |  |       |    |  |  |   |      |  |  |   | 99     | 
|                                              |  |                  |       |           |  |           |       |           |  |       |     |  |  |   |       |  |  |   |        | 
|Total contractual obligations and commitments |  | $                | 4,372 |           |  | $         | 7,669 |           |  | $     | 878 |  |  | $ | 9,000 |  |  | $ | 21,919 | 
|                                              |  |                  |       |           |  |           |       |           |  |       |     |  |  |   |       |  |  |   |        | 

Under the Companys New Credit Facility,
acceleration of principal payments would occur upon payment
default, violation of debt covenants or breach of certain other
conditions set forth in the New Credit Facility not cured within
15 days. At September 30, 2003, the Company was in
compliance with all of its debt covenants. There are no
provisions within the Companys leasing arrangements that
would trigger acceleration of future lease payments. (See
Notes 3 and 6 to the Condensed Consolidated Financial
Statements for additional information regarding the obligations
and commitments listed above.)

The Company does not use securitization of trade
receivables, affiliation with special purpose entities or
synthetic leases to finance its operations. Additionally, the
Company has not entered into any arrangement requiring the
Company to guarantee payment of third party debt or to fund
losses of an unconsolidated special purpose entity.



| |                                              
| | ---------------------------------------------
| | Recently Issued Accounting
    Pronouncements

In August 2001, the FASB issued
SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement addresses the financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount
of the long-lived asset and reported as a liability. This
statement is effective for fiscal years beginning after
June 15, 2002. The adoption of this statement, effective
January 1, 2003, had no material impact on the
Companys financial position or results of operations.

In May 2002, the FASB issued
SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. Under the provisions of
SFAS No. 145, gains and losses from the early
extinguishment of debt are no longer classified as an
extraordinary item, net of income taxes, but are included in the
determination of pretax earnings. The effective date for
SFAS No. 145 is for fiscal years beginning after
May 15, 2002, with early application encouraged. The
adoption of this statement, effective January 1, 2003, had
no material impact on the Companys financial position or
results of operations.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146
addresses accounting and reporting for costs associated with
exit or disposal activities by requiring that a liability for a
cost associated with an exit or disposal activity be recognized
and measured at fair value only when the liability is incurred.
SFAS No. 146 also nullifies EITF Issue 94-3,

27



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Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The
provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31,
2002.


In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of FASB Statement No. 123. This Statement amends
No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
for a voluntary change to the fair value method of accounting
for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications
are included in the notes to these consolidated financial
statements.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 also requires that a liability be
recorded in the guarantors balance sheet upon issuance of
certain guarantees. FIN 45 also requires disclosure about
certain guarantees that an entity has issued. The Company has
implemented the disclosure requirements required by FIN 45,
which were effective for fiscal years ending after
December 15, 2002. The Company will apply the recognition
provisions of FIN 45 prospectively to guarantees issued
after December 31, 2002. The adoption of this statement had
no material effect upon the Companys financial position or
results of operations.

In January 2003, FASB issued FASB Interpretation
No. 46 (FIN 46), Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of
FIN 46 must be applied for the first interim or annual
period beginning after June 15, 2003. The Company does not
expect FIN 46 to have a material effect on its financial
position or results of operations.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity. SFAS No. 150 establishes standards for
classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity.
SFAS No. 150 is effective for all financial
instruments created or modified after May 31, 2003 and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company does not
expect the adoption of SFAS No. 150 to have a material
impact on its financial position or results of operations.

In November 2002, the Emerging Issues Task Force
(EITF) reached a consensus on EITF 00-21, Revenue
Arrangements with Multiple Deliverables, related to the
timing of revenue recognition for arrangements in which goods or
services or both are delivered separately in a bundled sales
arrangement. The EITF requires that when the deliverables
included in this type of arrangement meet certain criteria they
should be accounted for separately as separate units of
accounting. This may result in a difference in the timing of
revenue recognition but will not result in a change in the total
amount of revenue recognized in a bundled sales arrangement. The
allocation of revenue to the separate deliverables is based on
the relative fair value of each item. If the fair value is not
available for the delivered items then the residual method must
be used. This method requires that the amount allocated to the
undelivered items in the arrangement is their full fair value.
This would result in the discount, if any, being allocated to
the delivered items. This consensus is effective prospectively
for arrangements entered into in fiscal periods beginning after
June 15, 2003. EITF 00-21 did not have an impact upon
initial adoption and is not expected to have a material impact
on its ongoing results of operations, financial position or cash
flows.

28



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##### Table of Contents








|        |                                                              
|------- | -------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosure
    About Market Risk

The Company is exposed to interest rate risk as
discussed below.



| |                   
| | ------------------
| | Interest Rate Risk

As of September 30, 2003, the Company has
debt outstanding under the New Credit Facility of
$20.4 million. As of September 30, 2003, the New
Credit Facility provides for maximum credit availability of
$28.4 million, subject to limitations based on certain
financial covenants, and consists of a $11.4 million Senior
Secured Term Loan, a $9.0 million Senior Subordinated
Promissory Note and a Revolving Credit Facility with an
availability of up to $8.0 million. The Senior Secured Term
Loan and the Revolving Credit Facility bear interest at LIBOR
plus 6% and prime plus 3.5%, respectively. Since the interest
rate on the Senior Secured Term Loan outstanding and the
Revolving Credit Facility is variable and is reset periodically,
we are exposed to interest risk. Before implementation of the
interest rate swap described below, an increase in interest
rates of 1% would have increased estimated annual interest
expense by approximately $0.1 million based on the amount
of borrowings outstanding under the New Credit Facility at
September 30, 2003.

Since the interest rate on the Senior Secured
Term Loan outstanding is variable, the Company is exposed to
variability in interest payments due to changes in interest
rates. Effective March 31, 2003, the Company entered into
an interest rate swap agreement which effectively converted the
$11.4 million of variable rate debt currently outstanding
under the New Credit Facility to a fixed rate. Under the terms
of the interest rate swap agreement, the Company will receive
variable interest rate payments and make fixed interest rate
payments, thereby creating the equivalent of fixed rate debt.
The net effect of this agreement is to lock the effective
interest rate on the Senior Secured Term Loan at 8.4% through
its maturity in 2006.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

As of the end of the period covered by this
report, an evaluation was performed under the supervision and
with the participation of our management, including the Chief
Executive Officer (CEO) and Chief Financial Officer
(CFO), of the effectiveness of the design and
operation of the Companys disclosure controls and
procedures (as defined in Rule 13a-15e under the Securities
Exchange Act of 1934).

Based on that evaluation, management, including
the CEO and CFO, concluded that the Companys disclosure
controls and procedures were effective. There have been no
significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the
date of their evaluation.

29



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##### Table of Contents






PART II

OTHER INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

From time to time the Company has been, and
expects to continue to be subject to various legal and
administrative proceedings or various claims in the normal
course of business. The Company believes the ultimate
disposition of these matters will not have a material adverse
effect on the Companys financial condition, liquidity, or
results of operations.

T-NETIX is a defendant in a state case brought in
June 2000 in the Superior Court of Washington for King County,
styled Sandy Judd, et al. v. American Telephone and
Telegraph Company, et al. In this case, the complaint
joined several inmate telecommunications service providers as
defendants, including T-NETIX. The complaint includes a request
for certification by the court of a plaintiffs class
action consisting of all persons who have been billed for and
paid for telephone calls initiated by an inmate confined in a
jail, prison, detention center or other Washington correctional
facility. The complaint alleges violations of the Washington
Consumer Protection Act (WCPA) and requests an
injunction under the Washington Consumer Protection Act and
common law to enjoin further violations. The trial court
dismissed all claims with prejudice against all defendants
except T-NETIX and AT&T. Plaintiffs have appealed the
dismissal of the other defendants and T-NETIX has crossed
appealed. The T-NETIX and AT&T claims have been referred to
the Washington Utilities and Transportation Commission while the
trial court proceeding is in abeyance. The Commission has not
yet commenced any proceedings.

In September 2001, T-NETIX filed patent
litigation against MCI WorldCom, Inc. and Global Tel*Link
Corporation. The lawsuit, filed in the Eastern District of
Texas, alleges infringement of six United States patents
protecting call processing equipment and services for the inmate
calling industry. In July 2002, MCI WorldCom, Inc. filed a
Chapter XI bankruptcy proceeding that automatically stayed
any further proceeding against them. On August 7, 2002,
T-NETIX subsequently filed its motion to sever MCI WorldCom from
the patent litigation, which was granted on February 13,
2003. The claims against Global Tel*Link were settled in
September 2003 with a cash payment to T-NETIX by Global Tel*Link
of $12.0 million and on-going royalty payments of
$12 per month for each telephone instrument in excess of
25,200 connected to a device using any of the patented
technologies.

Since September 1997 and through October 2001,
pursuant to a written agreement entered into in connection with
a settlement of an arbitration proceeding, the Company was
making monthly payments to a vendor of query transport services
with the understanding that the payments were for future
services to be utilized by the Company. The services to be
provided by Illuminet, Inc. under the contract were in the
nature of the transport of queries by Illuminet to a certain
database maintained by and available to Illuminet. In order to
utilize such transport, the queries were to be directed from the
Company for connection to Illuminet utilizing certain
technologies. Attempts were continually made by the Company over
the time period to complete connectivity but connectivity was
never accomplished. In November 2001, Illuminet notified the
Company that no credits for such services would be honored. In
January 2002 Illuminet filed a claim before the original
arbitration panel in Fairway, Kansas, requesting money damages
for T-NETIXs breach and declaratory relief that no credits
are due T-NETIX. The Company has made payments totaling
approximately $2.1 million pursuant to this written
agreement. The payments (the value of which were written down
during the period ended December 31, 2002) are classified
as an Asset Held for Sale at December 31, 2002.
A preliminary settlement was reached in September 2003, pending
definitive documents. In the settlement, T-NETIX will have the
right to purchase 200 million query transports for $0.0025
each at any time during the next 10 years. These rights are
assignable to any party that is not a customer of Illuminet. As
a result of this recent settlement, the Company further reduced
the value of this query transport agreement to $0.3 million
in September 2003. (See Note 4 of Notes to the
Condensed Consolidated Financial Statements.)

In August 2001, the U.S. Bankruptcy Court
for the Central District of California approved the sale of
assets of OAN Services, Inc. (OAN), a
Chapter 11 debtor and the primary billing agent of the
Company. The Company and about 20 other customers received a
portion of the proceeds. The sole objecting customer

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##### Table of Contents



appealed to the Bankruptcy Appellate Panel but it
was dismissed as moot. In December 2001, the Bankruptcy Court
granted OANs Summary Judgment Motion and ruled against the
objecting customer. In late August 2002, the United Stated
District Court reversed the summary judgment and remanded the
case to the Bankruptcy Court. The objecting customer has
notified the other customers, including the Company, that if it
ultimately prevails, it intends to pursue available claims
against the bankruptcy estate and the customers receiving the
portion of the proceeds.


Condes v. Evercom Systems, Inc.,
et al.is an action filed against
SBC Communications, Pacific Bell Tel. Co. and Evercom Systems,
Inc. in state court in Alameda County, California in June 2002,
alleging unfair trade practices based on asserted billing of
collect calls which were not accepted or authorized, and
requesting class action certification. T-NETIX was joined as a
defendant on March 11, 2003. The case is in early stages of
discovery.

In January 2003 suit was filed against T-NETIX
and various state correctional officials in the District Court
of Johnson County, Nebraska styled Dukhan Iqraa Jihad Mumin,
Vicky Marie Kitt v. T-NETIX Telephone Company,
et al. The suit, brought pro se by an inmate on
behalf of himself and the other plaintiffs, alleges violations
of privacy, United States and Nebraska constitutional and civil
rights. The complaint includes a demand for compensatory damages
of $500,000 and a total of $3,000,000 in treble and compensatory
damages. On June 30, 2003, the Court dismissed the action.
Plaintiff has appealed the ruling.

In May 2003, Global Tel*Link Corporation filed
patent litigation against the Company. The lawsuit, filed in the
Northern District of Texas, Dallas division, alleges
infringement of one United States patent protecting a telephone
apparatus. This litigation is in its very early stage.

On August 20, 1996, Value Added
Communications, Inc. (VAC) and Gateway Technologies,
Inc. entered into a Patent License Agreement regarding fourteen
United States Patents owned or controlled by Gateway and
involving the use of such patents for correctional facilities
and for hospitals. One of these patents pertains to on-site
automated operator systems that allow persons to make collect
telephone calls without the intervention of a human operator,
which was one of the patents that was the subject of the
recently settled T-NETIX v. Global Tel*Link litigation
described above. By letter of October 14, 2003 T-NETIX
notified VAC that the license agreement was terminated for
breach. On October 24, 2003 VAC filed a lawsuit in State
District Court in Dallas County, Texas seeking to have the court
declare that VAC was not in breach of the agreement and that the
agreement is in force and effect.

The Company believes the ultimate disposition of
the forgoing matters will not have a material adverse effect on
the Companys financial condition, liquidity, or results of
operations.






|        |                                              
|------- | ---------------------------------------------
|Item 2. | Changes in Securities and Use of
    Proceeds

None






|        |                                    
|------- | -----------------------------------
|Item 3. | Defaults upon Senior
    Securities

None






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

None

31



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##### Table of Contents








|        |                  
|------- | -----------------
|Item 5. | Other Information

None






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) The following exhibits are filed as part
of this Report:

|        |      |             |  |                                                                                                        
|------- | ---- | ----------- |  | -------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 31.1 |             |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.
|        | 31.2 |             |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.
|        | 32.1 |             |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.
|        | 32.2 |             |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

Press Release, T-NETIX Obtains $12 Million
Cash Settlement from Global Tel*Link Corporation, filed as
Form 8-K with the SEC on September 8, 2003.

Press Release, T-NETIX Reports
$6.5 Million Net Income for Third Quarter and
$6.2 Million for Nine Months Ended September 30,
2003, filed as Form 8-K with the SEC on
November 12, 2003.

32



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.



| |              
| | -------------
| | T-NETIX, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ RICHARD E. CREE

| |                        
| | -----------------------
| |                        
| | Richard E. Cree,       
| | Chief Executive Officer



| |     |                          
| | --- | -------------------------
| | By: | /s/ HENRY G. SCHOPFER III

| |                        
| | -----------------------
| |                        
| | Henry G. Schopfer III, 
| | Chief Financial Officer

Date: November 13, 2003

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INDEX TO EXHIBITS

|        |      |             |  |                                                                                                        
|------- | ---- | ----------- |  | -------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|No.     |      | Description
|        |      |            
|        | 31.1 |             |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.
|        | 31.2 |             |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.
|        | 32.1 |             |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.
|        | 32.2 |             |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.

34