##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

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 March 31,
2003

Commission file number 0-25016

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 April 28, 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                                           
|                                                   | 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                                        
|CERTIFICATION                                     
|CERTIFICATION                                     
|EX-99.1 Certification Pursuant to 18 USC Sec. 1350
|EX-99.2 Certification Pursuant to 18 USC Sec. 1350



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##### Table of Contents



FORM 10-Q CROSS REFERENCE INDEX

|                                         |  |                                                                                           |    |      |    | 
|---------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                         |  |                                                                                           |    | Page
|                                         |  |                                                                                           |    |     
|PART I FINANCIAL INFORMATION            
|Item 1.                                  |  | Condensed Financial Statements (Unaudited)                                                |    |      | 2  | 
|Item 2.                                  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 18 | 
|Item 3.                                  |  | Quantitative and Qualitative Disclosure About
    Market Risk                             |    |      | 25 | 
|Item 4.                                  |  | Controls and Procedures                                                                   |    |      | 25 | 
|PART II OTHER INFORMATION               
|Item 1.                                  |  | Legal Proceedings                                                                         |    |      | 25 | 
|Item 2.                                  |  | Changes in Securities and Use of Proceeds                                                 |    |      | 27 | 
|Item 3.                                  |  | Defaults Upon Senior Securities                                                           |    |      | 27 | 
|Item 4.                                  |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 27 | 
|Item 5.                                  |  | Other Information                                                                         |    |      | 27 | 
|Item 6.                                  |  | Exhibits and Reports on Form 8-K                                                          |    |      | 27 | 
|Signatures                               |  |                                                                                           | 28 |     
|Certification by Chief Executive Officer |  |                                                                                           | 29 |     
|Certification by Chief Financial Officer |  |                                                                                           | 30 |     

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
    March 31, 2003 and December 31, 2002 (Unaudited)                       |  |  | 3 | 
|Condensed Consolidated Statements of Operations
    for the Three Months Ended March 31, 2003 and 2002
    (Unaudited) |  |  | 4 | 
|Condensed Consolidated Statements of Cash Flows
    for the Three Months Ended March 31, 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

|                                           |                                                                                                                                                                     |                            |        |              |        |   |        |         |        | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------------ | ------ | - | ------ | ------- | ------ | 
|                                           |                                                                                                                                                                     | March 31,                  |        | December 31,
|                                           |                                                                                                                                                                     | 2003                       |        | 2002        
|                                           |                                                                                                                                                                     |                            |        |             
|                                           |                                                                                                                                                                     | (Unaudited)                |        |             
|                                           |                                                                                                                                                                     |                           
|                                           |                                                                                                                                                                     | (Amounts in thousands,    
|                                           |                                                                                                                                                                     | except per share and      
|                                           |                                                                                                                                                                     | share amounts)            
|ASSETS                                    
|Cash and cash equivalents                  |                                                                                                                                                                     | $                          | 6,904  |              |        | $ | 6,554  |        
|Accounts receivable, net (note 2)          |                                                                                                                                                                     |                            | 19,133 |              |        |   | 20,038 |        
|Prepaid expenses                           |                                                                                                                                                                     |                            | 3,369  |              |        |   | 1,608  |        
|Inventories                                |                                                                                                                                                                     |                            | 1,349  |              |        |   | 1,424  |        
|                                           |                                                                                                                                                                     |                            |        |              |        |   |        |        
|                                           |                                                                                                                                                                     | Total current assets       |        |              | 30,755 |   |        |         | 29,624 | 
|Property and equipment, net (note 2)       |                                                                                                                                                                     |                            | 24,530 |              |        |   | 25,342 |        
|Goodwill, net                              |                                                                                                                                                                     |                            | 2,245  |              |        |   | 2,245  |        
|Deferred tax asset                         |                                                                                                                                                                     |                            | 2,297  |              |        |   | 2,297  |        
|Assets held for sale                       |                                                                                                                                                                     |                            | 937    |              |        |   | 937    |        
|Intangible and other assets, net (note 2)  |                                                                                                                                                                     |                            | 6,613  |              |        |   | 6,212  |        
|                                           |                                                                                                                                                                     |                            |        |              |        |   |        |        
|                                           |                                                                                                                                                                     | Total assets               |        | $            | 67,377 |   |        | $       | 66,657 | 
|                                           |                                                                                                                                                                     |                            |        |              |        |   |        |        
|                                          
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Liabilities:                               |                                                                                                                                                                     |                            |        |              |        |   |        |        
|                                           | Accounts payable                                                                                                                                                    |                            | $      | 12,097       |        |   | $      | 11,070  |       
|                                           | Accrued liabilities (note 2)                                                                                                                                        |                            |        | 7,007        |        |   |        | 5,742   |       
|                                           | Current portion of long-term debt (note 3)                                                                                                                          |                            |        | 3,659        |        |   |        | 3,694   |       
|                                           |                                                                                                                                                                     |                            |        |              |        |   |        |        
|                                           |                                                                                                                                                                     | Total current liabilities  |        |              | 22,763 |   |        |         | 20,506 | 
|                                           | Long-term debt (note 3)                                                                                                                                             |                            |        | 18,292       |        |   |        | 19,091  |       
|                                           |                                                                                                                                                                     |                            |        |              |        |   |        |        
|                                           |                                                                                                                                                                     | Total liabilities          |        |              | 41,055 |   |        |         | 39,597 | 
|Commitments and contingencies              |                                                                                                                                                                     |                            |        |              |        |   |        |        
|Stockholders equity:                      |                                                                                                                                                                     |                            |        |              |        |   |        |        
|                                           | Preferred stock, $.01 stated value,
    10,000,000 shares authorized; no shares issued or
    outstanding at March 31, 2003 and December 31, 2002,
    respectively |                            |        |             |        |   |        |        |       
|                                           | Common stock, $.01 stated value,
    70,000,000 shares authorized; 15,052,210 shares issued
    and outstanding at March 31, 2003 and December 31, 2002             |                            |        | 150          |        |   |        | 150     |       
|                                           | Additional paid-in capital                                                                                                                                          |                            |        | 42,334       |        |   |        | 42,334  |       
|                                           | Accumulated deficit                                                                                                                                                 |                            |        | (16,162      | )      |   |        | (15,424 | )     
|                                           |                                                                                                                                                                     |                            |        |              |        |   |        |        
|                                           |                                                                                                                                                                     | Total stockholders equity |        |              | 26,322 |   |        |         | 27,060 | 
|                                           |                                                                                                                                                                     |                            |        |              |        |   |        |        
|Total liabilities and stockholders equity |                                                                                                                                                                     | $                          | 67,377 |              |        | $ | 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

|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |        |        |        | 
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------- | -------------------------------- | ---------------------------------- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | 
|                                                                 |                                                                                         |                                 
|                                                                 |                                                                                         | Three Months Ended              
|                                                                 |                                                                                         | March 31,                       
|                                                                 |                                                                                         |                                 
|                                                                 |                                                                                         | 2003                             |                                    | 2002  
|                                                                 |                                                                                         |                                  |                                    |       
|                                                                 |                                                                                         |                                 
|                                                                 |                                                                                         | (Unaudited)                     
|                                                                 |                                                                                         |                                 
|                                                                 |                                                                                         | (Amounts in thousands,          
|                                                                 |                                                                                         | except per share and            
|                                                                 |                                                                                         | share amounts)                  
|Revenue:                                                         |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 | Telecommunication services                                                              |                                  | $                                  | 13,199 |        |        | $     | 15,264 |       
|                                                                 | Direct call provisioning                                                                |                                  |                                    | 15,129 |        |        |       | 8,217  |       
|                                                                 | Equipment sales and other                                                               |                                  |                                    | 1,695  |        |        |       | 977    |       
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 |                                                                                         |                                  | Total revenue                      |        |        | 30,023 |       |        |        | 24,458 | 
|Operating costs and expenses:                                    |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 | Operating costs (exclusive of depreciation and
    amortization shown separately below) |                                  |                                    |        |        |        |       |        |       
|                                                                 |                                                                                         | Telecommunications services      |                                    |        | 5,053  |        |       |        | 5,484  |       
|                                                                 |                                                                                         | Direct call provisioning         |                                    |        | 14,102 |        |       |        | 7,463  |       
|                                                                 |                                                                                         | Cost of equipment sold and other |                                    |        | 743    |        |       |        | 531    |       
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 |                                                                                         |                                  | Total operating costs              |        |        | 19,898 |       |        |        | 13,478 | 
|                                                                 | Selling, general and administrative                                                     |                                  |                                    | 6,251  |        |        |       | 5,704  |       
|                                                                 | Research and development                                                                |                                  |                                    | 773    |        |        |       | 700    |       
|                                                                 | Depreciation and amortization                                                           |                                  |                                    | 3,031  |        |        |       | 2,657  |       
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 |                                                                                         |                                  | Total operating costs and expenses |        |        | 29,953 |       |        |        | 22,539 | 
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 |                                                                                         |                                  | Operating income                   |        |        | 70     |       |        |        | 1,919  | 
|Interest and other expenses, net                                 |                                                                                         |                                  | 719                                |        |        |        | 306   |       
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|Income (loss) from continuing operations before
    income taxes |                                                                                         |                                  | (649                               | )      |        |        | 1,613 |       
|Income tax expense                                               |                                                                                         |                                  | 89                                 |        |        |        | 135   |       
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 | Net income (loss) from continuing operations                                            |                                  |                                    | (738   | )      |        |       | 1,478  |       
|Net loss from discontinued operations                            |                                                                                         |                                  |                                   |        |        |        | (349  | )     
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|Net income (loss) applicable to common
    stockholders          |                                                                                         | $                                | (738                               | )      |        | $      | 1,129 |       
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 | Income (loss) per common share from continuing
    operations                           |                                  |                                    |        |        |        |       |        |       
|                                                                 |                                                                                         | Basic                            |                                    | $      | (0.05  | )      |       | $      | 0.10   |       
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 |                                                                                         | Diluted                          |                                    | $      | (0.05  | )      |       | $      | 0.10   |       
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 | Loss per common share from discontinued operations                                      |                                  |                                    |        |        |        |       |        |       
|                                                                 |                                                                                         | Basic                            |                                    | $      |       |        |       | $      | (0.02  | )     
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 |                                                                                         | Diluted                          |                                    | $      |       |        |       | $      | (0.02  | )     
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 | Income (loss) per common share applicable to
    common shareholders                    |                                  |                                    |        |        |        |       |        |       
|                                                                 |                                                                                         | Basic                            |                                    | $      | (0.05  | )      |       | $      | 0.08   |       
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 |                                                                                         | Diluted                          |                                    | $      | (0.05  | )      |       | $      | 0.07   |       
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 | Shares used in computing net income (loss) per
    common share                         |                                  |                                    |        |        |        |       |        |       
|                                                                 |                                                                                         | Basic                            |                                    |        | 15,052 |        |       |        | 15,032 |       
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       
|                                                                 |                                                                                         | Diluted                          |                                    |        | 15,052 |        |       |        | 15,450 |       
|                                                                 |                                                                                         |                                  |                                    |        |        |        |       |       

See accompanying notes to unaudited condensed
consolidated financial statements.

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T-NETIX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                      |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |       |       |        |        |  
|------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------------------------- | ------------------------------------------------------------------ | ----- | ------ | ------ | ----- | ----- | ------ | ------ | -
|                                      |                                                                                                                         |                                                          
|                                      |                                                                                                                         | Three Months Ended                                       
|                                      |                                                                                                                         | March 31,                                                
|                                      |                                                                                                                         |                                                          
|                                      |                                                                                                                         | 2003                                                      |                                                | 2002                                                              
|                                      |                                                                                                                         |                                                           |                                                |                                                                   
|                                      |                                                                                                                         |                                                          
|                                      |                                                                                                                         | (Unaudited)                                              
|                                      |                                                                                                                         |                                                          
|                                      |                                                                                                                         | (Amounts in thousands,                                   
|                                      |                                                                                                                         | except per share and                                     
|                                      |                                                                                                                         | share amounts)                                           
|Cash flows from operating activities: |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |      
|                                      | Net income (loss) from continuing operations                                                                            |                                                           | $                                              | (738                                                               | )     |        | $      | 1,478 |      
|                                      | Adjustments to reconcile net income (loss) to net
    cash provided by operating activities from continuing operations: |                                                           |                                                |                                                                    |       |        |        |       |      
|                                      |                                                                                                                         | Depreciation and amortization                             |                                                |                                                                    | 3,031 |        |        |       | 2,657 |       
|                                      |                                                                                                                         | Bad debt expense                                          |                                                |                                                                    | 4,073 |        |        |       | 2,519 |       
|                                      |                                                                                                                         | Equity income from unconsolidated subsidiary              |                                                |                                                                    | (15   | )      |        |       |      |       
|                                      |                                                                                                                         | Accretion of discount on subordinated promissory
    note |                                                |                                                                    | 28    |        |        |       |      |       
|                                      |                                                                                                                         | Changes in operating assets and liabilities:              |                                                |                                                                    |       |        |        |       |       |       
|                                      |                                                                                                                         |                                                           | Accounts receivable                            |                                                                    |       | (3,168 | )      |       |       | (5,745 | )     
|                                      |                                                                                                                         |                                                           | Prepaid expenses                               |                                                                    |       | (1,761 | )      |       |       | (207   | )     
|                                      |                                                                                                                         |                                                           | Inventories                                    |                                                                    |       | 75     |        |       |       | 148    |       
|                                      |                                                                                                                         |                                                           | Intangibles and other assets                   |                                                                    |       | 155    |        |       |       | 121    |       
|                                      |                                                                                                                         |                                                           | Accounts payable                               |                                                                    |       | 1,027  |        |       |       | (730   | )     
|                                      |                                                                                                                         |                                                           | Accrued liabilities                            |                                                                    |       | 1,265  |        |       |       | 3,515  |       
|                                      |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |      
|                                      |                                                                                                                         |                                                           |                                                | Cash provided by operating activities of
    continuing operations |       |        | 3,972  |       |       |        | 3,756  |  
|                                      |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |      
|                                      |                                                                                                                         | Cash used in investing activities:                        |                                                |                                                                    |       |        |        |       |       |       
|                                      |                                                                                                                         |                                                           | Purchase of property and equipment             |                                                                    |       | (2,030 | )      |       |       | (2,112 | )     
|                                      |                                                                                                                         |                                                           | Investment in unconsolidated subsidiary        |                                                                    |       | (730   | )      |       |       |       |       
|                                      |                                                                                                                         |                                                           | Other investing activities                     |                                                                    |       |       |        |       |       | (93    | )     
|                                      |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |      
|                                      |                                                                                                                         |                                                           |                                                | Cash used in investing activities of continuing
    operations     |       |        | (2,760 | )     |       |        | (2,205 | )
|                                      |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |      
|                                      |                                                                                                                         | Cash flows from financing activities:                     |                                                |                                                                    |       |        |        |       |       |       
|                                      |                                                                                                                         |                                                           | Net proceeds from (payments on) line of credit |                                                                    |       |       |        |       |       | 145    |       
|                                      |                                                                                                                         |                                                           | Conversion of payment in kind interest to debt |                                                                    |       | 56     |        |       |       |       |       
|                                      |                                                                                                                         |                                                           | Payments on senior secured term note           |                                                                    |       | (875   | )      |       |       |       |       
|                                      |                                                                                                                         |                                                           | Payments on other debt                         |                                                                    |       | (43    | )      |       |       | (657   | )     
|                                      |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |      
|                                      |                                                                                                                         |                                                           |                                                | Cash used in financing activities of continuing
    operations     |       |        | (862   | )     |       |        | (512   | )
|                                      |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |      
|                                      |                                                                                                                         | Cash used by discontinued operations                      |                                                |                                                                    |      |        |        |       | (349  | )     
|                                      |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |      
|                                      |                                                                                                                         | Net increase in cash and cash equivalents                 |                                                |                                                                    | 350   |        |        |       | 690   |       
|                                      |                                                                                                                         | Cash and cash equivalents at beginning of period          |                                                |                                                                    | 6,554 |        |        |       | 995   |       
|                                      |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |      
|                                      |                                                                                                                         | Cash and cash equivalents at end of period                |                                                | $                                                                  | 6,904 |        |        | $     | 1,685 |       
|                                      |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |      
|                                      |                                                                                                                         | Supplemental Disclosures:                                 |                                                |                                                                    |       |        |        |       |       |       
|                                      |                                                                                                                         |                                                           | Cash paid during the period for:               |                                                                    |       |        |        |       |       |        |       
|                                      |                                                                                                                         |                                                           |                                                | Interest                                                           |       | $      | 317    |       |       | $      | 306    |  
|                                      |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |      
|                                      |                                                                                                                         |                                                           |                                                | Income taxes                                                       |       | $      | 120    |       |       | $      | 42     |  
|                                      |                                                                                                                         |                                                           |                                                |                                                                    |       |        |        |      

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

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


(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
$0.7 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 will allow the Company
cost effective, flexible, high-speed access to a centralized
LIDB through sophisticated SS7 transport technology and
considerably enhances our capacity to utilize new technology for
controlling bad debt and unbillables. The investment in Accudata
is presented under the equity method of accounting and such
investment is included in Intangibles and other assets,
net at March 31, 2003. Equity in the results of
operations for the three months ended March 31, 2003 was
not significant.



| |                                     
| | ------------------------------------
| | Earnings (Loss) Per Common
    Share

Earnings (loss) per common share are presented in
accordance with the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share
(SFAS 128). Basic earnings 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 earnings 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)

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


(Unaudited)


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

|             |                                                         |                    |   |        |   |  |   |        |     | 
|------------ | ------------------------------------------------------- | ------------------ | - | ------ | - |  | - | ------ | --- | 
|             |                                                         |                   
|             |                                                         | Three Months Ended
|             |                                                         | March 31,         
|             |                                                         |                   
|             |                                                         | 2003               |   | 2002  
|             |                                                         |                    |   |       
|Numerator:   |                                                         |                    |   |        |   |  |   |       
|             | Net income (loss) applicable to common
    shareholders |                    | $ | (738   | ) |  | $ | 1,129  |    
|             |                                                         |                    |   |        |   |  |   |       
|Denominator: |                                                         |                    |   |        |   |  |   |       
|             | Denominator for basic earnings per share                |                    |   | 15,052 |   |  |   | 15,032 |    
|             | Effect of dilutive securities:                          |                    |   |        |   |  |   |        |    
|             |                                                         | Stock options      |   |        |  |  |   |        | 393 | 
|             |                                                         | Warrants           |   |        |  |  |   |        | 25  | 
|             |                                                         |                    |   |        |   |  |   |       
|             | Denominator for diluted earnings per share              |                    |   | 15,052 |   |  |   | 15,450 |    
|             |                                                         |                    |   |        |   |  |   |       

The calculation of diluted net loss per common
share for the three months ended March 31, 2003 does not
include 3,540,000 of potentially dilutive securities, including
common stock options and warrants, as their effect would be
anti-dilutive. For the three months ended March 31, 2002,
common stock equivalents of 1,548,000 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 Statement of Financial Accounting Standards
(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.

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
|                                                                      |                                                                        | March 31,         
|                                                                      |                                                                        |                   
|                                                                      |                                                                        | 2003               |        | 2002
|                                                                      |                                                                        |                    |        |     
|Net income (loss) applicable to common
    stockholders, as reported: |                                                                        | $                  | (738   | )    |       | $ | 1,129 |     
|                                                                      | Less: Stock-based compensation excluded from
    reported net earnings |                    |        | (301 | )     |   |       | (437 | )   
|                                                                      |                                                                        |                    |        |      |       |   |       |     
|Pro forma net income (loss)                                           |                                                                        | $                  | (1,039 | )    |       | $ | 692   |     
|                                                                      |                                                                        |                    |        |      |       |   |       |     
|Net income (loss) per common share:                                   |                                                                        |                    |        |      |       |   |       |     
|                                                                      | As reported:                                                           |                    |        |      |       |   |       |      |     
|                                                                      |                                                                        | Basic              |        | $    | (0.05 | ) |       | $    | 0.08 | 
|                                                                      |                                                                        | Diluted            |        | $    | (0.05 | ) |       | $    | 0.07 | 
|                                                                      | Pro forma:                                                             |                    |        |      |       |   |       |      |     
|                                                                      |                                                                        | Basic              |        | $    | (0.07 | ) |       | $    | 0.05 | 
|                                                                      |                                                                        | Diluted            |        | $    | (0.07 | ) |       | $    | 0.04 | 

7



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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


(Unaudited)


The per share weighted-average fair value of
stock options issued by the Company during 2003 and 2002 was
$1.30 and $3.00 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          |  |      | 83.5%     |      |  |  | 92.3%     | 
|Average expected option life |  |      | 5.4 years |      |  |  | 5.4 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, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options.



| |                                              
| | ---------------------------------------------
| | 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 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.

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

8



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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


(Unaudited)


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.



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

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



|    |                         
|--- | ------------------------
|(2) | Balance Sheet Components

Accounts receivable consist of the following:

|                          |                                     |                                       |        |              |        |   |        |        |        |  
|------------------------- | ----------------------------------- | ------------------------------------- | ------ | ------------ | ------ | - | ------ | ------ | ------ | -
|                          |                                     | March 31,                             |        | December 31,
|                          |                                     | 2003                                  |        | 2002        
|                          |                                     |                                       |        |             
|Accounts receivable, net: |                                     |                                       |        |              |        |   |        |       
|                          | Trade accounts receivable           |                                       | $      | 9,314        |        |   | $      | 11,375 |       
|                          | Direct call provisioning receivable |                                       |        | 13,950       |        |   |        | 13,015 |       
|                          | Other receivables                   |                                       |        | 162          |        |   |        | 131    |       
|                          |                                     |                                       |        |              |        |   |        |       
|                          |                                     |                                       | 23,426 |              |        |   | 24,521 |       
|                          |                                     | Less: Allowance for doubtful accounts |        |              | (4,293 | ) |        |        | (4,483 | )
|                          |                                     |                                       |        |              |        |   |        |       
|                          |                                     | $                                     | 19,133 |              |        | $ | 20,038 |       
|                          |                                     |                                       |        |              |        |   |        |       

Bad debt expense was $4.1 million or 27% of
direct call provisioning revenue of $15.1 million for the
three months ended March 31, 2003. For the comparative
three month period ended March 31, 2002, bad debt expense
totaled $2.5 million, or 29% of the $8.2 million in
direct call provisioning revenue and 1% of the
$15.3 million in telecommunication services revenue.

9



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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


(Unaudited)


Property and equipment consist of the following:

|                             |                              |                                                 |        |              |         |   |        |        |         |  
|---------------------------- | ---------------------------- | ----------------------------------------------- | ------ | ------------ | ------- | - | ------ | ------ | ------- | -
|                             |                              | March 31,                                       |        | December 31,
|                             |                              | 2003                                            |        | 2002        
|                             |                              |                                                 |        |             
|Property and equipment, net: |                              |                                                 |        |              |         |   |        |       
|                             | Telecommunications equipment |                                                 | $      | 74,332       |         |   | $      | 72,589 |        
|                             | Construction in progress     |                                                 |        | 1,817        |         |   |        | 3,009  |        
|                             | Office equipment             |                                                 |        | 15,621       |         |   |        | 14,333 |        
|                             |                              |                                                 |        |              |         |   |        |       
|                             |                              |                                                 | 91,770 |              |         |   | 89,931 |       
|                             |                              | Less: Accumulated depreciation and amortization |        |              | (67,240 | ) |        |        | (64,589 | )
|                             |                              |                                                 |        |              |         |   |        |       
|                             |                              | $                                               | 24,530 |              |         | $ | 25,342 |       
|                             |                              |                                                 |        |              |         |   |        |       

Intangible and other assets consist of the
following:

|                                  |                                         |                                |        |              |        |   |        |       |        |  
|--------------------------------- | --------------------------------------- | ------------------------------ | ------ | ------------ | ------ | - | ------ | ----- | ------ | -
|                                  |                                         | March 31,                      |        | December 31,
|                                  |                                         | 2003                           |        | 2002        
|                                  |                                         |                                |        |             
|Intangible and other assets, net: |                                         |                                |        |              |        |   |        |      
|                                  | Purchased technology assets             |                                | $      | 2,487        |        |   | $      | 2,487 |       
|                                  | Capitalized software development costs  |                                |        | 1,843        |        |   |        | 1,843 |       
|                                  | Acquired software technologies          |                                |        | 420          |        |   |        | 420   |       
|                                  | Acquired contract rights                |                                |        | 1,391        |        |   |        | 1,391 |       
|                                  | Deferred financing costs                |                                |        | 1,793        |        |   |        | 1,986 |       
|                                  | Patent defense and application costs    |                                |        | 2,914        |        |   |        | 2,914 |       
|                                  | Investment in unconsolidated subsidiary |                                |        | 755          |        |   |        | 10    |       
|                                  | Deposits and long-term prepayments      |                                |        | 546          |        |   |        | 435   |       
|                                  | Other                                   |                                |        | 526          |        |   |        | 599   |       
|                                  |                                         |                                |        |              |        |   |        |      
|                                  |                                         |                                | 12,675 |              |        |   | 12,085 |      
|                                  |                                         | Less: Accumulated amortization |        |              | (6,062 | ) |        |       | (5,873 | )
|                                  |                                         |                                |        |              |        |   |        |      
|                                  |                                         | $                              | 6,613  |              |        | $ | 6,212  |      
|                                  |                                         |                                |        |              |        |   |        |      

Accrued liabilities consist of the following:

|                     |                                        |           |       |              |  |   |       |       | 
|-------------------- | -------------------------------------- | --------- | ----- | ------------ |  | - | ----- | ----- | 
|                     |                                        | March 31, |       | December 31,
|                     |                                        | 2003      |       | 2002        
|                     |                                        |           |       |             
|Accrued liabilities: |                                        |           |       |              |  |   |       |      
|                     | Deferred revenue and customer advances |           | $     | 3,089        |  |   | $     | 2,431 | 
|                     | Compensation related                   |           |       | 2,369        |  |   |       | 2,040 | 
|                     | Other                                  |           |       | 1,549        |  |   |       | 1,271 | 
|                     |                                        |           |       |              |  |   |       |      
|                     |                                        | $         | 7,007 |              |  | $ | 5,742 |      
|                     |                                        |           |       |              |  |   |       |      

10



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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


(Unaudited)




|    |     
|--- | ----
|(3) | Debt

Debt consists of the following:

|      |                                     |                      |        |              |        |   |        |        |        |  
|----- | ----------------------------------- | -------------------- | ------ | ------------ | ------ | - | ------ | ------ | ------ | -
|      |                                     | March 31,            |        | December 31,
|      |                                     | 2003                 |        | 2002        
|      |                                     |                      |        |             
|Debt: |                                     |                      |        |              |        |   |        |       
|      | Senior secured term note            |                      | $      | 13,125       |        |   | $      | 14,000 |       
|      | Senior subordinated promissory note |                      |        | 9,056        |        |   |        | 9,000  |       
|      | Other                               |                      |        | 206          |        |   |        | 250    |       
|      |                                     |                      |        |              |        |   |        |       
|      |                                     |                      | 22,387 |              |        |   | 23,250 |       
|      | Less: unamortized debt discount     |                      |        | (436         | )      |   |        | (465   | )     
|      |                                     |                      |        |              |        |   |        |       
|      | Total Debt                          |                      | $      | 21,951       |        |   | $      | 22,785 |       
|      |                                     | Less current portion |        |              | (3,659 | ) |        |        | (3,694 | )
|      |                                     |                      |        |              |        |   |        |       
|      |                                     | Non current portion  |        | $            | 18,292 |   |        | $      | 19,091 |  
|      |                                     |                      |        |              |        |   |        |       

Future debt maturities for each of the next five
years are summarized as follows:

|                         |      |                       |   |       |        | 
|------------------------ | ---- | --------------------- | - | ----- | ------ | 
|Year ending December 31: |      |                       |   |      
|                         | 2003 |                       | $ | 2,625 |       
|                         | 2004 |                       |   | 3,500 |       
|                         | 2005 |                       |   | 3,500 |       
|                         | 2006 |                       |   | 3,500 |       
|                         | 2007 |                       |   |      |       
|                         |      |                       |   |      
|                         |      | Total debt maturities |   | $     | 13,125 | 
|                         |      |                       |   |      

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
$3.75 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

11



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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


(Unaudited)


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 our
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
March 31, 2003, the New Credit Facility provides for
maximum credit availability of $30.2 million, subject to
limitations based on certain financial covenants, and consists
of a $13.1 million Senior Secured Term Loan, a
$9.1 million Senior Subordinated Promissory Note and a
Revolving Credit Facility with an availability of up to
$8.0 million.

The Senior Secured Term Loan bears interest at
LIBOR plus 6.0%, with 15 equal quarterly principal installment
payments thorough 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 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:

|               |  |              |   |      |  |   |      |  
|-------------- |  | ------------ | - | ---- |  | - | ---- | -
|               |  |             
|               |  | Three Months
|               |  | Ended       
|               |  | March 31,   
|               |  |             
|               |  | 2003         |   | 2002
|               |  |              |   |     
|Revenue        |  | $            |  |      |  | $ | 78   |  
|Operating loss |  |              |  |      |  |   | (349 | )
|Net loss       |  |              |  |      |  |   | (349 | )

12



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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


(Unaudited)


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 approximately 130,000 shares of
SpeechWorks common stock valued at $0.3 million, 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. Payment of the earn-out
fee, if any, will be made through the issuance of additional
shares of SpeechWorks common stock. As part of the sales
agreement, the Company retained the right to utilize the speech
recognition technology in the corrections industry. SpeechWorks
stock received by the Company will not be registered.

During the year ended December 31, 2002, the
Company recorded a $1.1 million impairment charge to an
asset relating to a prepaid contract for call validation query
services that is currently in legal dispute (See Part II
Other Information, Item 1. Legal Proceedings). The
impairment charge does not change the Companys belief in
its rights under the disputed contract nor does it change the
Companys position to pursue its rights. In March 2003, the
Company invested in another provider of similar services that it
anticipates will significantly reduce its costs of validation
services and uncollectable accounts (See Note 1 of
Notes to Condensed Consolidated Financial
Statements). As such, the Company intends to assign its
rights to third parties under the terms of the disputed
contract. 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. For the
three months ended March 31, 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

Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise
and Related Information, (SFAS 131),
establishes standards for reporting operating segments in annual
financial statements. SFAS 131 also establishes standards
for disclosures about products and services, geographic areas
and major customers.

In 2003 and 2002, the Company had a single
reportable segment: 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 and through direct contracts between the
Company and correctional facilities. In addition, primarily
through its subsidiary TELEQUIP Labs, the Company sells inmate
call processing systems to certain telecommunication providers.

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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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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


(Unaudited)


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

|                                                                         |  |                    |        |      |  |   |        | 
|------------------------------------------------------------------------ |  | ------------------ | ------ | ---- |  | - | ------ | 
|                                                                         |  |                   
|                                                                         |  | Three Months Ended
|                                                                         |  | March 31,         
|                                                                         |  |                   
|                                                                         |  | 2003               |        | 2002
|                                                                         |  |                    |        |     
|Revenue from External Customers                                          |  | $                  | 30,023 |      |  | $ | 24,458 | 
|                                                                         |  |                    |        |      |  |   |        | 
|Research and Development                                                 |  | $                  | 773    |      |  | $ | 700    | 
|                                                                         |  |                    |        |      |  |   |        | 
|Depreciation and Amortization                                            |  | $                  | 3,031  |      |  | $ | 2,657  | 
|                                                                         |  |                    |        |      |  |   |        | 
|Interest and Other Expense                                               |  | $                  | 719    |      |  | $ | 306    | 
|                                                                         |  |                    |        |      |  |   |        | 
|Operating Income                                                         |  | $                  | 70     |      |  | $ | 1,919  | 
|                                                                         |  |                    |        |      |  |   |        | 
|Segment Earnings (Loss) from Continuing
    Operations Before Income Tax |  | $                  | (649   | )    |  | $ | 1,613  | 
|                                                                         |  |                    |        |      |  |   |        | 

|               |  |           |        |              |  |   |        | 
|-------------- |  | --------- | ------ | ------------ |  | - | ------ | 
|               |  | March 31, |        | December 31,
|               |  | 2003      |        | 2002        
|               |  |           |        |             
|Segment Assets |  | $         | 67,377 |              |  | $ | 66,657 | 
|               |  |           |        |              |  |   |        | 

The Company evaluates performance based on
earnings (loss) before income taxes. Additional measures include
operating income, depreciation and amortization, and interest
expense. There are no intersegment sales. The Companys
reportable segments are specific business units that offer
different products and services. They are managed separately
because each business requires different technology and
marketing strategies. 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 March 31, 2003 and the comparable
2002 period is as follows:

There was no intersegment revenue for the three
months ending March 31, 2003 and the comparable
2002 period. Consolidated total assets included
eliminations of approximately $2.2 million as of
March 31, 2003. Eliminations consist of intercompany
receivables in the Corrections Division and intercompany
payables in the TELEQUIP Labs subsidiary related solely to
intercompany borrowings.



|    |                   
|--- | ------------------
|(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 converts the
$13.1 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 notation 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 three month 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 interest rate swap agreement does qualify for
hedge accounting. As of March 31, 2003, the interest rate
swap has no fair value. The Company will assess the valuation of
this derivative instrument periodically on

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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


(Unaudited)


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) | Commitments and Contingencies

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

During 2000, a case styled Valdez v.
State of New Mexico, et al. against Gateway and
several other defendants was dismissed. The complaint, generally
alleging violations of state unfair practices, antitrust and
constitutional laws, included class action certification of all
persons who had been billed for and paid for telephone calls
initiated by an inmate confined in a New Mexico
correctional facility. On appeal by plaintiffs, in August 2002
the New Mexico State Supreme Court affirmed the District
Courts dismissal of the plaintiffs case.

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.

Gateway has been litigating an appeal from a
favorable ruling in Kentucky federal court in the case Gus
Skip Daleure, Jr., et al vs. Commonwealth of
Kentucky, et al. Plaintiffs, a class of relatives of
prisoners incarcerated in Kentucky correctional facilities,
sued, in October 1997, the Commonwealth of Kentucky, the
Kentucky Department of Corrections, the state of Missouri,
several Kentucky, Missouri, Arizona and Indiana municipal
entities, and various private telephone providers alleging
antitrust violations and excessive rates in connection with the
provision of telephone services to inmates. The plaintiffs
alleged Sherman Act, Robinson-Patman Act, and Equal Protection
violations. The district court held, on motions to dismiss, that
Kentucky did not have personal jurisdiction over defendants not
located in or doing business in the state of Kentucky; that
telephone calls are not goods or commodities and thus are not
subject to the antitrust provisions of the Robinson-Patman Act;
that Plaintiffs did not state a claim for relief under the Equal
Protection Clause of the Fourteenth Amendment; and that
Plaintiffs had not shown any harm in support of its antitrust
claim under Section 1 of the Sherman Act. The trial judge
did not, however, dismiss the plaintiffs petition for
injunctive relief, despite these findings. Recently, the appeal
brought by the plaintiffs has been dismissed and no further
action has been taken.

In another case styled Robert E. Lee
Jones, Jr. vs. MCI Communications, et al,
plaintiffs, 43 inmates of the Bland Correctional Center in
Virginia, filed a pro se action in January, 2001
alleging constitutional violations, RICO Act violations and
violations of Federal wiretapping laws. This case was dismissed
on all counts in November 2001 and plaintiffs appealed. The
dismissal was affirmed by the Fourth Circuit in July 2002.

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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


(Unaudited)


In October 2001, relatives of prisoners
incarcerated in Oklahoma Department of Correctional facilities
filed a putative class action against T-NETIX, AT&T, Evercom
and the Oklahoma Department of Corrections for claims in
anti-trust, under due process, equal protection and the first
amendment. This case, styled Kathy Lamon, et al v.
Ron Ward, et al, was dismissed by the Plaintiffs in
July 2002.

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. Trial is set for October 2003.

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 queried 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 has been written
down for the period ended December 31, 2002) are classified
as an Asset Held for Sale at March 31, 2003 and
December 31, 2002 (See Note 4 of Notes to the
Condensed Consolidated Financial Statements). It is the
contention of the Company, in the arbitration proceeding, that
the fault in the lack of connectivity, be it the lack of proper
technology, proper responsiveness on the part of Illuminet, or
otherwise, was that of Illuminet and that the Company is still
entitled to the services for which it paid. The Company intends
to vigorously pursue its rights under the agreement. In the
event the Company is not supported in the arbitration or any
related litigation, the balance of the prepaid expense could be
impaired. The arbitration hearing is scheduled for September
2003.

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 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.

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

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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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


(Unaudited)


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.
Following a May hearing on a Motion to Dismiss for failure to
state a claim on which relief can be granted filed by the
Company, the Court granted the Companys Motion to Dismiss
on all claims allowing the Plaintiff to replead with respect to
certain claims or be faced with final dismissal on those as well.

Richardson v. T-NETIX Telecommunications,
Inc.and Colman v. Miller ,
et al., are two civil actions filed pro se
on February 6, 2003 by inmates with the state Court of
Common Pleas in Somerset County, Pennsylvania. These non-class
action complaints allege inaccurate billing for pre-paid
services in one Pennsylvania Prison location and request
injunctive relief, unspecified compensatory damages and $2,500
in punitive damages.

We believe the ultimate disposition of the
forgoing matters will not have a material affect on our
financial condition, liquidity, or results of operations.

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##### Table of Contents








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

For a comprehensive understanding of our
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 our existing
telecommunications service provider customers such as Verizon,
AT&T and SBC Communications, to win new contracts for our
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 our sales or pricing, the impact of
competitive products and pricing in the our Corrections
Division, our 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.

We make forward-looking statements in this report
and may make such statements in future filings with the
Securities and Exchange Commission. We 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 our
expectations and possible or assumed future results of
operations. When we use any of the words believe,
expect, anticipate, estimate
or similar expressions, we are making a forward-looking
statement. While we believe that forward-looking statements are
reasonable, you 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 our results
of operations. Except as required by applicable law, we do 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 we derive revenue
from three main sources: 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
our telecommunications service provider customers including
Verizon, AT&T, SBC Communications, Qwest and Sprint. Here,
we provide 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 we either share the revenue with or receive a
prescribed fee from our telecommunications services providers
for each call completed. We receive additional fees for
validating the phone numbers dialed by inmates.

Our Corrections Division also provides our inmate
calling services directly as a telecommunications provider to
correctional facilities, or Direct Customers. In a
typical arrangement, we operate under site-specific contracts,
generally for a period of two to three years. We provide the
equipment, security enhanced call processing, call validation,
and customer service and support directly to the facility. We
then use the

18



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##### Table of Contents



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 we receive the entire
retail value of the collect call. Due to commissions and other
operating costs, including uncollectible revenue, 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 our current or future competitors for these
contracts, which would have a material adverse effect on our
business, operating results, and financial condition.

Equipment sales and other revenue include the
sales of our inmate calling system (primarily the systems of our
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 us 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, we 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 our SECUREvoice product. Due
to the subsequent sale of the assets, related operating results
of our 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.

19



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##### Table of Contents





| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Results of Operations for the Three Months
    Ended March 31, 2003 Compared to March 31,
    2002

The following table sets forth certain statement
of operations data as a percentage of total revenue for the
three months ended March 31, 2003 and 2002.

|          |                                     |                                                                  |  |      |     |    |  |    |     |  
|--------- | ----------------------------------- | ---------------------------------------------------------------- |  | ---- | --- | -- |  | -- | --- | -
|          |                                     | 2003                                                             |  | 2002
|          |                                     |                                                                  |  |     
|Revenue:  |                                     |                                                                  |  |      |     |    |  |   
|          | Telecommunications services         |                                                                  |  | 44   | %   |    |  | 62 | %  
|          | Direct call provisioning            |                                                                  |  | 50   |     |    |  | 34 |    
|          | Equipment sales and other           |                                                                  |  | 6    |     |    |  | 4  |    
|          |                                     |                                                                  |  |      |     |    |  |   
|          |                                     | Total revenue                                                    |  |      | 100 |    |  |    | 100 |  
|Expenses: |                                     |                                                                  |  |      |     |    |  |   
|          | Operating costs                     |                                                                  |  | 66   |     |    |  | 55 |    
|          | Selling, general and administrative |                                                                  |  | 21   |     |    |  | 23 |    
|          | Research and development            |                                                                  |  | 3    |     |    |  | 3  |    
|          | Depreciation and amortization       |                                                                  |  | 10   |     |    |  | 11 |    
|          |                                     |                                                                  |  |      |     |    |  |   
|          |                                     | Operating income                                                 |  |      |    |    |  |    | 8   |  
|          | Interest and other expense          |                                                                  |  | 2    |     |    |  | 1  |    
|          |                                     |                                                                  |  |      |     |    |  |   
|          |                                     | Income (loss) from continuing operations before
    income taxes |  |      | (2  | )  |  |    | 7   |  
|          | Income tax expense                  |                                                                  |  |     |     |    |  | 1  |    
|          |                                     |                                                                  |  |      |     |    |  |   
|          |                                     | Net income from continuing operations                            |  |      | (2  | )  |  |    | 6   |  
|          | Loss from discontinued operations   |                                                                  |  |     |     |    |  | (1 | )  
|          |                                     |                                                                  |  |      |     |    |  |   
|          |                                     | Net Income (loss) applicable to common stock                     |  |      | (2  | )% |  |    | 5   | %
|          |                                     |                                                                  |  |      |     |    |  |   

Total Revenue.Total
revenue for the three months ended March 31, 2003 was
$30.0 million, an increase of 22% from $24.5 million
for the corresponding 2002 period. This increase was
attributable to increases in direct call provisioning of
$6.9 million and equipment sales and other of
$0.7 million, offset partially by a decrease in
telecommunications services of $2.1 million.

Telecommunications services revenue decreased 14%
to $13.2 million for the three months ended March 31,
2003, from $15.3 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 and to a decline in call volumes.

Direct call provisioning revenue increased 84% to
$15.1 million for the three months ended March 31,
2003, from $8.2 million in the corresponding prior period.
This increase was primarily due to the awarding in 2002 of
several department of corrections contracts for which we are
provisioning comprehensive or the long distance communication
service on a direct basis. The addition of these sites is a
result of our being successful in providing competitive bidding
arrangements for contracts directly with correctional facilities.

Equipment sales and other revenue increased 70%
to $1.7 million for the three month period ended
March 31, 2003 from $1.0 million in the corresponding
prior period. This increase was primarily due to increased
equipment sales through our wholly-owned subsidiary, TELEQUIP
Labs, Inc. Equipment sales of TELEQUIP are primarily associated
with a single telecommunication service provider and revenue
associated with such sales are dependent upon the timing of
sales and installations for this customer.

Operating costs.Total operating costs increased 47% to $19.9 million for
the three months ended March 31, 2003 from
$13.5 million in the corresponding prior period. The
increase was primarily due to an increase in direct call
provisioning expenses of $6.6 million and the cost of
equipment sold of $0.2 million, partially offset by a
decrease in telecommunication services expenses of
$0.4 million.

20



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##### Table of Contents



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 March 31,
2003 and 2002.

|                              |                                  |      |  |      |   |  |  |    |  
|----------------------------- | -------------------------------- | ---- |  | ---- | - |  |  | -- | -
|                              |                                  | 2003 |  | 2002
|                              |                                  |      |  |     
|Operating costs and expenses: |                                  |      |  |      |   |  |  |   
|                              | Telecommunications services      |      |  | 38   | % |  |  | 36 | %
|                              | Direct call provisioning         |      |  | 93   |   |  |  | 91 |  
|                              | Cost of equipment sold and other |      |  | 44   |   |  |  | 54 |  

Operating costs associated with providing
telecommunications services as a percentage of corresponding
revenue was 38% for the three months ended March 31, 2003,
an increase from 36% for the comparable 2002 period. Total
telecommunications services operating costs were
$5.1 million for the three months ended March 31, 2003
and $5.5 million for the corresponding prior period. The
increase in costs as a percentage of applicable revenue in 2003
was due primarily to an increase in labor and communications
expenses, partially offset by lower call validation costs and
repairs and maintenance expenses.

Direct call provisioning costs, as a percentage
of applicable revenue, were 93% of revenue for the three months
ended March 31, 2003 compared to 91% in the comparable
2002 period. Due to the awarding of several department of
corrections contracts in 2002, total direct call provisioning
operating costs increased to $14.1 million for the three
months ended March 31, 2003 from $7.5 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 bad debt expense and commission
expenses associated with the increase in direct call
provisioning revenue. Bad debt expense increased primarily due
to a greater volume of calls being processed to Competitive
Local Exchange Carriers (CLEC) where the Company
does not have billing arrangements. The Company, beginning in
the first quarter of 2002, modified its call handling processes
to block certain of these CLEC calls, thereby reducing its
unbillable call volume.

Cost of equipment sold and other as a percentage
of applicable revenue decreased to 44% of revenue for the three
months ended March 31, 2003 from 54% for the corresponding
prior period. Due to increased equipment sales of TELEQUIP Labs,
Inc., total costs of equipment sold and other were
$0.7 million for the three months ended March 31, 2003
compared to $0.5 million for the corresponding
2002 period. The decrease in costs as a percentage of
applicable revenue was primarily due to the change in the
revenue mix for equipment and other sales.

Selling, General and Administrative Expenses.Selling, general and administrative
expenses were $6.3 million for the three months ended
March 31, 2003 and $5.7 million in the comparable
2002 period. The increase was primarily due to an increase
in professional services and legal fees associated with our
ongoing patent litigation.

Research and Development Expenses.Research and development expenses were
$0.8 million in the three months ended March 31, 2003
compared to $0.7 million for the corresponding prior period.

Depreciation and Amortization Expenses.Depreciation and amortization expense
was $3.0 million for the three months ended March 31,
2003, an increase from $2.7 million for the comparable
2002 period. Depreciation expense increased to
$2.8 million in the three months ended March 31, 2003
compared to $2.5 million in 2002. Amortization expenses
were $0.2 million for the three months ended March 31,
2003 and 2002, respectively.

21



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Interest and Other Expenses.Interest and other expense was
$0.7 million for the three months ended March 31, 2003
compared to $0.3 million for the corresponding prior
period. The increase in 2003 was attributable to an increase in
the average amount of indebtedness outstanding and to higher
applicable interest rates related to the New Credit Facility
obtained in November 2002.

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. Our 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
$4.0 million for the three months ended March 31, 2003
compared to $3.8 million in the corresponding
2002 period. This increase was primarily due to a
$2.1 million reduction in net working capital and a
$0.3 million increase in depreciation and amortization
expense, partially offset by a $2.2 million decline in net
income from continuing operations.

Net cash used in investing activity of continuing
operations was $2.8 million for the three months ended
March 31, 2003 compared to $2.2 million in the
corresponding 2002 period. Cash used in investing
activities consisted primarily of purchases of property, plant,
and equipment of $2.0 million for the three months ended
March 31, 2003 compared to $2.1 million in the
corresponding 2002 period. Cash used in investing
activities in the 2003 period also reflect the
Companys investment in Accudata in March 2003 of
$0.7 million.

We anticipate that our capital expenditures in
2003 will increase over 2002 levels based on our anticipated
growth in installed systems at correctional facilities. We
believe our cash flows from operations and our availability
under our New Credit Facility will be sufficient in order for us
to meet our anticipated cash needs for new installations of
inmate call processing systems, upgrades of existing systems,
and to finance our 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 $0.9 million during
the three months ended March 31, 2003 compared to net debt
payments of $0.5 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 our financial performance. In April 2001 our
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 our 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 $3.75 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

22



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##### Table of Contents



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 our 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
March 31, 2003, the New Credit Facility provides for
maximum credit availability of $30.2 million, subject to
limitations based on certain financial covenants, and consists
of a $13.1 million Senior Secured Term Loan, a
$9.1 million Senior Subordinated Promissory Note and a
Revolving Credit Facility with an availability of up to
$8.0 million.

The Senior Secured Term Loan bears interest at
LIBOR plus 6.0%, with 15 equal quarterly principal installment
payments thorough 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 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 March 31, 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 |           |  | $     | 2,625 |  |  | $ |      |  |  | $ | 13,125 | 
|Senior subordinated promissory note           |  |                  |      |           |  |           |      |           |  |       |      |  |  |   | 9,056 |  |  |   | 9,056  | 
|Operating leases                              |  |                  | 902   |           |  |           | 981   |           |  |       | 129   |  |  |   |      |  |  |   | 2,012  | 
|Capital lease and other                       |  |                  | 158   |           |  |           | 48    |           |  |       |      |  |  |   |      |  |  |   | 206    | 
|                                              |  |                  |       |           |  |           |       |           |  |       |       |  |  |   |       |  |  |   |        | 
|Total contractual obligations and commitments |  | $                | 4,560 |           |  | $         | 8,029 |           |  | $     | 2,754 |  |  | $ | 9,056 |  |  | $ | 24,399 | 
|                                              |  |                  |       |           |  |           |       |           |  |       |       |  |  |   |       |  |  |   |        | 

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 March 31, 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.

23



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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.

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 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 does 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.

24



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##### Table of Contents








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

We are exposed to interest rate risk as discussed
below.

Interest Rate Risk

As of March 31, 2003, we have debt
outstanding under our New Credit Facility of $22.2 million.
As of March 31, 2003, the New Credit Facility provides for
maximum credit availability of $30.2 million, subject to
limitations based on certain financial covenants, and consists
of a $13.1 million Senior Secured Term Loan, a
$9.1 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. An increase in interest rates of 1% would
increase estimated annual interest expense by approximately
$0.1 million based on the amount of borrowings outstanding
under our New Credit Facility at March 31, 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 converts the
$13.1 million of variable rate debt 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

Within the 90-day period prior to the filing of
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 our disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act
of 1934).

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




PART II

OTHER INFORMATION






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

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

During 2000, a case styled Valdez v.
State of New Mexico, et al. against Gateway and
several other defendants was dismissed. The complaint, generally
alleging violations of state unfair practices, antitrust and
constitutional laws, included class action certification of all
persons who had been billed for and paid for telephone calls
initiated by an inmate confined in a New Mexico
correctional facility. On appeal by plaintiffs, in August 2002
the New Mexico State Supreme Court affirmed the District
Courts dismissal of the plaintiffs case.

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,

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##### Table of Contents



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.


Gateway has been litigating an appeal from a
favorable ruling in Kentucky federal court in the case Gus
Skip Daleure, Jr., et al vs. Commonwealth
of Kentucky, et al. Plaintiffs, a class of relatives of
prisoners incarcerated in Kentucky correctional facilities,
sued, in October 1997, the Commonwealth of Kentucky, the
Kentucky Department of Corrections, the state of Missouri,
several Kentucky, Missouri, Arizona and Indiana municipal
entities, and various private telephone providers alleging
antitrust violations and excessive rates in connection with the
provision of telephone services to inmates. The plaintiffs
alleged Sherman Act, Robinson-Patman Act, and Equal Protection
violations. The district court held, on motions to dismiss, that
Kentucky did not have personal jurisdiction over defendants not
located in or doing business in the state of Kentucky; that
telephone calls are not goods or commodities and thus are not
subject to the antitrust provisions of the Robinson-Patman Act;
that Plaintiffs did not state a claim for relief under the Equal
Protection Clause of the Fourteenth Amendment; and that
Plaintiffs had not shown any harm in support of its antitrust
claim under Section 1 of the Sherman Act. The trial judge
did not, however, dismiss the plaintiffs petition for
injunctive relief, despite these findings. Recently, the appeal
brought by the plaintiffs has been dismissed and no further
action has been taken.

In another case styled Robert E. Lee
Jones, Jr. vs. MCI Communications, et al,
plaintiffs, 43 inmates of the Bland Correctional Center in
Virginia, filed a pro se action in January, 2001
alleging constitutional violations, RICO Act violations and
violations of Federal wiretapping laws. This case was dismissed
on all counts in November 2001 and plaintiffs appealed. The
dismissal was affirmed by the Fourth Circuit in July 2002.

In October 2001, relatives of prisoners
incarcerated in Oklahoma Department of Correctional facilities
filed a putative class action against T-NETIX, AT&T, Evercom
and the Oklahoma Department of Corrections for claims in
anti-trust, under due process, equal protection and the first
amendment. This case, styled Kathy Lamon, et al v.
Ron Ward, et al, was dismissed by the Plaintiffs in
July 2002.

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. Trial is set for October 2003.

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 queried 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 has been written
down for the period ended December 31, 2002) are classified
as an Asset Held for Sale at March 31, 2003 and
December 31, 2002 (See Note 4 of Notes to the
Condensed Consolidated Financial Statements). It is the

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contention of the Company, in the arbitration
proceeding, that the fault in the lack of connectivity, be it
the lack of proper technology, proper responsiveness on the part
of Illuminet, or otherwise, was that of Illuminet and that the
Company is still entitled to the services for which it paid. The
Company intends to vigorously pursue its rights under the
agreement. In the event the Company is not supported in the
arbitration or any related litigation, the balance of the
prepaid expense could be impaired. The arbitration hearing is
scheduled for September 2003.


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 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.

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. Following a May hearing on a
Motion to Dismiss for failure to state a claim on which relief
can be granted filed by the Company, the Court granted the
Companys Motion to Dismiss on all claims allowing the
Plaintiff to replead with respect to certain claims or be faced
with final dismissal on these as well.

Richardson v. T-NETIX Telecommunications,
Inc.and Colman v. Miller,
et al., are two civil actions filed pro se
on February 6, 2003 by inmates with the state Court of
Common Pleas in Somerset County, Pennsylvania. These non-class
action complaints allege inaccurate billing for pre-paid
services in one Pennsylvania Prison location and request
injunctive relief, unspecified compensatory damages and $2,500
in punitive damages.

We believe the ultimate disposition of the
forgoing matters will not have a material affect on our
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






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

None






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

None

27



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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: May 13, 2003

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CERTIFICATION

I, Richard E. Cree, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of T-NETIX, Inc.

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of and for the periods presented in this quarterly
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of the registrants board of directors:



| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    control; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                   

6. The registrants other certifying
officer and I have indicated in this quarterly report whether or
not there were significant changes in internal control or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



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

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

Dated: May 13, 2003

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CERTIFICATION

I, Henry G. Schopfer III, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of T-NETIX, Inc.

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of and for the periods presented in this quarterly
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of the registrants board of directors:



| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    control; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                   

6. The registrants other certifying
officer and I have indicated in this quarterly report whether or
not there were significant changes in internal control or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



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

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

Dated: May 13, 2003

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