##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q

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

For the quarter ended June 30, 2003

Commission file number 0-25016



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T-NETIX, Inc.

(Exact name of registrant as specified in its
charter)


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

Registrants telephone number, including
area code:

(972) 241-1535




---

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

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

|                                 |  |                             
|-------------------------------- |  | ----------------------------
|Class                            |  | Outstanding at July 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 OTHER INFORMATION                       
|                                                 | Item 1. Legal Proceedings                                                                    
|                                                 | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                 | Item 3. Defaults upon Senior Securities                                                      
|                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                 | Item 5. Other Information                                                                    
|                                                 | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                      
|EX-31.1 Certification of Chief Executive Officer
|EX-31.2 Certification of Chief Financial Officer
|EX-32.1 Certification of Chief Executive Officer
|EX-32.2 Certification of Chief Financial Officer



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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 |    |      | 19 | 
|Item 3                            |  | Quantitative and Qualitative Disclosure About
    Market Risk                             |    |      | 28 | 
|Item 4                            |  | Controls and Procedures                                                                   |    |      | 29 | 
|PART II  OTHER INFORMATION       
|Item 1                            |  | Legal Proceedings                                                                         |    |      | 30 | 
|Item 2                            |  | Changes in Securities and Use of Proceeds                                                 |    |      | 32 | 
|Item 3                            |  | Defaults Upon Senior Securities                                                           |    |      | 32 | 
|Item 4                            |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 32 | 
|Item 5                            |  | Other Information                                                                         |    |      | 32 | 
|Item 6                            |  | Exhibits and Reports on Form 8-K                                                          |    |      | 32 | 
|Signatures                        |  |                                                                                           | 33 |     
|Index to Exhibits                 |  |                                                                                           | 34 |     

1



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##### Table of Contents






PART I






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

INDEX TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

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

2



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE
SHEETS

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


|                                           |                                                                                                                                                                |                            |        |              |        |   |        |         |        | 
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------------ | ------ | - | ------ | ------- | ------ | 
|                                           |                                                                                                                                                                | June 30,                   |        |             
|                                           |                                                                                                                                                                | 2003                       |        | December 31,
|                                           |                                                                                                                                                                | (Unaudited)                |        | 2002        
|                                           |                                                                                                                                                                |                            |        |             
|ASSETS                                    
|Cash and cash equivalents                  |                                                                                                                                                                | $                          | 3,667  |              |        | $ | 6,554  |        
|Accounts receivable, net (note 2)          |                                                                                                                                                                |                            | 22,340 |              |        |   | 20,038 |        
|Prepaid expenses                           |                                                                                                                                                                |                            | 2,739  |              |        |   | 1,608  |        
|Inventories                                |                                                                                                                                                                |                            | 1,197  |              |        |   | 1,424  |        
|                                           |                                                                                                                                                                |                            |        |              |        |   |        |        
|                                           |                                                                                                                                                                | Total current assets       |        |              | 29,943 |   |        |         | 29,624 | 
|Property and equipment, net (note 2)       |                                                                                                                                                                |                            | 22,720 |              |        |   | 25,342 |        
|Goodwill, net                              |                                                                                                                                                                |                            | 2,245  |              |        |   | 2,245  |        
|Deferred tax asset, net                    |                                                                                                                                                                |                            | 2,297  |              |        |   | 2,297  |        
|Assets held for sale                       |                                                                                                                                                                |                            | 937    |              |        |   | 937    |        
|Intangible and other assets, net (note 2)  |                                                                                                                                                                |                            | 6,235  |              |        |   | 6,212  |        
|                                           |                                                                                                                                                                |                            |        |              |        |   |        |        
|                                           |                                                                                                                                                                | Total assets               |        | $            | 64,377 |   |        | $       | 66,657 | 
|                                           |                                                                                                                                                                |                            |        |              |        |   |        |        
|                                          
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Liabilities:                               |                                                                                                                                                                |                            |        |              |        |   |        |        
|                                           | Accounts payable                                                                                                                                               |                            | $      | 10,224       |        |   | $      | 11,070  |       
|                                           | Accrued liabilities (note 2)                                                                                                                                   |                            |        | 6,668        |        |   |        | 5,742   |       
|                                           | Current portion of long-term debt (note 3)                                                                                                                     |                            |        | 3,586        |        |   |        | 3,694   |       
|                                           |                                                                                                                                                                |                            |        |              |        |   |        |        
|                                           |                                                                                                                                                                | Total current liabilities  |        |              | 20,478 |   |        |         | 20,506 | 
|                                           | Long-term debt (note 3)                                                                                                                                        |                            |        | 17,369       |        |   |        | 19,091  |       
|                                           |                                                                                                                                                                |                            |        |              |        |   |        |        
|                                           |                                                                                                                                                                | Total liabilities          |        |              | 37,847 |   |        |         | 39,597 | 
|Commitments and contingencies              |                                                                                                                                                                |                            |        |              |        |   |        |        
|Stockholders equity:                      |                                                                                                                                                                |                            |        |              |        |   |        |        
|                                           | Preferred stock, $.01 stated value, 10,000,000
    shares authorized; no shares issued or outstanding at
    June 30, 2003 and December 31, 2002, respectively |                            |        |             |        |   |        |        |       
|                                           | Common stock, $.01 stated value, 70,000,000
    shares authorized; 15,052,210 shares issued and outstanding at
    June 30, 2003 and December 31, 2002         |                            |        | 150          |        |   |        | 150     |       
|                                           | Additional paid-in capital                                                                                                                                     |                            |        | 42,334       |        |   |        | 42,334  |       
|                                           | Accumulated other comprehensive income (loss)                                                                                                                  |                            |        | (150         | )      |   |        |        |       
|                                           | Accumulated deficit                                                                                                                                            |                            |        | (15,804      | )      |   |        | (15,424 | )     
|                                           |                                                                                                                                                                |                            |        |              |        |   |        |        
|                                           |                                                                                                                                                                | Total stockholders equity |        |              | 26,530 |   |        |         | 27,060 | 
|                                           |                                                                                                                                                                |                            |        |              |        |   |        |        
|Total liabilities and stockholders equity |                                                                                                                                                                | $                          | 64,377 |              |        | $ | 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

(Amounts in Thousands, Except Per Share
Amounts)


(Unaudited)


|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |        |        |        | 
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ---------------------------------- | ---------------- | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | 
|                                                                 |                                                                                         |                                                             |                                    |                 
|                                                                 |                                                                                         | Three Months Ended                                          |                                    | Six Months Ended
|                                                                 |                                                                                         | June 30,                                                    |                                    | June 30,        
|                                                                 |                                                                                         |                                                             |                                    |                 
|                                                                 |                                                                                         | 2003                                                        |                                    | 2002             |        | 2003   |       | 2002  
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |       
|Revenue:                                                         |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 | Telecommunication services                                                              |                                                             | $                                  | 13,106           |        |        | $     | 15,105 |        |        | $     | 26,305 |        |        | $     | 30,369 |       
|                                                                 | Direct call provisioning                                                                |                                                             |                                    | 15,324           |        |        |       | 14,001 |        |        |       | 30,453 |        |        |       | 22,218 |       
|                                                                 | Equipment sales and other                                                               |                                                             |                                    | 2,639            |        |        |       | 2,440  |        |        |       | 4,334  |        |        |       | 3,417  |       
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 |                                                                                         |                                                             | Total revenue                      |                  |        | 31,069 |       |        |        | 31,546 |       |        |        | 61,092 |       |        |        | 56,004 | 
|Operating costs and expenses:                                    |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 | Operating costs (exclusive of depreciation and
    amortization shown separately below) |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |        |       
|                                                                 |                                                                                         | Telecommunications services                                 |                                    |                  | 4,925  |        |       |        | 5,349  |        |       |        | 9,978  |        |       |        | 10,833 |       
|                                                                 |                                                                                         | Direct call provisioning, exclusive of bad debt
    expense |                                    |                  | 10,195 |        |       |        | 9,928  |        |       |        | 20,154 |        |       |        | 15,014 |       
|                                                                 |                                                                                         | Direct call provisioning  bad debt
    expense             |                                    |                  | 3,465  |        |       |        | 3,692  |        |       |        | 7,608  |        |       |        | 6,068  |       
|                                                                 |                                                                                         | Cost of equipment sold and other                            |                                    |                  | 879    |        |       |        | 1,061  |        |       |        | 1,622  |        |       |        | 1,593  |       
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 |                                                                                         |                                                             | Total operating costs              |                  |        | 19,464 |       |        |        | 20,030 |       |        |        | 39,362 |       |        |        | 33,508 | 
|                                                                 | Selling, general and administrative                                                     |                                                             |                                    | 6,643            |        |        |       | 6,232  |        |        |       | 12,894 |        |        |       | 11,936 |       
|                                                                 | Research and development                                                                |                                                             |                                    | 880              |        |        |       | 730    |        |        |       | 1,653  |        |        |       | 1,430  |       
|                                                                 | Depreciation and amortization                                                           |                                                             |                                    | 2,935            |        |        |       | 2,755  |        |        |       | 5,966  |        |        |       | 5,412  |       
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 |                                                                                         |                                                             | Total operating costs and expenses |                  |        | 29,922 |       |        |        | 29,747 |       |        |        | 59,875 |       |        |        | 52,286 | 
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 |                                                                                         |                                                             | Operating income                   |                  |        | 1,147  |       |        |        | 1,799  |       |        |        | 1,217  |       |        |        | 3,718  | 
|Interest and other expenses, net                                 |                                                                                         |                                                             | 721                                |                  |        |        | 584   |        |        |        | 1,440 |        |        |        | 890   |       
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|Income (loss) from continuing operations before
    income taxes |                                                                                         |                                                             | 426                                |                  |        |        | 1,215 |        |        |        | (223  | )      |        |        | 2,828 |       
|Income tax expense                                               |                                                                                         |                                                             | 69                                 |                  |        |        | 45    |        |        |        | 158   |        |        |        | 180   |       
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 | Net income (loss) from continuing operations                                            |                                                             |                                    | 357              |        |        |       | 1,170  |        |        |       | (381   | )      |        |       | 2,648  |       
|Net loss from discontinued operations                            |                                                                                         |                                                             |                                   |                  |        |        | (85   | )      |        |        |      |        |        |        | (433  | )     
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|Net income (loss) applicable to common
    shareholders          |                                                                                         | $                                                           | 357                                |                  |        | $      | 1,085 |        |        | $      | (381  | )      |        | $      | 2,215 |       
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 | Income (loss) per common share from continuing
    operations                           |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |        |       
|                                                                 |                                                                                         | Basic                                                       |                                    | $                | 0.02   |        |       | $      | 0.08   |        |       | $      | (0.03  | )      |       | $      | 0.18   |       
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 |                                                                                         | Diluted                                                     |                                    | $                | 0.02   |        |       | $      | 0.08   |        |       | $      | (0.03  | )      |       | $      | 0.17   |       
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 | Loss per common share from discontinued operations                                      |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |        |       
|                                                                 |                                                                                         | Basic                                                       |                                    | $                |       |        |       | $      | (0.01  | )      |       | $      |       |        |       | $      | (0.03  | )     
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 |                                                                                         | Diluted                                                     |                                    | $                |       |        |       | $      | (0.01  | )      |       | $      |       |        |       | $      | (0.03  | )     
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 | Income (loss) per common share applicable to
    common shareholders                    |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |        |       
|                                                                 |                                                                                         | Basic                                                       |                                    | $                | 0.02   |        |       | $      | 0.07   |        |       | $      | (0.03  | )      |       | $      | 0.15   |       
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 |                                                                                         | Diluted                                                     |                                    | $                | 0.02   |        |       | $      | 0.07   |        |       | $      | (0.03  | )      |       | $      | 0.14   |       
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 | Shares used in computing net income (loss) per
    common share                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |        |       
|                                                                 |                                                                                         | Basic                                                       |                                    |                  | 15,052 |        |       |        | 15,032 |        |       |        | 15,052 |        |       |        | 15,032 |       
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       
|                                                                 |                                                                                         | Diluted                                                     |                                    |                  | 15,267 |        |       |        | 15,484 |        |       |        | 15,052 |        |       |        | 15,467 |       
|                                                                 |                                                                                         |                                                             |                                    |                  |        |        |       |        |        |        |       |        |        |        |       |       

See accompanying notes to unaudited condensed
consolidated financial statements.

4



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

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


(Unaudited)


|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |        |       |        |        |  
|------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------- | ------------------------------------------------------------------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | -
|                                                 |                                                                                                                         |                                                          
|                                                 |                                                                                                                         | Six Months Ended                                         
|                                                 |                                                                                                                         | June 30,                                                 
|                                                 |                                                                                                                         |                                                          
|                                                 |                                                                                                                         | 2003                                                      |                              | 2002                                                              
|                                                 |                                                                                                                         |                                                           |                              |                                                                   
|Cash flows from operating activities:            |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|                                                 | Net income (loss) from continuing operations                                                                            |                                                           | $                            | (381                                                               | )     |        | $      | 2,648  |      
|                                                 | Adjustments to reconcile net income (loss) to net
    cash provided by operating activities from continuing operations: |                                                           |                              |                                                                    |       |        |        |        |      
|                                                 |                                                                                                                         | Depreciation and amortization                             |                              |                                                                    | 5,966 |        |        |        | 5,412 |       
|                                                 |                                                                                                                         | Bad debt expense                                          |                              |                                                                    | 7,680 |        |        |        | 6,153 |       
|                                                 |                                                                                                                         | Gain on the sale of property and equipment                |                              |                                                                    | (32   | )      |        |        | (36   | )     
|                                                 |                                                                                                                         | Equity income from unconsolidated subsidiary              |                              |                                                                    | (97   | )      |        |        |      |       
|                                                 |                                                                                                                         | Accretion of discount on subordinated promissory
    note |                              |                                                                    | 43    |        |        |        |      |       
|                                                 |                                                                                                                         | Changes in operating assets and liabilities:              |                              |                                                                    |       |        |        |        |       |       
|                                                 |                                                                                                                         |                                                           | Accounts receivable          |                                                                    |       | (9,982 | )      |        |       | (8,848 | )     
|                                                 |                                                                                                                         |                                                           | Prepaid expenses             |                                                                    |       | (1,131 | )      |        |       | (1,068 | )     
|                                                 |                                                                                                                         |                                                           | Inventories                  |                                                                    |       | 227    |        |        |       | (490   | )     
|                                                 |                                                                                                                         |                                                           | Intangibles and other assets |                                                                    |       | 414    |        |        |       | (140   | )     
|                                                 |                                                                                                                         |                                                           | Accounts payable             |                                                                    |       | (847   | )      |        |       | 1,162  |       
|                                                 |                                                                                                                         |                                                           | Accrued liabilities          |                                                                    |       | 776    |        |        |       | 2,234  |       
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|                                                 |                                                                                                                         |                                                           |                              | Cash provided by operating activities of
    continuing operations |       |        | 2,636  |        |       |        | 7,027  |  
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|Cash used in investing activities:               |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|                                                 | Purchase of property and equipment                                                                                      |                                                           |                              | (2,869                                                             | )     |        |        | (3,330 | )    
|                                                 | Investment in unconsolidated subsidiary                                                                                 |                                                           |                              | (782                                                               | )     |        |        |       |      
|                                                 | Other investing activities                                                                                              |                                                           |                              |                                                                   |       |        |        | (183   | )    
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|                                                 |                                                                                                                         |                                                           |                              | Cash used in investing activities of continuing
    operations     |       |        | (3,651 | )      |       |        | (3,513 | )
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|Cash flows from financing activities:            |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|                                                 | Net payments on line of credit                                                                                          |                                                           |                              |                                                                   |       |        |        | (2,405 | )    
|                                                 | Payments on senior secured term note                                                                                    |                                                           |                              | (1,750                                                             | )     |        |        |       |      
|                                                 | Payments on other debt                                                                                                  |                                                           |                              | (122                                                               | )     |        |        | (1,286 | )    
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|                                                 |                                                                                                                         |                                                           |                              | Cash used in financing activities of continuing
    operations     |       |        | (1,872 | )      |       |        | (3,691 | )
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|Cash used by discontinued operations             |                                                                                                                         |                                                           |                             |                                                                    |       |        | (433   | )     
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|Net decrease in cash and cash equivalents        |                                                                                                                         |                                                           | (2,887                       | )                                                                  |       |        | (610   | )     
|Cash and cash equivalents at beginning of period |                                                                                                                         |                                                           | 6,554                        |                                                                    |       |        | 995    |       
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|Cash and cash equivalents at end of period       |                                                                                                                         | $                                                         | 3,667                        |                                                                    |       | $      | 385    |       
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|Supplemental Disclosures:                        |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|                                                 | Cash paid during the period for:                                                                                        |                                                           |                              |                                                                    |       |        |        |        |      
|                                                 |                                                                                                                         | Interest                                                  |                              | $                                                                  | 978   |        |        | $      | 986   |       
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|                                                 |                                                                                                                         | Income taxes                                              |                              | $                                                                  | 198   |        |        | $      | 124   |       
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|Note received in exchange of assets              |                                                                                                                         | $                                                         |                             |                                                                    |       | $      | 91     |       
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       
|Assets received in exchange for note             |                                                                                                                         | $                                                         |                             |                                                                    |       | $      | 400    |       
|                                                 |                                                                                                                         |                                                           |                              |                                                                    |       |        |        |       

See accompanying notes to unaudited condensed
consolidated financial statements.

5



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)


(1) Summary of Significant Accounting
Policies



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

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



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

In March 2003 the Company acquired a 50%
preferred stock interest in a newly formed company, Accudata
Technologies, Inc. (Accudata). Of the
$0.8 million invested in Accudata, $0.5 million went
to the purchase out of a Chapter XI bankruptcy proceeding
of substantially all of the assets (in essence the ongoing
business) of Revenue Communications, Inc. With such purchase,
Accudata became one of only twelve active telephone line
information databases (LIDB) in the United States
where important customer information is stored and maintained,
including telephone number, service provider and collect call
preferences. The investment in Accudata will allow the Company
cost effective, flexible, high-speed access to a centralized
LIDB through sophisticated SS7 transport technology and
considerably enhances the Companys 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 June 30, 2003. Equity in the
results of operations for the three and six months ended
June 30, 2003 was $0.1 million, which is included in
Interest and other expenses, net.



| |                                     
| | ------------------------------------
| | 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)

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

|             |                                                         |                    |   |                  |     |      |   |        |     |  |   |        |   |  |   |        |     | 
|------------ | ------------------------------------------------------- | ------------------ | - | ---------------- | --- | ---- | - | ------ | --- |  | - | ------ | - |  | - | ------ | --- | 
|             |                                                         |                    |   |                 
|             |                                                         | Three Months Ended |   | Six Months Ended
|             |                                                         | June 30,           |   | June 30,        
|             |                                                         |                    |   |                 
|             |                                                         | 2003               |   | 2002             |     | 2003 |   | 2002  
|             |                                                         |                    |   |                  |     |      |   |       
|Numerator:   |                                                         |                    |   |                  |     |      |   |        |     |  |   |        |   |  |   |       
|             | Net income (loss) applicable to common
    shareholders |                    | $ | 357              |     |      | $ | 1,085  |     |  | $ | (381   | ) |  | $ | 2,215  |    
|             |                                                         |                    |   |                  |     |      |   |        |     |  |   |        |   |  |   |       
|Denominator: |                                                         |                    |   |                  |     |      |   |        |     |  |   |        |   |  |   |       
|             | Denominator for basic earnings per share                |                    |   | 15,052           |     |      |   | 15,032 |     |  |   | 15,052 |   |  |   | 15,032 |    
|             | Effect of dilutive securities:                          |                    |   |                  |     |      |   |        |     |  |   |        |   |  |   |        |    
|             |                                                         | Stock options      |   |                  | 29  |      |   |        | 421 |  |   |        |  |  |   |        | 407 | 
|             |                                                         | Warrants           |   |                  | 186 |      |   |        | 31  |  |   |        |  |  |   |        | 28  | 
|             |                                                         |                    |   |                  |     |      |   |        |     |  |   |        |   |  |   |       
|             | Denominator for diluted earnings per share              |                    |   | 15,267           |     |      |   | 15,484 |     |  |   | 15,052 |   |  |   | 15,467 |    
|             |                                                         |                    |   |                  |     |      |   |        |     |  |   |        |   |  |   |       

The calculation of diluted net income (loss) per
common share for the three and six months ended June 30,
2003 does not include 3,340,000 of potentially dilutive
securities, including common stock options and warrants, as
their effect would be anti-dilutive. For the three and six
months ended June 30, 2002, common stock equivalents of
1,533,000 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 SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and
Disclosure. Accordingly, the Company did not recognize
compensation expense upon the issuance of its stock options
because the option terms were fixed and the exercise price
equaled the market price of the Companys common stock on
the date of grant.

7



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                      |                                                                        |                |     |                  |      |      |       |      |      |   |      |      |       |   |       |        |      | 
|--------------------------------------------------------------------- | ---------------------------------------------------------------------- | -------------- | --- | ---------------- | ---- | ---- | ----- | ---- | ---- | - | ---- | ---- | ----- | - | ----- | ------ | ---- | 
|                                                                      |                                                                        |                |     |                 
|                                                                      |                                                                        | Three Months   |     | Six Months Ended
|                                                                      |                                                                        | Ended June 30, |     | June 30,        
|                                                                      |                                                                        |                |     |                 
|                                                                      |                                                                        | 2003           |     | 2002             |      | 2003 |       | 2002
|                                                                      |                                                                        |                |     |                  |      |      |       |     
|Net income (loss) applicable to common
    shareholders, as reported: |                                                                        | $              | 357 |                  |      | $    | 1,085 |      |      | $ | (381 | )    |       | $ | 2,215 |       
|                                                                      | Less: Stock-based compensation excluded from
    reported net earnings |                |     | (301             | )    |      |       | (589 | )    |   |      | (602 | )     |   |       | (1,026 | )   
|                                                                      |                                                                        |                |     |                  |      |      |       |      |      |   |      |      |       |   |       |       
|Pro forma net income (loss)                                           |                                                                        | $              | 56  |                  |      | $    | 496   |      |      | $ | (983 | )    |       | $ | 1,189 |       
|                                                                      |                                                                        |                |     |                  |      |      |       |      |      |   |      |      |       |   |       |       
|Net income (loss) per common share:                                   |                                                                        |                |     |                  |      |      |       |      |      |   |      |      |       |   |       |       
|                                                                      | As reported:                                                           |                |     |                  |      |      |       |      |      |   |      |      |       |   |       |        |     
|                                                                      |                                                                        | Basic          |     | $                | 0.02 |      |       | $    | 0.07 |   |      | $    | (0.03 | ) |       | $      | 0.15 | 
|                                                                      |                                                                        | Diluted        |     | $                | 0.02 |      |       | $    | 0.07 |   |      | $    | (0.03 | ) |       | $      | 0.14 | 
|                                                                      | Pro forma:                                                             |                |     |                  |      |      |       |      |      |   |      |      |       |   |       |        |     
|                                                                      |                                                                        | Basic          |     | $                |     |      |       | $    | 0.03 |   |      | $    | (0.07 | ) |       | $      | 0.08 | 
|                                                                      |                                                                        | Diluted        |     | $                |     |      |       | $    | 0.03 |   |      | $    | (0.07 | ) |       | $      | 0.08 | 

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          |  |      | 82.0       | %    |  |  | 81.2       | %
|Average expected option life |  |      | 5.0  years |      |  |  | 5.1  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.



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

SFAS No. 130, Reporting Comprehensive
Income, requires that certain items such as foreign
currency translation adjustments and unrealized gains and losses
on certain derivative instruments classified as a hedge be
presented as separate components of shareholders equity.
Total comprehensive income (loss) for the six months ended
June 30, 2003 and June 30, 2002 was approximately
$0.5 million loss and $2.2 million income,
respectively. Total comprehensive income for the three months
ended June 30, 2003 and June 30, 2002 was
approximately $0.2 million and $1.1 million,
respectively.

The Company had no items of comprehensive income
prior to the three months ended June 30, 2003.

8



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                              
| | ---------------------------------------------
| | 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 and interim
financial statements. Certain of the disclosure modifications
are included in the notes to these consolidated financial
statements.

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

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

9



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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



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

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

(2) Balance Sheet Components

Accounts receivable consist of the following (in
thousands):

|                          |                                     |                                       |        |              |        |   |        |        |        |  
|------------------------- | ----------------------------------- | ------------------------------------- | ------ | ------------ | ------ | - | ------ | ------ | ------ | -
|                          |                                     | June 30,                              |        | December 31,
|                          |                                     | 2003                                  |        | 2002        
|                          |                                     |                                       |        |             
|Accounts receivable, net: |                                     |                                       |        |              |        |   |        |       
|                          | Trade accounts receivable           |                                       | $      | 13,117       |        |   | $      | 11,375 |       
|                          | Direct call provisioning receivable |                                       |        | 12,976       |        |   |        | 13,015 |       
|                          | Other receivables                   |                                       |        | 137          |        |   |        | 131    |       
|                          |                                     |                                       |        |              |        |   |        |       
|                          |                                     |                                       | 26,230 |              |        |   | 24,521 |       
|                          |                                     | Less: Allowance for doubtful accounts |        |              | (3,890 | ) |        |        | (4,483 | )
|                          |                                     |                                       |        |              |        |   |        |       
|                          |                                     | $                                     | 22,340 |              |        | $ | 20,038 |       
|                          |                                     |                                       |        |              |        |   |        |       

Bad debt expense for the three months ended
June 30, 2003, was $3.5 million or 23% of direct call
provisioning revenue of $15.3 million. For the comparative
three month period ended June 30, 2002, bad debt expense
totaled $3.7 million, or 26% of the $14.0 million in
direct call provisioning revenue. Bad debt expense was
$7.6 million or 25% of direct call provisioning revenue of
$30.5 million for the six months ended June 30, 2003.
For the comparative six month period ended June 30, 2002,
bad debt expense totaled $6.1 million, or 27% of the
$22.2 million in direct call provisioning revenue.

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

|                             |                              |                                                 |        |              |         |   |        |        |         |  
|---------------------------- | ---------------------------- | ----------------------------------------------- | ------ | ------------ | ------- | - | ------ | ------ | ------- | -
|                             |                              | June 30,                                        |        | December 31,
|                             |                              | 2003                                            |        | 2002        
|                             |                              |                                                 |        |             
|Property and equipment, net: |                              |                                                 |        |              |         |   |        |       
|                             | Telecommunications equipment |                                                 | $      | 69,024       |         |   | $      | 72,589 |        
|                             | Construction in progress     |                                                 |        | 1,644        |         |   |        | 3,009  |        
|                             | Office equipment             |                                                 |        | 16,195       |         |   |        | 14,333 |        
|                             |                              |                                                 |        |              |         |   |        |       
|                             |                              |                                                 | 86,863 |              |         |   | 89,931 |       
|                             |                              | Less: Accumulated depreciation and amortization |        |              | (64,143 | ) |        |        | (64,589 | )
|                             |                              |                                                 |        |              |         |   |        |       
|                             |                              | $                                               | 22,720 |              |         | $ | 25,342 |       
|                             |                              |                                                 |        |              |         |   |        |       

10



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                  |                                         |                                |        |              |        |   |        |       |        |  
|--------------------------------- | --------------------------------------- | ------------------------------ | ------ | ------------ | ------ | - | ------ | ----- | ------ | -
|                                  |                                         | June 30,                       |        | 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                |                                |        | 1,615        |        |   |        | 1,986 |       
|                                  | Patent defense and application costs    |                                |        | 2,914        |        |   |        | 2,914 |       
|                                  | Investment in unconsolidated subsidiary |                                |        | 889          |        |   |        | 10    |       
|                                  | Deposits and long-term prepayments      |                                |        | 556          |        |   |        | 435   |       
|                                  | Other                                   |                                |        | 434          |        |   |        | 599   |       
|                                  |                                         |                                |        |              |        |   |        |      
|                                  |                                         |                                | 12,549 |              |        |   | 12,085 |      
|                                  |                                         | Less: Accumulated amortization |        |              | (6,314 | ) |        |       | (5,873 | )
|                                  |                                         |                                |        |              |        |   |        |      
|                                  |                                         | $                              | 6,235  |              |        | $ | 6,212  |      
|                                  |                                         |                                |        |              |        |   |        |      

Accrued liabilities consist of the following (in
thousands):

|                     |                                        |          |       |              |  |   |       |       | 
|-------------------- | -------------------------------------- | -------- | ----- | ------------ |  | - | ----- | ----- | 
|                     |                                        | June 30, |       | December 31,
|                     |                                        | 2003     |       | 2002        
|                     |                                        |          |       |             
|Accrued liabilities: |                                        |          |       |              |  |   |       |      
|                     | Deferred revenue and customer advances |          | $     | 2,994        |  |   | $     | 2,431 | 
|                     | Compensation related                   |          |       | 1,998        |  |   |       | 2,040 | 
|                     | Other                                  |          |       | 1,676        |  |   |       | 1,271 | 
|                     |                                        |          |       |              |  |   |       |      
|                     |                                        | $        | 6,668 |              |  | $ | 5,742 |      
|                     |                                        |          |       |              |  |   |       |      

(3) Debt

Debt consists of the following (in thousands):

|      |                                     |                      |        |              |        |   |        |        |        |  
|----- | ----------------------------------- | -------------------- | ------ | ------------ | ------ | - | ------ | ------ | ------ | -
|      |                                     | June 30,             |        | December 31,
|      |                                     | 2003                 |        | 2002        
|      |                                     |                      |        |             
|Debt: |                                     |                      |        |              |        |   |        |       
|      | Senior secured term note            |                      | $      | 12,250       |        |   | $      | 14,000 |       
|      | Senior subordinated promissory note |                      |        | 9,000        |        |   |        | 9,000  |       
|      | Other                               |                      |        | 127          |        |   |        | 250    |       
|      |                                     |                      |        |              |        |   |        |       
|      |                                     |                      | 21,377 |              |        |   | 23,250 |       
|      | Less: Unamortized debt discount     |                      |        | (422         | )      |   |        | (465   | )     
|      |                                     |                      |        |              |        |   |        |       
|      | Total Debt                          |                      | $      | 20,955       |        |   | $      | 22,785 |       
|      |                                     | Less current portion |        |              | (3,586 | ) |        |        | (3,694 | )
|      |                                     |                      |        |              |        |   |        |       
|      |                                     | Non current portion  |        | $            | 17,369 |   |        | $      | 19,091 |  
|      |                                     |                      |        |              |        |   |        |       

11



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##### Table of Contents



T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                         |      |                       |   |       |        | 
|------------------------ | ---- | --------------------- | - | ----- | ------ | 
|Year ending December 31: |      |                       |   |      
|                         | 2003 |                       | $ | 1,750 |       
|                         | 2004 |                       |   | 3,500 |       
|                         | 2005 |                       |   | 3,500 |       
|                         | 2006 |                       |   | 3,500 |       
|                         | 2007 |                       |   |      |       
|                         |      |                       |   |      
|                         |      | Total debt maturities |   | $     | 12,250 | 
|                         |      |                       |   |      

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

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

In November 2002, the Company obtained new
financing (the New Credit Facility). Net proceeds of this
New Credit Facility were utilized to repay in full the existing
Credit Facility and the Subordinated Note Payable. As of
June 30, 2003, the New Credit Facility provides for maximum
credit availability of $29.3 million, subject to
limitations based on certain financial covenants, and consists
of a $12.3 million Senior Secured Term Loan, a
$9.0 million Senior Subordinated Promissory Note and a
Revolving Credit Facility with an availability of up to
$8.0 million.

The Senior Secured Term Loan bears interest at
LIBOR plus 6.0%, with 14 equal quarterly principal installment
payments remaining through December 2006. Effective
March 31,2003, the Company entered into an interest rate
swap agreement which effectively converts this variable rate
debt to a fixed rate. (See Note 6 Interest Rate
Swap of Notes to Condensed Consolidated Financial
Statements.) Due in 2008, the Senior Subordinated
Promissory Note bears interest at a fixed rate of 13%, payable
on a quarterly basis, with an additional 4.75% of interest
payable in kind. In addition, the lender received detachable
stock purchase

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

warrants, which are immediately exercisable, to
purchase 186,792 shares of common stock at an exercise price of
$0.01 per share. The expiration date of these warrants is
November 2010. The estimated fair value of the stock purchase
warrants, calculated using the Black-Scholes model, was recorded
as a debt discount and is being amortized over the term of the
Senior Subordinated Promissory Note. Availability under the
Revolving Credit Facility is based on the lesser of eligible
accounts receivable or a calculated maximum leverage ratio.
Interest on the Revolving Credit Facility is set at prime plus
3.5% with a 0.75% annual commitment fee assessed on the unused
portion of this Facility.

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

(4) Discontinued Operations and Assets
Held for Sale

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

|               |  |          |   |            |  |      |     |      |  |   |   |  |  |   |      |  
|-------------- |  | -------- | - | ---------- |  | ---- | --- | ---- |  | - | - |  |  | - | ---- | -
|               |  |          |   |            |  |     
|               |  | Three    |   |           
|               |  | Months   |   | Six Months
|               |  | Ended    |   | Ended     
|               |  | June 30, |   | June 30,  
|               |  |          |   |           
|               |  | 2003     |   | 2002       |  | 2003 |     | 2002
|               |  |          |   |            |  |      |     |     
|Revenue        |  | $        |  |            |  | $    | 22  |      |  | $ |  |  |  | $ | 101  |  
|Operating loss |  |          |  |            |  |      | (85 | )    |  |   |  |  |  |   | (433 | )
|Net loss       |  |          |  |            |  |      | (85 | )    |  |   |  |  |  |   | (433 | )

In July 2002, the Company completed the sale of
the SpeakEZ voice verification assets to SpeechWorks
International, Inc. (SpeechWorks) for
$0.4 million cash and 134,360 shares of SpeechWorks common
stock valued at $0.3 million at the time of the
transaction, (both cash and stock being subject to a 10% escrow
provision) and recognized a gain on the sale of discontinued
operations of $0.3 million. In addition, SpeechWorks will
pay the Company an earn-out fee based on the sale over the next
two years of future SpeechWorks products incorporating the
SpeakEZ technology. As part of the sales agreement, the Company
retained the right to utilize the speech recognition technology
in the corrections industry. SpeechWorks stock (net of the
escrow) received by the Company was subsequently sold on
July 29, 2003 with net proceeds to the Company of
approximately $0.5 million resulting in a gain of
approximately $0.3 million.

During the fourth quarter of 2002, the Company
recorded a $1.1 million impairment charge to an asset
relating to a prepaid contract for call validation query
services that 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

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

realized through sale, net of any selling
expenses. For the six months ended June 30, 2003 and the
year ended December 31, 2002, the prepaid validation asset
has been classified as an Asset Held for Sale.

(5) Segment Information 
Continuing Operations

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

The Company evaluates performance 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

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

significant accounting policies. Segment
information for the three and six months ended June 30,
2003 and the comparable 2002 periods is as follows (in
thousands):

|                                                                         |  |                    |  |                  |  |         |  |        
|------------------------------------------------------------------------ |  | ------------------ |  | ---------------- |  | ------- |  | -------
|                                                                         |  |                    |  |                 
|                                                                         |  | Three Months Ended |  | Six Months Ended
|                                                                         |  | June 30,           |  | June 30,        
|                                                                         |  |                    |  |                 
|                                                                         |  | 2003               |  | 2002             |  | 2003    |  | 2002   
|                                                                         |  |                    |  |                  |  |         |  |        
|Revenue from External Customers                                          |  | $31,069            |  | $31,546          |  | $61,092 |  | $56,004
|                                                                         |  |                    |  |                  |  |         |  |        
|Research and Development                                                 |  | $880               |  | $730             |  | $1,653  |  | $1,430 
|                                                                         |  |                    |  |                  |  |         |  |        
|Depreciation and Amortization                                            |  | $2,935             |  | $2,755           |  | $5,966  |  | $5,412 
|                                                                         |  |                    |  |                  |  |         |  |        
|Interest and Other Expense                                               |  | $721               |  | $584             |  | $1,440  |  | $890   
|                                                                         |  |                    |  |                  |  |         |  |        
|Operating Income                                                         |  | $1,147             |  | $1,799           |  | $1,217  |  | $3,718 
|                                                                         |  |                    |  |                  |  |         |  |        
|Segment Earnings (Loss) from Continuing
    Operations Before Income Tax |  | $426               |  | $1,215           |  | $(223)  |  | $2,828 
|                                                                         |  |                    |  |                  |  |         |  |        

|               |  |          |        |              |  |   |        | 
|-------------- |  | -------- | ------ | ------------ |  | - | ------ | 
|               |  | June 30, |        | December 31,
|               |  | 2003     |        | 2002        
|               |  |          |        |             
|Segment Assets |  | $        | 64,377 |              |  | $ | 66,657 | 
|               |  |          |        |              |  |   |        | 

There was no intersegment revenue for the three
and six months ending June 30, 2003 and the comparable 2002
period. Consolidated total assets included eliminations of
approximately $1.7 million as of June 30, 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 converted the
$12.3 million of variable rate debt outstanding under the
New Credit Facility to a fixed rate. Under the terms of this
interest rate swap agreement, the notional amount of the swap
coincides with the maturity schedule of the Senior Secured Term
Loan and has an expiration date of September 2006. On a
quarterly basis, the Company will receive variable interest rate
payments based on 90 day LIBOR and make fixed interest rate
payments of 2.4%, thereby creating the equivalent of fixed rate
debt. The net effect of this agreement is to lock the effective
interest rate on the Senior Secured Term Loan at 8.4% through
its maturity in 2006.

The Company has designated the interest rate swap
as a cash flow hedge in accordance with the requirements of SFAS
No. 133, Accounting for Derivatives and Hedging
Activities and its amendments. Any gain or loss is
recorded as interest expense in the same period or periods that
the hedged transaction affects earnings. At June 30, 2003,
the fair value of the interest rate swap, with quarterly
settlements through September 2006, was a liability of
approximately $0.2 million with the offset recorded in
other comprehensive income. The Company will assess the
valuation of the interest rate swap quarterly on a go forward
basis. The Company does not enter into derivative instruments
for any other purpose than cash flow hedging purposes and does
not intend to speculate using derivative instruments.

(7) Commitments and
Contingencies

From time to time the Company has been, and
expects to continue to be subject to various legal and
administrative proceedings or various claims in the normal
course of our business. We believe the ultimate

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 queries by Illuminet to a certain
database maintained by and available to Illuminet. In order to
utilize such transport the queries were to be directed from the
Company for connection to Illuminet utilizing certain
technologies. Attempts were continually made by the Company over
the time period to complete connectivity but connectivity was
never accomplished. In November 2001, Illuminet notified the
Company that no credits for such services would be honored. In
January 2002 Illuminet filed a claim before the original
arbitration panel in Fairway, Kansas, requesting money damages
for T-NETIXs breach and declaratory relief that no credits
are due T-NETIX. The Company has made payments totaling
approximately $2.1 million pursuant to this written
agreement. The payments (the value of which were written down
during the period ended December 31, 2002) are classified
as an Asset Held for Sale at June 30, 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. The case is in early stages of
discovery.

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

Richardson v. T-NETIX Telecommunications,
Inc.and Colman v. T-NETIX
Telecommunications, Inc., 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

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T-NETIX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and $2,500 in punitive damages. T-NETIX argued
its Motion to Dismiss on June 18, 2003, however, the Court
has not yet ruled on the Motion.

In May 2003, Global Tel*Link Corporation filed
patent litigation against the Company. The lawsuit, filed in the
Northern District of Texas, Dallas division, alleges
infringement of one United States patent protecting a
telephone apparatus. This litigation is in its very early stage;
no discovery has been instituted.

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

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

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

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

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

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



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

In the Corrections Division the Company derives
revenue from three 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
the Companys telecommunications service provider customers
including Verizon, AT&T, SBC Communications, Qwest and
Sprint. Here, the Company provides the equipment, security
enhanced call processing, call validation, and service and
support through the provider, rather than directly to the
facility. The provider does the billing and the Company either
shares the revenue with or receives a prescribed fee from the
Companys telecommunications services providers for each
call completed. The Company receives additional fees for
validating the phone numbers dialed by inmates.

The Companys Corrections Division also
provides inmate calling services directly as a
telecommunications provider to correctional facilities, or
Direct Customers. In a typical arrangement, the
Company operates under site-specific contracts, generally for a
period of two to three years. The Company provides the

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##### Table of Contents



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


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

Equipment sales and other revenue include the
sales of our inmate calling system (primarily the systems of the
Companys wholly owned subsidiary, TELEQUIP Labs, Inc.),
and digital recording systems. Currently, sales of inmate
calling systems are generally made by TELEQUIP to a limited
number of telecommunication service provider customers.



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

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



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

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

20



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##### Table of Contents



Results of Operations for the Three Months
Ended June 30, 2003 Compared to
June 30, 2002

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

|          |                                     |                                                           |  |      |     |   |  |    |     |  
|--------- | ----------------------------------- | --------------------------------------------------------- |  | ---- | --- | - |  | -- | --- | -
|          |                                     | 2003                                                      |  | 2002
|          |                                     |                                                           |  |     
|Revenue:  |                                     |                                                           |  |      |     |   |  |   
|          | Telecommunications services         |                                                           |  | 42   | %   |   |  | 48 | %  
|          | Direct call provisioning            |                                                           |  | 49   |     |   |  | 44 |    
|          | Equipment sales and other           |                                                           |  | 9    |     |   |  | 8  |    
|          |                                     |                                                           |  |      |     |   |  |   
|          |                                     | Total revenue                                             |  |      | 100 |   |  |    | 100 |  
|Expenses: |                                     |                                                           |  |      |     |   |  |   
|          | Operating costs                     |                                                           |  | 63   |     |   |  | 63 |    
|          | Selling, general and administrative |                                                           |  | 21   |     |   |  | 20 |    
|          | Research and development            |                                                           |  | 3    |     |   |  | 2  |    
|          | Depreciation and amortization       |                                                           |  | 9    |     |   |  | 9  |    
|          |                                     |                                                           |  |      |     |   |  |   
|          |                                     | Operating income                                          |  |      | 4   |   |  |    | 6   |  
|          | Interest and other expense          |                                                           |  | 3    |     |   |  | 2  |    
|          |                                     |                                                           |  |      |     |   |  |   
|          |                                     | Income from continuing operations before income
    taxes |  |      | 1   |   |  |    | 4   |  
|          | Income tax expense                  |                                                           |  |     |     |   |  |   |    
|          |                                     |                                                           |  |      |     |   |  |   
|          |                                     | Net income from continuing operations                     |  |      | 1   |   |  |    | 4   |  
|          | Loss from discontinued operations   |                                                           |  |     |     |   |  | (1 | )  
|          |                                     |                                                           |  |      |     |   |  |   
|          |                                     | Net Income applicable to common stock                     |  |      | 1   | % |  |    | 3   | %
|          |                                     |                                                           |  |      |     |   |  |   

Total Revenue.Total
revenue for the three months ended June 30, 2003 was
$31.1 million, a decrease of 2% from $31.5 million for
the corresponding 2002 period. This decrease was attributable to
a decrease in telecommunications services of $2.0 million,
partially offset by increases in direct call provisioning of
$1.4 million and equipment sales and other of
$0.2 million.

Telecommunications services revenue decreased 8%
to $13.1 million for the three months ended June 30,
2003, from $15.1 million for the corresponding prior
period. This decrease was primarily due to the transition of
certain department of corrections contracts to a direct call
provisioning basis, the loss of contracts by telecommunication
service provider customers and to a decline in call volumes.

Direct call provisioning revenue increased 10% to
$15.4 million for the three months ended June 30,
2003, from $14.0 million in the corresponding prior period.
This increase was primarily due to the awarding in the latter
six months of 2002 of several department of corrections
contracts for which 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 8% to
$2.6 million for the three month period ended June 30,
2003 from $2.4 million in the corresponding prior period.
This increase was primarily due to increased ancillary equipment
sales and equipment upgrades to a telecommunication service
provider customer. Such equipment sales and the sale of
equipment through the Companys wholly-owned subsidiary,
TELEQUIP Labs, Inc., are dependent upon the timing of sales and
installations to a limited number of customers.

Operating costs.Total operating costs decreased 3% to $19.5 million for the
three months ended June 30, 2003 from $20.0 million in
the corresponding prior period. The decrease was primarily due
to a decrease in telecommunication services expenses of
$0.4 million combined with the lower cost of equipment sold
of $0.2 million, offset partially by a $0.1 million
increase in direct call provisioning costs.

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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 June 30,
2003 and 2002.

|                              |                                                          |      |  |      |   |  |  |    |  
|----------------------------- | -------------------------------------------------------- | ---- |  | ---- | - |  |  | -- | -
|                              |                                                          | 2003 |  | 2002
|                              |                                                          |      |  |     
|Operating costs and expenses: |                                                          |      |  |      |   |  |  |   
|                              | Telecommunications services                              |      |  | 38   | % |  |  | 35 | %
|                              | Direct call provisioning, including bad debt
    expense |      |  | 89   |   |  |  | 97 |  
|                              | Cost of equipment sold and other                         |      |  | 33   |   |  |  | 43 |  

Operating costs associated with providing
telecommunications services as a percentage of corresponding
revenue were 38 % for the three months ended June 30, 2003,
an increase from 35% for the comparable 2002 period. Total
telecommunications services operating costs were
$4.9 million for the three months ended June 30, 2003
and $5.3 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 expenses, partially
offset by lower call validation and communications costs.

Direct call provisioning costs, as a percentage
of applicable revenue, were 89% of revenue for the three months
ended June 30, 2003 compared to 97% in the comparable 2002
period. Due to the awarding of several department of corrections
contracts in the latter six months of 2002, total direct call
provisioning operating costs,including bad debt expense,
increased to $13.7 million for the three months ended
June 30, 2003 from $13.6 million for the corresponding
2002 period. The decrease in costs as a percentage of applicable
revenue in 2003 was due primarily to a proportional decrease in
bad debt expense and commission expenses associated with the
increase in direct call provisioning revenue. The proportional
decreases in bad debt expense reflects the Companys
improved ability to block calls attempting to be processed
through Competitive Local Exchange Carriers (CLEC)
where the Company does not have billing arrangements. The
Company, beginning in the first quarter of 2002, began modifying
its call handling processes to block certain of these CLEC
calls. Combined with the deployment of new technology and
techniques to control bad debt and unbillables achieved in part
through the investment in Accudata Technologies, Inc. in March
2003, the Company has been successful in reducing its unbillable
call volume and overall bad debt expense from 2002 levels.

Cost of equipment sold and other as a percentage
of applicable revenue decreased to 33% of revenue for the three
months ended June 30, 2003 from 43% for the corresponding
prior period. Total costs of equipment sold and other were
$0.9 million for the three months ended June 30, 2003
compared to $1.1 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 $6.6 million for the three months ended
June 30, 2003 and $6.2 million in the comparable 2002
period. The increase was primarily due to an increase in
professional services and legal fees associated with the ongoing
patent litigation.

Research and Development Expenses.Research and development expenses were
$0.9 million in the three months ended June 30, 2003
compared to $0.7 million for the corresponding prior
period. This increase was primarily due to an increase in
consulting services costs related to the acceleration of several
product development efforts.

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##### Table of Contents



Depreciation and Amortization Expenses.Depreciation and amortization expense
was $3.0 million for the three months ended June 30,
2003, an increase from $2.8 million for the comparable 2002
period. Depreciation expense increased to $2.7 million in
the three months ended June 30, 2003 compared to
$2.5 million in 2002. Amortization expenses were
$0.3 million for the three months ended June 30, 2003
and 2002.

Interest and Other Expenses.Interest and other expense was
$0.7 million for the three months ended June 30, 2003
compared to $0.6 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.

Results of Operations for the Six Months Ended
June 30, 2003 Compared to June 30, 2002

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

|          |                                     |                                                                  |  |      |     |    |  |    |     |  
|--------- | ----------------------------------- | ---------------------------------------------------------------- |  | ---- | --- | -- |  | -- | --- | -
|          |                                     | 2003                                                             |  | 2002
|          |                                     |                                                                  |  |     
|Revenue:  |                                     |                                                                  |  |      |     |    |  |   
|          | Telecommunications services         |                                                                  |  | 43   | %   |    |  | 54 | %  
|          | Direct call provisioning            |                                                                  |  | 50   |     |    |  | 40 |    
|          | Equipment sales and other           |                                                                  |  | 7    |     |    |  | 6  |    
|          |                                     |                                                                  |  |      |     |    |  |   
|          |                                     | Total revenue                                                    |  |      | 100 |    |  |    | 100 |  
|Expenses: |                                     |                                                                  |  |      |     |    |  |   
|          | Operating costs                     |                                                                  |  | 64   |     |    |  | 60 |    
|          | Selling, general and administrative |                                                                  |  | 21   |     |    |  | 21 |    
|          | Research and development            |                                                                  |  | 3    |     |    |  | 2  |    
|          | Depreciation and amortization       |                                                                  |  | 10   |     |    |  | 10 |    
|          |                                     |                                                                  |  |      |     |    |  |   
|          |                                     | Operating income                                                 |  |      | 2   |    |  |    | 7   |  
|          | Interest and other expense          |                                                                  |  | 3    |     |    |  | 2  |    
|          |                                     |                                                                  |  |      |     |    |  |   
|          |                                     | Income (loss) from continuing operations before
    income taxes |  |      | (1  | )  |  |    | 5   |  
|          | Income tax expense                  |                                                                  |  |     |     |    |  |   |    
|          |                                     |                                                                  |  |      |     |    |  |   
|          |                                     | Net income (loss) from continuing operations                     |  |      | (1  | )  |  |    | 5   |  
|          | Loss from discontinued operations   |                                                                  |  |     |     |    |  | (1 | )  
|          |                                     |                                                                  |  |      |     |    |  |   
|          |                                     | Net Income (loss) applicable to common stock                     |  |      | (1  | )% |  |    | 4   | %
|          |                                     |                                                                  |  |      |     |    |  |   

Total Revenue.Total
revenue for the six months ended June 30, 2003 was
$61.1 million, an increase of 9% from $56.0 million
for the corresponding 2002 period. This increase was
attributable to increases in direct call provisioning of
$8.3 million and equipment sales and other of
$0.9 million, offset partially by a decrease in
telecommunications services of $4.1 million.

Telecommunications services revenue decreased 13%
to $26.3 million for the six months ended June 30,
2003, from $30.4 million for the corresponding prior
period. This decrease was primarily due to the transition of
certain department of corrections contracts to a direct call
provisioning basis, the loss of contracts by our
telecommunications service provider customers and to a decline
in call volumes.

Direct call provisioning revenue increased 37% to
$30.5 million for the six months ended June 30, 2003,
from $22.2 million in the corresponding prior period. This
increase was primarily due to the awarding in the latter half of
2002 of several department of corrections contracts for which
the Company is provisioning comprehensive or the long distance
communication service on a direct basis. The addition of these
sites is a result of being successful in providing competitive
bidding arrangements for contracts directly with correctional
facilities.

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Equipment sales and other revenue increased 27%
to $4.3 million for the six month period ended
June 30, 2003 from $3.4 million in the corresponding
prior period. This increase was primarily due to increased
ancillary equipment sales and equipment upgrades to a
telecommunication service provider customer. Such equipment
sales and the sale of equipment through the Companys
wholly-owned subsidiary, TELEQUIP Labs, Inc. are dependent upon
the timing of sales and installations of a limited number of
telecommunications services provider customers.

Operating costs.Total operating costs increased 17% to $39.4 million for
the six months ended June 30, 2003 from $33.5 million
in the corresponding prior period. The increase was primarily
due to an increase in direct call provisioning expenses of
$6.7 million, partially offset by a decrease in
telecommunication services expenses of $0.8 million.

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

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

|                              |                                                          |      |  |      |   |  |  |    |  
|----------------------------- | -------------------------------------------------------- | ---- |  | ---- | - |  |  | -- | -
|                              |                                                          | 2003 |  | 2002
|                              |                                                          |      |  |     
|Operating costs and expenses: |                                                          |      |  |      |   |  |  |   
|                              | Telecommunications services                              |      |  | 38   | % |  |  | 36 | %
|                              | Direct call provisioning, including bad debt
    expense |      |  | 91   |   |  |  | 95 |  
|                              | Cost of equipment sold and other                         |      |  | 37   |   |  |  | 47 |  

Operating costs associated with providing
telecommunications services as a percentage of corresponding
revenue was 38% for the six months ended June 30, 2003, an
increase from 36% for the comparable 2002 period. Total
telecommunications services operating costs were
$10.0 million for the six months ended June 30, 2003
and $10.8 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 costs, partially
offset by lower call validation costs.

Direct call provisioning costs, as a percentage
of applicable revenue, were 91% of revenue for the six months
ended June 30, 2003 compared to 95% in the comparable 2002
period. Due to the awarding of several department of corrections
contracts in the latter half of 2002, total direct call
provisioning operating costs, including bad debt expenses,
increased to $27.8 million for the six months ended
June 30, 2003 from $21.1 million for the corresponding
2002 period. The decrease in costs as a percentage of applicable
revenue in 2003 was due primarily to a proportional decrease in
bad debt expense and communication costs associated with the
increase in direct call provisioning revenue. The decrease in
bad debt expense reflects the Companys improved ability to
block calls attempting to be processed through Competitive Local
Exchange Carriers (CLEC) where the Company does not
have billing arrangements. The Company, beginning in the first
quarter of 2002, began modifying its call handling processes to
block certain of these CLEC calls. Combined with the deployment
of new technology and techniques to control bad debt and
unbillables achieved in part through the investment in Accudata
Technologies, Inc. in March 2003, the Company has been
successful in reducing its unbillable call volume and overall
bad debt expense from 2002 levels.

Cost of equipment sold and other as a percentage
of applicable revenue decreased to 37% of revenue for the six
months ended June 30, 2003 from 47% for the corresponding
prior period. Total costs of equipment sold and other were
$1.6 million for the six months ended June 30, 2003
and 2002. 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.

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##### Table of Contents



Selling, General and Administrative Expenses.Selling, general and administrative
expenses were $12.9 million for the six months ended
June 30, 2003 and $12.0 million in the comparable 2002
period. This increase was primarily due to an increase in
professional services and legal fees associated with the ongoing
patent litigation.

Research and Development Expenses.Research and development expenses were
$1.6 million in the six months ended June 30, 2003
compared to $1.4 million for the corresponding prior
period. This increase was primarily due to an increase in
consulting costs related to the acceleration of several product
development efforts.

Depreciation and Amortization Expenses.Depreciation and amortization expense
was $6.0 million for the six months ended June 30,
2003, an increase from $5.4 million for the comparable 2002
period. Depreciation expense increased to $5.5 million in
the six months ended June 30, 2003 compared to
$5.0 million in 2002 reflecting recent capital
expenditures. Amortization expenses were $0.5 million for
the six months ended June 30, 2003 compared to
$0.4 million in the corresponding prior period.

Interest and Other Expenses.Interest and other expense was
$1.4 million for the six months ended June 30, 2003
compared to $0.9 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. The
Companys capital needs consist primarily of additions to
property and equipment for site telecommunication equipment,
upgrades to existing systems and to fund acquisitions.

Cash provided by continuing operations was
$2.6 million for the six months ended June 30, 2003
compared to $7.0 million in the corresponding 2002 period.
This decrease was primarily due to a $3.0 million decline
in net income from continuing operations and a $1.9 million
increase in net working capital, offset partially by a
$0.6 million increase in depreciation and amortization
expense.

Net cash used in investing activity of continuing
operations was $3.7 million for the six months ended
June 30, 2003 compared to $3.5 million in the
corresponding 2002 period. Cash used in investing activities
consisted primarily of purchases of property, plant, and
equipment of $2.9 million for the six months ended
June 30, 2003 compared to $3.3 million in the
corresponding 2002 period. Cash used in investing activities in
the 2003 period also reflects the Companys investment in
Accudata in March 2003 of $0.8 million.

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

Cash used in financing activities of continuing
operations consisted primarily of net payments on the
Companys New Credit Facility of $1.8 million during
the six months ended June 30, 2003 compared to net debt
payments of $3.7 million in the corresponding 2002 period.



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

In September 1999, the Company entered into a
Senior Secured Revolving Credit Facility (Credit
Facility) with a commercial bank for working capital and
general corporate purposes. The Credit Facility provided maximum
credit of $40 million subject to certain financial
covenants and financial performance. In April 2001, lenders
extended the Credit Facility maturity date to March 31,
2002. The maximum available borrowing on the facility was
reduced to $30 million consisting of a $10 million
term portion and a $20 million line of credit. Interest was
set at prime rate plus 1.25% effective March 31, 2001,
increasing by 0.25% each quarter thereafter on June 30,
September 30, and December 31, 2001. In addition,
monthly payments of

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##### Table of Contents



$0.2 million on the term loan commenced on
April 30, 2001. In March 2002 the maturity date of the
Credit Facility was extended to July 2002. In April 2002, the
Company obtained a further commitment from the bank to extend
this facility to January 2003. Maximum available borrowing from
the facility was reduced to $21.8 million, consisting of a
$7.8 million term portion and a $14.0 million line of
credit. Interest was set at prime plus 2.25%, effective
March 31, 2002. In addition, monthly payments of
$0.2 million on the term loan were set to continue through
November 2002, when the Company obtained new financing (see
below).


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

In November 2002, the Company obtained new
financing (the New Credit Facility). Net proceeds of this
New Credit Facility were utilized to repay in full the existing
Credit Facility and the Subordinated Note Payable. As of
June 30, 2003, the New Credit Facility provides for maximum
credit availability of $29.3 million, subject to
limitations based on certain financial covenants, and consists
of a $12.3 million Senior Secured Term Loan, a
$9.0 million Senior Subordinated Promissory Note and a
Revolving Credit Facility with an availability of up to
$8.0 million.

The Senior Secured Term Loan bears interest at
LIBOR plus 6.0%, with 14 equal quarterly principal installment
payments remaining through December 2006. The Senior
Subordinated Promissory Note is due in 2008 and bears interest
at a fixed rate of 13%, payable on a quarterly basis, with an
additional 4.75% interest payable in kind. In addition, the
lender received detachable stock purchase warrants, which are
immediately exercisable, to purchase 186,792 shares of common
stock at an exercise price of $0.01 per share. The expiration
date of these warrants is November 2010. Availability under the
Revolving Credit Facility is based on the lesser of up to 85% of
eligible accounts receivable or a calculated maximum leverage
ratio. Interest on the Revolving Credit Facility is set at prime
plus 3.5% with a 0.75% annual commitment fee assessed on the
unused portion of this Facility.

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

26



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##### Table of Contents





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

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

|                                              |  |                  |       |           |  |           |       |           |  |       |       |  |  |   |       |  |  |   |        | 
|--------------------------------------------- |  | ---------------- | ----- | --------- |  | --------- | ----- | --------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                              |  | Due In One       |       | Due In    |  | Due In    |       | Due After |  |      
|                                              |  | Year Or Less     |       | 2-3 Years |  | 4-5 Years |       | 5 Years   |  | Total
|                                              |  |                  |       |           |  |           |       |           |  |      
|                                              |  |                 
|                                              |  | ($ In Thousands)
|Senior secured term note                      |  | $                | 3,500 |           |  | $         | 7,000 |           |  | $     | 1,750 |  |  | $ |      |  |  | $ | 12,250 | 
|Senior subordinated promissory note           |  |                  |      |           |  |           |      |           |  |       |      |  |  |   | 9,000 |  |  |   | 9,000  | 
|Operating leases                              |  |                  | 811   |           |  |           | 779   |           |  |       | 3     |  |  |   |      |  |  |   | 1,593  | 
|Capital lease and other                       |  |                  | 86    |           |  |           | 41    |           |  |       |      |  |  |   |      |  |  |   | 127    | 
|                                              |  |                  |       |           |  |           |       |           |  |       |       |  |  |   |       |  |  |   |        | 
|Total contractual obligations and commitments |  | $                | 4,397 |           |  | $         | 7,820 |           |  | $     | 1,753 |  |  | $ | 9,000 |  |  | $ | 22,970 | 
|                                              |  |                  |       |           |  |           |       |           |  |       |       |  |  |   |       |  |  |   |        | 

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 June 30, 2003, the Company was in
compliance with all of its debt covenants. There are no
provisions within the Companys leasing arrangements that
would trigger acceleration of future lease payments. (See
Notes 3 and 6 to the condensed consolidated financial
statements for additional information regarding the obligations
and commitments listed above.)

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



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

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

In May 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. Under the provisions of SFAS No. 145,
gains and losses from the early extinguishment of debt are no
longer classified as an extraordinary item, net of income taxes,
but are included in the determination of pretax earnings. The
effective date for SFAS No. 145 is for fiscal years
beginning after May 15, 2002, with early application
encouraged.

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

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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.

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






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

We are exposed to interest rate risk as discussed
below.



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

As of June 30, 2003, we have debt
outstanding under our New Credit Facility of $21.3 million.
As of June 30, 2003, the New Credit Facility provides for
maximum credit availability of $29.3 million, subject to
limitations based on certain financial covenants, and consists
of a $12.3 million Senior Secured Term Loan, a
$9.0 million Senior Subordinated Promissory Note and a
Revolving Credit Facility with an availability of up to
$8.0 million. The Senior Secured Term Loan and the
Revolving Credit Facility bear interest at LIBOR plus 6% and
prime plus 3.5%, respectively. Since the interest rate on the
Senior Secured Term Loan outstanding and the Revolving Credit
Facility is variable and is reset periodically, we are exposed
to interest risk. Before implementation of the interest rate
swap described below, an increase in interest rates of 1% would
have increased estimated annual interest expense by
approximately $0.1 million based on the amount of
borrowings outstanding under our New Credit Facility at
June 30, 2003.

Since the interest rate on the Senior Secured
Term Loan outstanding is variable, the Company is exposed to
variability in interest payments due to changes in interest
rates. Effective March 31, 2003, the Company entered into
an interest rate swap agreement which effectively converted the
$12.3 million of variable rate debt currently outstanding
under the New Credit Facility to a fixed rate. Under the terms
of the interest rate swap agreement, the Company will receive
variable interest rate payments and make fixed interest rate
payments, thereby creating the equivalent of fixed rate debt.
The net effect of this agreement is to lock the effective
interest rate on the Senior Secured Term Loan at 8.4% through
its maturity in 2006.

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

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

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

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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, 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.

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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 queries by Illuminet to a certain
database maintained by and available to Illuminet. In order to
utilize such transport the queries were to be directed from the
Company for connection to Illuminet utilizing certain
technologies. Attempts were continually made by the Company over
the time period to complete connectivity but connectivity was
never accomplished. In November 2001, Illuminet notified the
Company that no credits for such services would be honored. In
January 2002 Illuminet filed a claim before the original
arbitration panel in Fairway, Kansas, requesting money damages
for T-NETIXs breach and declaratory relief that no credits
are due T-NETIX. The Company has made payments totaling
approximately $2.1 million pursuant to this written
agreement. The payments (the value of which were written down
during the period ended December 31, 2002) are classified
as an Asset Held for Sale at June 30, 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. The case is in early stages of
discovery.

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

Richardson v. T-NETIX Telecommunications,
Inc.and Colman v. T-NETIX
Telecommunications, Inc., 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

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and $2,500 in punitive damages. T-NETIX argued
its Motion to Dismiss on June 18, 2003, however, the Court
has not yet ruled on the Motion.


In May 2003, Global Tel*Link Corporation filed
patent litigation against the Company. The lawsuit, filed in the
Northern District of Texas, Dallas division, alleges
infringement of one United States patent protecting a
telephone apparatus. This litigation is in its very early stage;
no discovery has been instituted.

We believe the ultimate disposition of the
forgoing matters will not have a material adverse effect 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

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

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

(b) Reports on Form 8-K

Press Release, T-NETIX Reports Financial
Results for Second Quarter and Six Months Ended June 30,
2003, filed as Form 8-K with the SEC on
August 1, 2003.

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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: August 7, 2003

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INDEX TO EXHIBITS

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

34