<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                             ---------------------

                                   FORM 10-Q

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

[X]         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                                       OR

[ ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                    FOR THE QUARTER ENDED SEPTEMBER 30, 2001

                         COMMISSION FILE NUMBER 0-25016

                                 T-NETIX, INC.
             (Exact name of registrant as Specified in Its Charter)

<Table>
<S>                                            <C>
                   DELAWARE                                      84-1037352
         (State or Other Jurisdiction                         (I.R.S. Employer
              of Incorporation)                             Identification No.)
        2155 CHENAULT DRIVE, SUITE 410                             75006
              CARROLLTON, TEXAS                                  (Zip Code)
   (Address of principal executive offices)
</Table>

      Registrant's telephone number, including area code:  (972) 241-1535

                             ---------------------

     Indicate by check [X] whether the registrant (1) has filed all reports
required to 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 [X]  No [ ]

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

<Table>
<S>                                            <C>
                    CLASS                             OUTSTANDING AT NOVEMBER 7, 2001
---------------------------------------------- ----------------------------------------------
       Common Stock, $.01 stated value                           15,032,368
</Table>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                        FORM 10-Q CROSS REFERENCE INDEX

<Table>
<Caption>
                                                                        PAGE
                                                                        ----
<S>      <C>                                                            <C>
                        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.................................    12
Item 3   Quantitative and Qualitative Disclosure About Market Risk...    19

                         PART II OTHER INFORMATION


Item 1   Legal Proceedings...........................................    20
Item 2   Changes in Securities and Use of Proceeds...................    21
Item 3   Defaults Upon Senior Securities.............................    21
Item 4   Submission of Matters to a Vote of Security Holders.........    21
Item 5   Other Information...........................................    21
Item 6   Exhibits and Reports on Form 8-K............................    21
</Table>

                                        1
<PAGE>

                                     PART I

ITEM 1. FINANCIAL STATEMENTS

              INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<S>                                                           <C>
Condensed Consolidated Balance Sheets as of September 30,
  2001 and December 31, 2000 (Unaudited)....................    3
Condensed Consolidated Statements of Operations for the
  Three Months Ended September 30, 2001 and 2000, and the
  Nine Months Ended September 30, 2001 and 2000
  (Unaudited)...............................................    4
Condensed Consolidated Statements of Cash Flows for the Nine
  Months Ended September 30, 2001 and 2000 (Unaudited)......    5
Notes to Condensed Consolidated Financial Statements
  (Unaudited)...............................................    6
</Table>

                                        2
<PAGE>

                         T-NETIX, INC. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS
           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
                                  (UNAUDITED)

<Table>
<Caption>
                                                              SEPTEMBER 30,      DECEMBER 31,
                                                                  2001               2000
                                                              -------------      ------------
<S>                                                           <C>                <C>
                                           ASSETS

Cash and cash equivalents...................................    $    721           $    102
Accounts receivable, net....................................      23,912             18,268
Prepaid expenses............................................       1,603              1,124
Inventories.................................................         401                764
                                                                --------           --------
          Total current assets..............................      26,637             20,258
Property and equipment, net.................................      31,712             34,650
Net assets of discontinued operations.......................       1,249              1,863
Goodwill, net...............................................       5,324              5,557
Deferred tax asset..........................................       2,297              2,297
Intangible and other assets, net............................       7,901              6,867
                                                                --------           --------
          Total assets......................................    $ 75,120           $ 71,492
                                                                ========           ========
                     LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
                                  AND STOCKHOLDERS' EQUITY
Liabilities:
  Accounts payable..........................................    $ 10,877           $  8,654
  Accrued liabilities.......................................       7,158              5,778
  Subordinated note payable.................................       3,750                 --
  Current portion of long term debt.........................      23,971              1,848
                                                                --------           --------
          Total current liabilities.........................      45,756             16,280
  Long-term debt............................................          59             29,813
                                                                --------           --------
          Total liabilities.................................      45,815             46,093
Series A redeemable convertible preferred stock, $1,000 per
  share, stated value, 3,750 shares authorized; 3,250 issued
  and outstanding at December 31, 2000......................          --              2,173
Stockholders' equity:
  Common stock, $.01 stated value, 70,000,000 shares
     authorized; 15,032,638 and 13,228,872 shares issued and
     outstanding at September 30, 2001 and December 31,
     2000, respectively.....................................         150                132
  Additional paid-in capital................................      41,779             38,541
  Accumulated deficit.......................................     (12,624)           (15,447)
                                                                --------           --------
          Total stockholders' equity........................      29,305             23,226
                                                                --------           --------
          Total liabilities, redeemable convertible
            preferred stock and stockholders' equity........    $ 75,120           $ 71,492
                                                                ========           ========
</Table>

     See accompanying notes to condensed consolidated financial statements.

                                        3
<PAGE>

                         T-NETIX, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
                                  (UNAUDITED)

<Table>
<Caption>
                                                         THREE MONTHS ENDED    NINE MONTHS ENDED
                                                            SEPTEMBER 30,        SEPTEMBER 30,
                                                         -------------------   -----------------
                                                           2001       2000      2001      2000
                                                         --------   --------   -------   -------
<S>                                                      <C>        <C>        <C>       <C>
Revenue:
  Telecommunications services..........................  $15,529    $14,615    $46,697   $36,693
  Direct call provisioning.............................    6,753      6,811     19,834    21,303
  Internet services....................................    7,377      5,514     22,121    15,690
  Equipment sales and other............................    1,752        484      3,590     1,590
                                                         -------    -------    -------   -------
          Total revenue................................   31,411     27,424     92,242    75,276
                                                         -------    -------    -------   -------
Operating costs and expenses:
  Operating costs:
     Telecommunications services.......................    4,827      5,405     16,987    15,265
     Direct call provisioning..........................    6,495      6,050     18,184    19,318
     Internet services.................................    5,572      4,100     15,350    12,466
     Cost of equipment sold and other..................      476        105      1,566       655
                                                         -------    -------    -------   -------
          Total operating costs........................   17,370     15,660     52,087    47,704
  Selling, general and administrative..................    6,355      5,034     18,810    13,090
  Research and development.............................    1,111      1,096      3,958     3,543
  Depreciation and amortization........................    3,138      2,902      9,240     8,601
                                                         -------    -------    -------   -------
          Total operating costs and expenses...........   27,974     24,692     84,095    72,938
                                                         -------    -------    -------   -------
          Operating income.............................    3,437      2,732      8,147     2,338
Interest and other expense, net........................      590        734      1,965     1,761
                                                         -------    -------    -------   -------
Income (loss) from continuing operations before income
  taxes................................................    2,847      1,998      6,182       577
Income tax expense.....................................     (111)        --       (333)       --
                                                         -------    -------    -------   -------
Net income from continuing operations..................    2,736      1,998      5,849       577
Loss from discontinued operations......................     (580)      (444)    (1,950)   (1,372)
                                                         -------    -------    -------   -------
Net income (loss) before accretion of discount on
  redeemable convertible preferred stock...............    2,156      1,554      3,899      (795)
Accretion of discount on redeemable convertible
  preferred stock......................................       --       (515)        --      (945)
Charge for conversion of redeemable convertible
  preferred stock......................................       --         --     (1,077)       --
                                                         -------    -------    -------   -------
Net income (loss) applicable to common stockholders....  $ 2,156    $ 1,039    $ 2,822   $(1,740)
                                                         =======    =======    =======   =======
Income (loss) per common share from continuing
  operations
  Basic................................................  $  0.18    $  0.16    $  0.39   $  0.05
                                                         =======    =======    =======   =======
  Diluted..............................................  $  0.18    $  0.15    $  0.39   $  0.05
                                                         =======    =======    =======   =======
Loss per common share from discontinued operations
  Basic................................................  $ (0.04)   $ (0.03)   $ (0.13)  $ (0.11)
                                                         =======    =======    =======   =======
  Diluted..............................................  $ (0.04)   $ (0.03)   $ (0.13)  $ (0.11)
                                                         =======    =======    =======   =======
Income (loss) per common share applicable to common
  shareholders
  Basic................................................  $  0.14    $  0.08    $  0.19   $ (0.14)
                                                         =======    =======    =======   =======
  Diluted..............................................  $  0.14    $  0.08    $  0.19   $ (0.14)
                                                         =======    =======    =======   =======
Shares used in computing net income (loss) per common
  share
                                                         =======    =======    =======   =======
  Basic................................................   15,032     12,733     14,844    12,761
                                                         =======    =======    =======   =======
  Diluted..............................................   15,199     13,025     15,032    12,761
                                                         =======    =======    =======   =======
</Table>

     See accompanying notes to condensed consolidated financial statements.
                                        4
<PAGE>

                         T-NETIX, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
                                  (UNAUDITED)

<Table>
<Caption>
                                                               NINE MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                              -------------------
                                                               2001        2000
                                                              -------    --------
<S>                                                           <C>        <C>
Cash flows from operating activities:
  Net Income (loss) from continuing operations..............  $ 5,849    $    577
  Adjustments to reconcile net income to net cash provided
     by operating activities from continuing operations:
     Depreciation and amortization..........................    9,240       8,601
     Deferred income tax expense (benefit)..................       --          50
     Gain on sale of property and equipment.................       --        (324)
     Accretion of discount on subordinated note payable.....       --          40
     Changes in operating assets and liabilities:
       Accounts receivable, net.............................   (5,124)     (2,307)
       Prepaid expenses.....................................     (465)       (855)
       Inventories..........................................      757         518
       Intangibles and other assets.........................   (1,414)       (417)
       Accounts payable.....................................    2,105      (2,590)
       Accrued liabilities..................................    1,182         268
                                                              -------    --------
          Cash provided by operating activities of
           continuing operations............................   12,130       3,561
                                                              -------    --------
Cash used in investing activities:
  Purchase of property and equipment........................   (4,205)    (10,208)
  Purchase of Telequip......................................   (1,654)         --
  Investments in Patents....................................     (410)         --
  Proceeds from disposal of property and equipment..........       --         350
  Other investing activities................................       --         (23)
                                                              -------    --------
          Cash used in investing activities of continuing
           operations.......................................   (6,269)     (9,881)
                                                              -------    --------
Cash flows from financing activities:
  Net payments on line of credit............................   (3,877)        (69)
  Payments of debt..........................................      (43)       (350)
  Proceeds from subordinated debt...........................       --       3,750
  Proceeds from issuance of redeemable convertible preferred
     stock, net.............................................       --       3,459
  Common stock issued for cash under stock option plans.....       --          75
                                                              -------    --------
          Cash provided by (used in) financing activities of
           continuing operations............................   (3,920)      6,865
                                                              -------    --------
Cash used by discontinued operations........................  $(1,322)   $   (649)
                                                              -------    --------
Net increase (decrease) in cash and cash equivalents........      619        (104)
Cash and cash equivalents at beginning of period............      102         118
                                                              -------    --------
Cash and cash equivalents at end of period..................  $   721    $     14
                                                              -------    --------
Cash paid for interest......................................  $ 2,357    $  1,535
                                                              =======    ========
Cash paid for income taxes..................................  $   222    $    103
                                                              =======    ========
</Table>

     See accompanying notes to condensed consolidated financial statements.

                                        5
<PAGE>

                         T-NETIX, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
                                  (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Unaudited Financial Statements

     The accompanying unaudited consolidated financial statements reflect all
adjustments which, in the opinion of management, are necessary to reflect a fair
presentation of the financial position and results of operations of T-NETIX,
Inc. and subsidiaries (the Company) for the interim periods presented. All
adjustments, in the opinion of management, are of a normal and recurring nature.
Some adjustments involve estimates, which may require revision in subsequent
interim periods or at year-end. The financial statements have been presented in
accordance with generally accepted accounting principles. Refer to notes to
consolidated financial statements, which appear in the 2000 Annual Report on
Form 10-K for the Company's accounting policies, which are pertinent to these
statements.

  Acquisitions

     On January 19, 2001 the Company completed the purchase of all the
outstanding shares of common stock, not already owned, of Telequip Labs, Inc., a
provider of telecommunications calling services. The purchase price was $605 per
share of which $573 per share was paid upon closing. The remaining $32 per share
is payable on the first anniversary of the closing date upon determination that
all representations and warranties were materially true and accurate as of the
closing date and all covenants have been substantially fulfilled. The excess of
the purchase price over the fair value of the net identifiable assets acquired
has been recorded as goodwill and is being amortized on a straight line basis
over seven years. The total cash paid in January 2001 was $1.5 million. The
acquisition has been accounted for as a purchase and accordingly, the results of
operations of Telequip Labs, Inc. have been included in the Company's
consolidated financial statements from January 19, 2001.

  Earnings (Loss) Per Common Share

     Earnings (loss) per common share are presented in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) 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
<PAGE>
                         T-NETIX, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
                                  (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

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

<Table>
<Caption>
                                                         THREE MONTHS ENDED    NINE MONTHS ENDED
                                                            SEPTEMBER 30,        SEPTEMBER 30,
                                                         -------------------   -----------------
                                                           2001       2000      2001      2000
                                                         --------   --------   -------   -------
<S>                                                      <C>        <C>        <C>       <C>
Numerator:
  Net income (loss) applicable to common
     shareholders......................................  $ 2,156    $ 1,039    $ 2,822   $(1,740)
                                                         =======    =======    =======   =======
Denominator:
  Denominator for basic earnings per share.............   15,032     12,733     14,844    12,761
  Effect of dilutive securities:
     Stock options.....................................      142        292        163        --
     Warrants..........................................       25         --         25        --
                                                         -------    -------    -------   -------
  Denominator for diluted earnings per share...........   15,199     13,025     15,032    12,761
                                                         =======    =======    =======   =======
</Table>

     For the three and nine months ended September 30, 2001 and 2000, common
stock equivalents of 1,722,000, 1,702,000, 1,127,000 and 844,000, respectively
were not included in the diluted earnings per share calculation, as their effect
would be anti-dilutive.

  Recent Accounting Pronouncements

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" which requires the use of the purchase method
and eliminates the option of using pooling-of-interests method of accounting for
all business combinations. The provisions in this statement apply to all
business combinations initiated after June 30, 2001, and to all business
combinations accounted for using the purchase method, for which the date of
acquisition is on or near July 1, 2001. The Company does not believe that the
adoption of this statement will have a material impact on the Company's
financial position, results of operations or cash flows.

     In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). In general, SFAS 142 is effective for fiscal years
beginning after December 15, 2001. SFAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets, and requires that
all intangible assets acquired, other than those acquired in a business
combination, be initially recognized and measured based on fair value. In
addition, the intangible assets should be amortized based on useful life. If the
intangible asset is determined to have an indefinite useful life, it should not
be amortized, but shall be tested for impairment at least annually. For the
three and nine months ended September 30, 2001 and 2000, amortization expense
for goodwill and other intangible assets totalled $.6 million, $1.5 million, $.3
million and $.9 million respectively. Management has not determined the
potential impact that this statement will have on the Company's financial
position, results of operations or cash flows.

     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

                                        7
<PAGE>
                         T-NETIX, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
                                  (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

amount of the long-lived asset and reported as a liability. This statement is
effective for fiscal years beginning after June 15, 2002. The Company is
currently evaluating the impact of the adoption of SFAS 143.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement establishes a
single accounting model, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and broadens the presentation of discontinued operations to
include more disposal transactions. This statement is effective for fiscal years
beginning after December 15, 2001. The Company is currently evaluating the
impact of adoption of SFAS 144.

  Reclassification

     Certain amounts in the 2000 financial statements have been reclassified to
conform to the 2001 presentation.

(2) BALANCE SHEET COMPONENTS

     Accounts receivable consist of the following:

<Table>
<Caption>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  2001            2000
                                                              -------------   ------------
<S>                                                           <C>             <C>
Accounts receivable, net:
  Trade accounts receivable.................................     $18,296        $13,216
  Direct call provisioning receivable.......................       7,041          5,934
  Other receivables.........................................         250            209
                                                                 -------        -------
                                                                  25,587         19,359
          Less: Allowance for doubtful accounts.............      (1,675)        (1,091)
                                                                 -------        -------
                                                                 $23,912        $18,268
                                                                 =======        =======
</Table>

     Bad debt expense was $1.7 million and $1.3 million for the three months
ended September 30, 2001 and 2000, respectively, and $4.3 million and $3.9
million for the nine months ended September 30, 2001 and 2000, respectively.

     Property and equipment consists of the following:

<Table>
<Caption>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  2001            2000
                                                              -------------   ------------
<S>                                                           <C>             <C>
Property and equipment, net:
  Telecommunications equipment..............................    $ 65,280        $ 62,813
  Construction in progress..................................       6,978           6,495
  Office equipment..........................................      12,724          10,855
                                                                --------        --------
                                                                  84,982          80,163
          Less: Accumulated depreciation and amortization...     (53,270)        (45,513)
                                                                --------        --------
                                                                $ 31,712        $ 34,650
                                                                ========        ========
</Table>

                                        8
<PAGE>
                         T-NETIX, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
                                  (UNAUDITED)

(2) BALANCE SHEET COMPONENTS -- (CONTINUED)

     Intangible and other assets consist of the following:

<Table>
<Caption>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  2001            2000
                                                              -------------   ------------
<S>                                                           <C>             <C>
Intangible and other assets, net:
  Purchased technology assets...............................     $ 2,487        $ 2,487
  Capitalized software development costs....................       1,690          1,690
  Acquired software technologies............................         439            408
  Patent defense and application costs......................       2,896          2,486
  Deposits and long-term prepayments........................       2,165          1,718
  Other.....................................................       1,219            358
                                                                 -------        -------
                                                                  10,896          9,147
          Less: Accumulated amortization....................      (2,995)        (2,280)
                                                                 -------        -------
                                                                 $ 7,901        $ 6,867
                                                                 =======        =======
</Table>

     Accrued liabilities consist of the following:

<Table>
<Caption>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  2001            2000
                                                              -------------   ------------
<S>                                                           <C>             <C>
Accrued liabilities:
  Deferred revenue and customer advances....................     $1,558          $1,905
  Accrued salaries, commissions, and wages..................      2,239           1,281
  Other.....................................................      3,361           2,592
                                                                 ------          ------
                                                                 $7,158          $5,778
                                                                 ======          ======
</Table>

(3) DEBT

     Debt consists of the following:

<Table>
<Caption>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  2001            2000
                                                              -------------   ------------
<S>                                                           <C>             <C>
Debt:
  Bank lines of credit......................................     $23,946        $27,813
  Subordinated note payable.................................       3,750          3,750
  Other.....................................................          84             98
                                                                 -------        -------
                                                                  27,780         31,661
  Less current portion......................................      27,721          1,848
                                                                 -------        -------
  Non current portion.......................................     $    59        $29,813
                                                                 =======        =======
</Table>

  Bank Line of Credit

     In September 1999, the Company entered into a Senior Secured Revolving
Credit Facility (the "Credit Facility") with its commercial bank. 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, (7.5% at September 30, 2001). The Company also pays a fee of
0.40% per annum on the unused portion of the line of credit.
                                        9
<PAGE>
                         T-NETIX, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
                                  (UNAUDITED)

(3) DEBT -- (CONTINUED)

     The Credit Facility is collateralized by substantially all of the assets of
the Company. Under the terms of the 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 fixed charges (interest
and debt payments) to EBITDA, and minimum quarterly EBITDA. The Agreement also
prohibits the Company from incurring additional indebtedness.

     The Company issued a subordinated note payable of $3.75 million, due April
30, 2001, to a director and significant shareholder of the Company. The note
bears interest at prime rate plus one percent per annum (6.5% at September 30,
2001) which is payable every six months. The lender received warrants, which are
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 30, 2002 at which time the lender received
additional warrants, which are 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. The estimated fair value of the stock purchase warrants, calculate
using the Black-Scholes model, has been recorded as deferred financing fees and
is being amortized over the term of the debt.

(4) DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE

     In August 2001, the Company formalized the decision to offer for sale its
voice print business unit, which includes the SpeakEZ speaker verification
products. Accordingly, related operating results have been reported as
discontinued operations. On September 27, 2001, the Company entered into a
definitive agreement to sell substantially all of the assets of the business
unit for approximately $3.0 million in cash at closing plus certain other
considerations. This transaction is expected to close during the fourth quarter
of 2001.

     For purposes of the balance sheet presentation, the current assets and
liabilities of discontinued operations have been netted. The financial
information for the discontinued voice print operations is as follows.

<Table>
<Caption>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  2001            2000
                                                              -------------   ------------
<S>                                                           <C>             <C>
Net current assets..........................................     $   18          $   86
Net property, plant and equipment...........................        131             171
Other assets................................................      1,100           1,606
                                                                 ------          ------
     Net assets of discontinued operations..................     $1,249          $1,863
                                                                 ======          ======
</Table>

<Table>
<Caption>
                                              THREE MONTHS ENDED       NINE MONTHS ENDED
                                                 SEPTEMBER 30,           SEPTEMBER 30,
                                              -------------------     -------------------
                                               2001        2000        2001        2000
                                              -------     -------     -------     -------
<S>                                           <C>         <C>         <C>         <C>
Revenue.....................................   $   4       $  10      $    31     $   111
Operating income (loss).....................    (580)       (444)      (1,950)     (1,372)
Net income (loss)...........................    (580)       (444)      (1,950)     (1,372)
</Table>

(5) SEGMENT INFORMATION -- CONTINUING OPERATIONS

     The Company has two reportable segments: the Corrections and the Internet
Services Divisions. In September 2001, the Company entered into a definitive
agreement to sell substantially all of the assets of the SpeakEZ speaker
verification business segment. Discontinued operations in the consolidated
financial

                                        10
<PAGE>
                         T-NETIX, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
                                  (UNAUDITED)

(5) SEGMENT INFORMATION -- CONTINUING OPERATIONS -- (CONTINUED)

statements reflect the results of operations of this business unit. Segment
reporting has been conformed to correspond to the current presentation.

     The Company evaluates performance based on earnings (loss) before income
taxes. Additional measures include operating income, depreciation and
amortization, and interest expense. There are no intersegment sales. The
Company's reportable segments are specific business units that offer different
products and services. They are managed separately because each business
requires different technology and marketing strategies. The accounting policies
of the reportable segments are the same as those described in the summary of
significant accounting policies. Segment information for the three and nine
months ended September 30, 2001 and 2000 is as follows:

<Table>
<Caption>
                                                 THREE MONTHS ENDED    NINE MONTHS ENDED
                                                    SEPTEMBER 30,        SEPTEMBER 30,
                                                 -------------------   -----------------
                                                   2001       2000      2001      2000
                                                 --------   --------   -------   -------
<S>                                              <C>        <C>        <C>       <C>
REVENUE FROM EXTERNAL CUSTOMERS:
  Corrections Division.........................  $24,034    $21,910    $70,121   $59,586
  Internet Services Division...................    7,377      5,514     22,121    15,690
                                                 -------    -------    -------   -------
                                                 $31,411    $27,424    $92,242   $75,276
                                                 =======    =======    =======   =======
RESEARCH AND DEVELOPMENT:
  Corrections Division.........................  $ 1,111    $ 1,096    $ 3,958   $ 3,543
  Internet Services Division...................       --         --         --        --
                                                 -------    -------    -------   -------
                                                 $ 1,111    $ 1,096    $ 3,958   $ 3,543
                                                 =======    =======    =======   =======
DEPRECIATION AND AMORTIZATION:
  Corrections Division.........................  $ 3,138    $ 2,902    $ 9,240   $ 8,601
  Internet Services Division...................       --         --         --        --
                                                 -------    -------    -------   -------
                                                 $ 3,138    $ 2,902    $ 9,240   $ 8,601
                                                 =======    =======    =======   =======
OPERATING INCOME (LOSS):
  Corrections Division.........................  $ 1,632    $ 1,318    $ 1,376   $  (886)
  Internet Services Division...................    1,805      1,414      6,771     3,224
                                                 -------    -------    -------   -------
                                                 $ 3,437    $ 2,732    $ 8,147   $ 2,338
                                                 =======    =======    =======   =======
INTEREST AND OTHER EXPENSE, NET:
  Corrections Division.........................  $   590    $   734    $ 1,965   $ 1,761
  Internet Services Division...................       --         --         --        --
                                                 -------    -------    -------   -------
                                                 $   590    $   734    $ 1,965   $ 1,761
                                                 =======    =======    =======   =======
SEGMENT EARNINGS (LOSS) FROM CONTINUING
  OPERATIONS BEFORE INCOME TAXES:
  Corrections Division.........................  $ 1,041    $   584    $   389   $(2,647)
  Internet Services Division...................    1,806      1,414      6,771     3,224
                                                 -------    -------    -------   -------
                                                 $ 2,847    $ 1,998    $ 6,182   $   577
                                                 =======    =======    =======   =======
</Table>

                                        11
<PAGE>
                         T-NETIX, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
                                  (UNAUDITED)

(5) SEGMENT INFORMATION -- CONTINUING OPERATIONS -- (CONTINUED)


<Table>
<Caption>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  2001            2000
                                                              -------------   ------------
<S>                                                           <C>             <C>
SEGMENT ASSETS:
  Corrections Division......................................     $73,871        $69,629
  Internet Services Division................................          --             --
                                                                 -------        -------
                                                                 $73,871        $69,629
                                                                 =======        =======
</Table>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

     The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this Form 10-Q includes forward-looking statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, but are not limited to, those
listed under the caption "Risk Factors" in the Company's Form 10-K for the year
ended December 31, 2000, 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 to win new contracts for our products and services, the
ability of our existing customers, including AT&T, to maintain their market
share of the inmate calling market, our ability to penetrate the market for jail
management systems, the effect of economic conditions, the effect of regulation,
including the Telecommunications Act of 1996, that could affect our sales or
pricing, the impact of competitive products and pricing particularly in the our
Corrections Division, our continuing ability to develop hardware and software
products, commercialization and technological difficulties, manufacturing
capacity and product supply constraints or difficulties, actual purchases by
current and prospective customers under existing and expected agreements, and
the results of financing efforts, along with the other risks detailed therein.

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

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

                                        12
<PAGE>

OVERVIEW

  Corrections Division

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

     Telecommunications services revenue is generated under long-term contracts.
Historically, pricing has been provided by transaction fees paid on a per-call
basis. We are paid a prescribed fee for each call completed and additional fees
for validating phone numbers dialed by inmates. The per-call charge is primarily
for the provisioning of specialized call processing services to
telecommunications service providers for their customers, the correctional
facilities. However, during the last year we entered into agreements and
contract amendments with three customers to record revenue as a percentage of
gross revenue earned by the customer, subject to certain adjustments. This new
pricing was an effort by us to have our pricing remain flexible and not be
affected by factors that effected call volumes. Pursuant to these amendments, we
also recognized certain telecommunications expenses that were previously
reimbursable charges to these customers. Our telecommunications service provider
customers include AT&T, Verizon (formerly Bell Atlantic and GTE), Qwest
(formerly US WEST), and SBC Communications (including Ameritech).

     As a direct inmate call provider, we buy "wholesale" call services to be
re-sold as collect calls. We use the services of third parties to bill the
collect calls. We then enter into direct contracts with the correctional
facilities and generally pay the correctional facilities commissions on the
gross billed revenue. The rates charged by us are consistent with the collect
call rates charged by the incumbent local exchange carrier or "ILEC" in the same
service area and the predominant interexchange carrier or "IXC". Since all calls
originating from the inmate phones are collect calls, each phone generates
higher-than-industry-average revenues. The uncertainty of the creditworthiness
of the billed parties results however in a higher-than-industry-average
uncollectible cost.

     Equipment sales and other revenues include the sales of our inmate calling
system and digital recording systems. Sales of inmate calling systems are
generally made to a limited number of telecommunication service provider
customers. Subsequent to the sale of the equipment, we then charge monthly
maintenance fees to keep the system operational. Sales to these customers can
vary depending upon the success of these customers winning contracts with
correctional facilities.

  Internet Services Division

     In December 1999, we entered into a master service agreement with US WEST
!NTERPRISE (now named Qwest America, Inc.) (The "Qwest Agreement") to provide
interLATA Internet services to Qwest customers. The Qwest Agreement, which
commenced December 1, 1999, called for us to buy, resell and process billing of
Internet bandwidth to these customers. The initial term of the Qwest Agreement
was for a minimum of sixteen months until March 2001. Although the Qwest
Agreement expired on March 2001, we continued providing services under the
agreement through October 2001. Effective November 2001, services under this
agreement have ceased.

     Factors affecting margin include a negotiated base management fee and
contract incentive payments based on cost savings. The costs associated with
this contract are primarily the costs for Internet bandwidth. There were no
capital outlays required to begin provisioning these services.

  Speaker Verification Division

     Our voice print revenue has been minimal to date and management has been
seeking strategic alternatives including the sale of this division. Pursuant to
this strategy, we entered into a definitive agreement on September 27, 2001 to
sell substantially all of the assets of this business unit for approximately
$3.0 million in cash at closing plus certain other considerations. Discontinued
operations in the consolidated financial statements reflect the result of
operations of the speaker verification business. In addition, we have
reclassified
                                        13
<PAGE>

and netted all of the speaker verification assets and their related liabilities
to "Net assets of discontinued operations" on the balance sheet.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO
SEPTEMBER 30, 2000

     The following table sets forth certain statement of operations data as a
percentage of total revenue for the three months ended September 30, 2001 and
2000.

<Table>
<Caption>
                                                              2001   2000
                                                              ----   ----
<S>                                                           <C>    <C>
Revenue:
  Telecommunications services...............................   49%    53%
  Direct call provisioning..................................   22     25
  Internet services.........................................   23     20
  Equipment sales and other.................................    6      2
                                                              ---    ---
          Total revenue.....................................  100    100
Expenses:
  Operating costs...........................................   55     57
  Selling, general and administrative.......................   20     18
  Research and development..................................    4      4
  Depreciation and amortization.............................   10     11
                                                              ---    ---
          Operating income..................................   11     10
  Interest and other expense................................   (2)    (3)
                                                              ---    ---
          Income from continuing operations before income
           taxes............................................    9      7
  Income tax (expense) benefit..............................   --     --
                                                              ---    ---
          Net income from continuing operations.............    9      7
  Discontinued operations...................................   (2)    (1)
  Accretion of discount on redeemable convertible preferred
     stock..................................................   --     (2)
                                                              ---    ---
          Net income applicable to common stock.............    7%     4%
                                                              ===    ===
</Table>

     Total Revenue.  Total revenue for the three months ended September 30, 2001
was $31.4 million, an increase of 15% over $27.4 million for the corresponding
prior period. This $4.0 million increase was attributable to increases in
telecommunications services revenue of $0.9 million, Internet services revenue
of $1.9 million and equipment and other sales of $1.2 million.

     The 6% increase in telecommunications services revenue to $15.5 million in
the three months ended September 30, 2001, from $14.6 million for the
corresponding prior period, was primarily due to an increase in contract
pricing. We increased our per call transaction fee with a major customer, and
changed our pricing with three other major customers whereby revenue is now
calculated as a percentage of our customer's gross revenue versus a transaction
fee per call.

     Direct call provisioning revenue was $6.8 million for the three months
ended September 30, 2001 and 2000 respectively. There was no change in direct
provisioning revenue as additions of new sites were offset by the loss of other
sites.

     The Internet services revenue increased by 34% to $7.4 million for the
three months ended September 30, 2001 from $5.5 million for the corresponding
period. This increase was the result of an increase in the base of Internet
services subscribers. Although the Qwest Agreement expired on March 31, 2001, we
continued providing services under the agreement through October 2001. Effective
November 2001, all operations of this segment have ceased. The termination of
these services may have an adverse impact on our operating results.

     Equipment sales and other revenue increased 262% to $1.7 million for the
three months ended September 30, 2001 from $0.5 million in the corresponding
prior period. This increase was primarily attributable to the acquisition of
Telequip Labs, Inc., a telecommunication service provider, in January 2001.

                                        14
<PAGE>

Equipment sales and services were primarily associated with one
telecommunications service provider customer and are dependent upon the timing
of installations for this customer and the customer's success rate in its
territory.

     Operating costs.  Total operating costs were $17.4 million in the three
months ended September 30, 2001, an increase of 11% from $15.7 million in the
corresponding prior period. This $1.7 million increase was primarily due to
increases in direct call provisioning of $0.4 million, Internet services of $1.5
million and cost of equipment sold of $0.4 million, offset partially by a
reduction in telecommunication services expenses of $0.6 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 expense. Operating costs of telecommunications services also
includes costs associated with call verification procedures, primarily network
expenses and database access charges. Operating costs associated with direct
call provisioning includes the costs associated with telephone line access, long
distance charges, commissions paid to correctional facilities, costs associated
with uncollectible accounts and billing charges. Internet services expense
consists of Internet bandwidth costs. Cost of equipment sold and other primarily
includes the purchase price of equipment, which is then resold. Other equipment
cost components are minimal.

     The following table sets forth the operating costs and expenses for each
type of revenue as a percentage of corresponding revenue for the three months
ended September 30, 2001 and 2000.

<Table>
<Caption>
                                                              2001   2000
                                                              ----   ----
<S>                                                           <C>    <C>
Operating costs:
  Telecommunications services...............................   31%    37%
  Direct call provisioning..................................   96     89
  Internet services.........................................   76     74
  Cost of equipment sold and other..........................   27     22
</Table>

     Operating costs associated with providing telecommunications services, as a
percentage of corresponding revenue, was 31% for the three months ended
September 30, 2001, a decrease from 37% for the corresponding prior period. The
decrease was due to revenue increases and a decrease in telecommunications
services expenses for the comparative periods. Total telecommunications services
operating expenses were $4.8 million for the three months ended September 30,
2001 and $5.4 million for the corresponding prior period. The decrease in 2001
is primarily due to a decrease in consulting fees, contract labor costs and
lower travel expenses.

     Direct call provisioning costs as a percentage of applicable revenue
increased to 96% of revenue for the three months ended September 30, 2001, from
89% for the corresponding prior period. This increase was primarily due to
increases in bad debt expenses.

     Operating costs as a percentage of revenue for Internet services increased
to 76% of revenue for the three months ended September 30, 2001, compared to 74%
for the corresponding prior period. This increase is the result of the migration
of Internet service subscribers due to the termination of the Qwest Agreement,
partially offset by our ability to obtain better pricing from our transport
providers.

     The cost of equipment sold and other increased to 27%, as a percentage of
corresponding revenue, during the three months ended September 30, 2001 from 22%
for the corresponding prior period. This increase was primarily due to the
change in the revenue mix from equipment and other sales resulting from the
acquisition of Telequip Labs, Inc. in January 2001.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses were $6.4 million for the three months ended September
30, 2001 compared to $5.0 million for the corresponding prior period. This
increase was primarily due to increased personnel costs, including the impact of
adding new

                                        15
<PAGE>

personnel related to the acquisition of Telequip Labs, Inc. on January 9, 2001.
Other increases included professional fees and communication expenses.

     Research and Development Expenses.  Research and development expenses were
$1.1 million in the three months ended September 30, 2001 and 2000,
respectively.

     Depreciation and Amortization Expenses.  Depreciation and amortization
expenses were $3.1 million for the three months ended September 30, 2001,
compared to $2.9 million for the corresponding prior period. The increase was
due primarily to the depreciation associated with new site installations and
additional equipment purchased for internal operations.

     Interest and Other Expense, Net.  Interest and other expense, net was $.6
million for the three months ended September 30, 2001, compared to $.7 million
for the corresponding prior period. The decrease in 2001 was attributable to a
decrease in the average amount of outstanding indebtedness.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO
SEPTEMBER 30, 2000

     The following table sets forth certain statement of operations data as a
percentage of total revenue for the nine months ended September 30, 2001 and
2000.

<Table>
<Caption>
                                                              2001   2000
                                                              ----   ----
<S>                                                           <C>    <C>
Revenue:
  Telecommunications services...............................   51%    49%
  Direct call provisioning..................................   21     28
  Internet services.........................................   24     21
  Equipment sales and other.................................    4      2
                                                              ---    ---
          Total revenue.....................................  100    100
Expenses:
  Operating costs...........................................   57     63
  Selling, general and administrative.......................   20     18
  Research and development..................................    4      5
  Depreciation and amortization.............................   10     11
                                                              ---    ---
          Operating income..................................    9      3
  Interest and other expense................................   (2)    (2)
                                                              ---    ---
          Income (loss) from continuing operations before
           income taxes.....................................    7      1
  Income tax expense........................................   --     --
                                                              ---    ---
          Net income (loss) from continuing operations......    7      1
  Loss from discontinued operations.........................   (2)    (2)
  Accretion of discount on redeemable convertible preferred
     stock..................................................   --     (1)
  Charge for conversion of redeemable convertible preferred
     stock..................................................   (2)    --
                                                              ---    ---
          Net income (loss) applicable to common stock......    3%    (2)%
                                                              ===    ===
</Table>

     Total Revenue.  Total revenue for the nine months ended September 30, 2000
was $92.2 million, an increase of 23% over $75.3 million for the corresponding
prior period. This increase was attributable to increases in telecommunications
services of $10.0 million, Internet services of $6.4 million and equipment sales
and other of $2.0 million, offset in part by a decrease of $1.5 million in
direct provisioning.

     The 27% increase in telecommunications services revenue to $46.7 million in
the nine months ended September 30, 2001 from $36.7 million for the
corresponding prior period, was primarily due to an increase in contract
pricing. We increased our per call transaction fee with a major customer and
changed our pricing with three other major customers whereby revenue is now
calculated as a percentage of our customer's gross revenue versus a transaction
fee per call. In addition we experienced an increase in revenue due to increased
call volume, primarily due to the addition of new sites.

                                        16
<PAGE>

     Direct call provisioning revenue decreased 7% to $19.8 million for the nine
months ended September 30, 2001 from $21.3 million in the corresponding prior
period. This decrease was primarily due to the loss of sites for which we are
provisioning the long distance service. The loss of sites is the result of
unsuccessful competitive bidding for direct contracts with correctional
institutions.

     The Internet services revenue increased by $6.4 million to $22.1 million
for the nine months ended September 30, 2001, from $15.7 million in the
corresponding prior period. This represented an increase of 41% and was the
result of an increase in the base of Internet services subscribers. Although the
Qwest agreement expired on March 31, 2001, we continued providing services under
this agreement through October 2001. Effective November 2001, all operations of
this segment have ceased.

     Equipment sales and other revenue increased 126% to $3.6 million for the
nine months ended September 30, 2001 from $1.6 million in the corresponding
prior period. This increase was largely attributable to the acquisition of
Telequip Labs, Inc., a telecommunication service provider, in January 2001. Such
sales of equipment and services are primarily associated with a limited number
of telecommunication service providers and are dependent upon the timing of
sales and installations for these customers.

     Operating costs.  Total operating costs were $52.1 million in the nine
months ended September 30, 2001, an increase of 9% from $47.7 million in the
corresponding prior period. The increases were primarily due to an increase in
telecommunication services of $1.7 million, Internet services of $2.9 million,
and cost of equipment sold and other expenses of $0.9 million, partially offset
by a reduction in direct call provisioning expenses of $1.1 million.

     Operating costs of telecommunications services primarily consists of
service administration costs for correctional facilities, including salaries and
related personnel expenses, communication costs and inmate calling systems
repair and maintenance expense. Operating costs of telecommunications services
also includes costs associated with call verification 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. Internet
services operating expense consists of purchased Internet bandwidth costs. Cost
of equipment sold and other primarily includes the purchase price of equipment,
which is then resold. Other equipment cost components are minimal.

     The following table sets forth the operating costs and expenses for each
type of revenue as a percentage of corresponding revenue for the nine months
ended September 30, 2001 and 2000.

<Table>
<Caption>
                                                              2001   2000
                                                              ----   ----
<S>                                                           <C>    <C>
Operating costs:
  Telecommunications services...............................   36%    42%
  Direct call provisioning..................................   92     91
  Internet services.........................................   69     79
  Cost of equipment sold and other..........................   44     41
</Table>

     Operating costs associated with providing telecommunications services, as a
percentage of corresponding revenue was 36% for the nine months ended September
30, 2001, a decrease from 42% for the comparable prior period. Total
telecommunications services operating costs were $17.0 million for the nine
months ended September 30, 2001 and $15.3 million for the corresponding prior
period. The increase in 2001 is due to new services being provisioned for
significant customers as part of contract amendments, increases in personnel
costs, communications expenses and repairs and maintenance.

     Direct call provisioning costs as a percentage of applicable revenue
increased to 92% of revenue for the nine months ended September 30, 2001 from
91% for the corresponding prior period. This increase was primarily due to a
higher bad debt expense as a percentage of total revenue.

     Internet Services costs increased to $15.4 million for the period ended
September 30, 2001 compared to $12.5 million for the corresponding prior period,
although costs as a percentage of applicable revenue

                                        17
<PAGE>

decreased to 69% of revenue for the nine months ended September 30, 2001 from
79% for the corresponding prior period. The increase in costs is due to
increased line costs as a result of more subscribers. The percentage decrease
was primarily the result of obtaining lower pricing from transport providers.

     Cost of equipment sold and other increased to $1.6 million in the nine
months ended September 30, 2001, compared to $.7 million for the corresponding
prior period. As a percentage of revenue, the cost of equipment sold and other
also increased to 44% of revenue from 41% for the comparable 2000 period
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 $18.8 million for the nine months ended September
30, 2001 compared to $13.1 million for the corresponding prior period. This $5.7
million increase was primarily due to increases in personnel costs, contract
labor, travel, communications and legal expenses.

     Research and Development Expenses.  Research and development expenses were
$4.0 million in the nine months ended September 30, 2001 compared to $3.5
million for the corresponding prior period. The increase was primarily due to
the acquisition of Telequip Labs, Inc. in January 2001.

     Depreciation and Amortization Expenses.  Depreciation and amortization
expense was $9.2 million in the nine months ended September 30, 2001, an
increase from $8.6 million for the corresponding prior period. The increase was
due primarily to the depreciation associated with new site installations.

     Interest and Other Expense, Net.  Interest and other expense, net was $2.0
million for the nine months ended September 30, 2001, an increase from $1.8
million for the corresponding prior period. Included in other income in the nine
months ended September 30, 2000 is a gain of approximately $0.3 million on the
sale of used telecommunications equipment. Interest expense was $2.0 million for
the nine months ended September 30, 2001 and $2.1 million for the corresponding
prior period. The decrease in 2001 was attributable to a decrease in the average
amount of indebtedness outstanding offset by a slight increase in interest
rates. The average debt balance decreased primarily due to the pay down of debt
as the result of improved operating results.

LIQUIDITY AND CAPITAL RESOURCES

  Cash Flows

     We have historically relied upon operating cash flow, debt financing and
the sale of equity securities to fund our operations and capital needs. Our
capital needs consist primarily of additions to property and equipment for site
telecommunication equipment, upgrades to existing systems and to fund
acquisitions.

     Cash provided by continuing operations increased to $12.1 million for the
nine months ended September 30, 2001 from $3.6 million in the corresponding
prior period. This increase was primarily the result of an improvement in net
income from continuing operations of $5.3 million combined with a $3.2 million
increase in net working capital.

     Cash used in investing activities of continuing operations was $6.3 million
for the nine months ended September 30, 2001, compared to $9.9 million in the
corresponding prior period. This decrease was primarily the result of a $6.0
million reduction in capital expenditures in 2001 from the comparable 2000
period resulting from a lower number of new calling system installations, offset
partially by the purchase of Telequip Labs, Inc. for $1.7 million and a $.4
million investment in patents during 2001.

     We anticipate that our capital expenditures in 2001 will remain below the
levels of the prior year as a result of a lower number of installed systems at
correctional facilities. We believe our cash flows from operations and our
availability under our existing credit facility will be sufficient in order for
us to meet our anticipated cash needs for new installations of inmate call
processing systems, upgrades of existing systems and to finance our operations
for at least the next six months.

     Cash used in financing activities from continuing operations consisted
primarily of net payments on the Company's credit facility of $3.9 million for
the nine months ended September 30, 2001, compared to net

                                        18
<PAGE>

borrowings during the corresponding prior period of $3.7 million related to the
subordinated debt and proceeds of $3.5 million from the issuance of redeemable
convertible preferred stock.

  Capital Resources

     In September 1999, we entered into a Senior Secured Revolving Credit
Facility ("Credit Facility") with a commercial bank. In July 2000 our lenders
amended our credit agreement to revise certain financial covenants. The maximum
available amount of credit under the credit facility available to us is
dependent upon our financial performance. Based on the financial covenants, our
maximum borrowings at December 31, 2000 were $40.0 million. In April 2001 our
lenders extended the Credit Facility maturity date to March 31, 2002. The
maximum available borrowing on the facility was reduced to $30 million
consisting of a $10 million term portion and a $20 million line of credit.
Interest was set at prime rate plus 1.25% effective March 31, 2001 increasing by
0.25% each quarter thereafter on June 30, September 30, and December 31, 2001.
In addition, per terms of the extension, monthly payments of $.2 million on the
term loan commenced on April 30, 2001.

     In April 2000, we raised $7.5 million of debt and equity financing. The net
proceeds of approximately $7.2 million were used to reduce the outstanding
balance on the Credit Facility. The Company issued 3,750 shares of series A
non-voting redeemable convertible preferred stock and five-year stock purchase
warrants to acquire 340,909 common shares for net proceeds of $3.5 million. In
November 2000, 500 shares of preferred stock were converted to 251,630 shares of
common stock at a conversion price of $2.09. In February 2001, the remaining
3,250 shares of preferred stock were converted into 1,770,179 shares of common
stock at an average conversion price of $1.95. The unamortized discount on the
preferred stock of $1.1 million was recognized as a charge to income (loss)
applicable to common stockholders.

     The Company also issued a subordinated note payable of $3.75 million, due
April 30, 2001, to a director and significant shareholder of the Company. The
note bears interest at prime rate plus one percent per annum (6.5% at September
30, 2001) which is payable every six months. The lender received warrants, which
are 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 30, 2002 at which time the lender received
additional warrants, which are 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.

     Our existing Credit Facility expires at March 31, 2002, at which time we
will need to either renew the current agreement or find a new financing source.
In the event we are unable to obtain financing, current cash flows may not be
sufficient for continued operations at present levels. There can be no assurance
that such financing will be available or, if available, will be obtainable on
acceptable terms.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     We are exposed to interest rate risk as discussed below.

  Interest Rate Risk

     We have current debt outstanding under the credit facility of $23.9 million
at September 30, 2001. Under the terms of the debt agreement the maximum credit
available at September 30, 2001 is $29.0 million. The loan bears interest at
prime rate plus 1.75% (7.75% at September 30, 2001) with a scheduled increase of
an additional .25% on December 31, 2001. Interest is payable monthly. Since the
interest rate on the loan outstanding is variable and is reset periodically, we
are exposed to interest risk. An increase in interest rates of 1% would increase
estimated annual interest expense by approximately $.2 million based on the
amount of borrowings outstanding under the credit facility at September 30,
2001.

                                        19
<PAGE>

                                    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.

     Gateway Technologies, Inc., a wholly owned subsidiary of the Company, 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 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.

     In February 2001 a case styled Mildred Fair, et al vs. Sprint Payphone
Services, et al. was filed by four relatives of inmates of an unnamed South
Carolina correctional institution alleging, state antitrust and unfair trade
practices violations. Defendants, in addition to T-NETIX, included AT&T,
BellSouth, GTE, Sprint United, Rock Hill Telephone Company, the South Carolina
Department of Corrections and the State of South Carolina. The plaintiffs from
this litigation have recently voluntarily dismissed T-NETIX.

     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 is in the
very early stages.

     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 corrections industry. Defendants
received an extension of time to file an answer and have not yet answered.

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

                                        20
<PAGE>

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

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

     None.

ITEM 5. OTHER INFORMATION

     None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     None

                                        21
<PAGE>

                                   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.
                                            (Registrant)

                                            By:    /s/ THOMAS E. LARKIN
                                              ----------------------------------
                                                       Thomas E. Larkin
                                                   Chief Executive Officer

Date November 14, 2001

                                            By: /s/ HENRY G. SCHOPFER, III
                                              ----------------------------------
                                                    Henry G. Schopfer, III
                                                   Chief Financial Officer

Date November 14, 2001

                                        22