SCC COMMUNICATIONS CORP, 10-Q, 2000-08-14

SCC COMMUNICATIONS CORP
10-Q, 2000-08-14
COMPUTER PROCESSING & DATA PREPARATION

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<PAGE>

================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER: 000-29678

SCC COMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 84-0796285
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)

6285 LOOKOUT ROAD 80301
BOULDER, COLORADO
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (303) 581-5600

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

As of July 31, 2000, there were 11,271,237 shares of the Registrant's
Common Stock outstanding.

================================================================================
<PAGE>

INDEX

<TABLE>
PART 1 - FINANCIAL INFORMATION

<S> <C>
Item 1 - Financial Statements
Balance Sheets as of June 30, 2000 and December 31, 1999 (Unaudited)....................... 2
Statements of Operations for the three months ended June 30, 2000 and 1999 and the
six months ended June 30, 2000 and 1999 (Unaudited)....................................... 4
Statements of Cash Flows for the six months ended June 30, 2000 and 1999
(Unaudited)................................................................................ 5
Notes to Financial Statements (Unaudited).................................................. 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................. 9
Item 2A - Factors That May Affect Future Results............................................ 16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk......................... 23

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings.................................................................. 24
Item 2 - Changes in Securities and Use of Proceeds.......................................... 24
Item 3 - Defaults on Senior Securities...................................................... 24
Item 4 - Submission of Matters to a Vote of Security Holders................................ 24
Item 5 - Other Information.................................................................. 25
Item 6 - Exhibits and Reports on Form 8-K................................................... 25
Signatures.................................................................................. 26
</TABLE>
<PAGE>

SCC COMMUNICATIONS CORP.

BALANCE SHEETS
(dollars in thousands)

June 30, December 31,
2000 1999
----------- -----------
(Unaudited)

<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 9,444 $ 8,354
Short-term investments................................................... 7,958 12,165
Accounts receivable, net of allowance for doubtful accounts of
approximately $58 in 2000 and 1999...................................... 4,254 2,255
Unbilled revenue......................................................... 1,439 846
Prepaids and other....................................................... 1,589 548
Deferred income taxes -- current portion................................. 653 653
-------- --------
Total current assets................................................... 25,337 24,821
-------- --------

PROPERTY AND EQUIPMENT, at cost:
Computer hardware and equipment.......................................... 27,127 25,411
Furniture and fixtures................................................... 1,039 933
Leasehold improvements................................................... 958 915
-------- --------
29,124 27,259
Less -- Accumulated depreciation......................................... (18,157) (15,753)
-------- --------
Total property and equipment........................................... 10,967 11,506
-------- --------

OTHER ASSETS.............................................................. 62 86
LONG-TERM INVESTMENTS..................................................... 995 993

DEFERRED INCOME TAXES -- NONCURRENT....................................... 3,423 3,423

SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization of $717 and
$575 in 2000 and 1999, respectively...................................... 1,028 951
-------- --------
$ 41,812 $ 41,780
======== ========
</TABLE>

The accompanying notes to financial statements are an integral part of these
balance sheets.

2
<PAGE>

SCC COMMUNICATIONS CORP.

BALANCE SHEETS
(dollars in thousands)

June 30, December 31,
2000 1999
---------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable........................................................................ $ 1,215 $ 752
Payroll-related accruals................................................................ 904 786
Other accrued liabilities............................................................... 1,582 1,641
Property and other tax liabilities...................................................... 874 792
Current portion of capital lease obligations............................................ 2,242 1,971
Deferred contract revenue............................................................... 1,546 865
-------- --------
Total current liabilities....................................................... 8,363 6,807

LONG-TERM DEBT:
Capital lease obligations, net of current portion....................................... 1,876 2,038
-------- --------
Total liabilities............................................................... 10,239 8,845
-------- --------

STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 15,000,000 shares authorized; none issued or
outstanding............................................................................ -- --

Common stock, $.001 par value; 30,000,000 shares authorized; 11,250,921 and
11,104,111 shares issued in 2000 and 1999, respectively................................ 11 11
Additional paid-in capital.............................................................. 44,347 43,925
Common stock warrants................................................................... 373 --
Stock subscriptions receivable.......................................................... (33) (33)
Accumulated deficit..................................................................... (13,125) (10,968)
-------- --------
Total stockholders' equity...................................................... 31,573 32,935
-------- --------
$ 41,812 $ 41,780
======== ========
</TABLE>

The accompanying notes to financial statements are an integral part of these
balance sheets.

3
<PAGE>

SCC COMMUNICATIONS CORP.

STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
Unaudited

<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
ILEC Business Unit.............................................. $ 7,111 $ 6,806 $ 13,769 $ 13,370
CLEC Business Unit.............................................. 1,710 891 3,409 1,489
Wireless Business Unit.......................................... 1,034 392 1,715 846
Direct Business Unit............................................ 701 100 988 100
----------- ----------- ---------- ------------
Total revenue............................................ 10,556 8,189 19,881 15,805
COSTS AND EXPENSES:
ILEC Business Unit.............................................. 3,964 3,768 7,841 7,373
CLEC Business Unit.............................................. 538 472 1,097 880
Wireless Business Unit.......................................... 1,186 1,148 2,235 2,084
Direct Business Unit............................................ 1,587 402 2,529 762
Sales and marketing............................................. 2,105 1,421 3,457 2,701
General and administrative...................................... 1,956 1,158 3,499 2,361
Research and development........................................ 1,177 433 1,806 848
----------- ----------- ----------- ------------
Total costs and expenses................................. 12,513 8,802 22,464 17,009
----------- ----------- ----------- ------------
LOSS FROM OPERATIONS.............................................. (1,957) (613) (2,583) (1,204)
OTHER INCOME (EXPENSE):
Interest and other income....................................... 315 262 618 535
Interest and other expense...................................... (100) (146) (192) (261)
----------- ----------- ----------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES............... (1,742) (497) (2,157) (930)
INCOME TAX BENEFIT................................................ -- 178 -- 354
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS................................... -- (319) -- (576)
LOSS FROM OPERATIONS OF DISCONTINUED DIVISION, net of tax......... -- (15) -- (124)
----------- ----------- ----------- -----------
NET LOSS.......................................................... $ (1,742) $ (334) $ (2,157) $ (700)
=========== =========== =========== ===========

NET LOSS PER SHARE (Note 2):
Basic and diluted............................................... $ (0.16) $ (0.03) $ (0.19) $ (0.06)
=========== =========== =========== ===========

SHARES USED IN COMPUTING NET LOSS PER SHARE (Note 2):
Basic and diluted............................................... 11,202,361 10,951,832 11,176,482 10,921,227
=========== =========== =========== ===========
</TABLE>

The accompanying notes to financial statements are an
integral part of these statements.

4
<PAGE>

SCC COMMUNICATIONS CORP.

STATEMENTS OF CASH FLOWS
(dollars in thousands)
Unaudited

<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................................. $(2,157) $ (700)
Adjustments to reconcile net loss to net cash provided by
Operating activities --
Amortization and depreciation........................................................... 2,562 2,516
Accretion of and interest accrued on investments........................................ (151) (177)
Loss on disposal of assets.............................................................. 6 36
Deferred income tax benefit............................................................. -- (430)
Provision for doubtful accounts......................................................... -- 50
Change in --
Accounts receivable................................................................... (1,999) 1,910
Unbilled revenue...................................................................... (593) (11)
Prepaids and other.................................................................... (644) (322)
Accounts payable...................................................................... 463 (252)
Accrued liabilities................................................................... 141 (612)
Deferred contract revenue............................................................. 681 (1,114)
------- -------
Net cash provided by (used in) operating activities................................. (1,691) 894
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................................................... (1,875) (1,141)
Purchase of investments................................................................... (5,894) (5,261)
Sale of investments....................................................................... 10,250 --
Software development costs................................................................ (220) (328)
------- -------
Net cash provided by (used in) investing activities................................. 2,261 (6,730)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations........................................... (1,021) (956)
Proceeds from equipment lease............................................................. 1,119 --
Exercise of stock options................................................................. 350 255
Proceeds received from employee stock purchase plan....................................... 72 88
Payments received from stock subscriptions................................................ -- 22
------- -------
Net cash provided by (used in) financing activities................................. 520 (591)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................ 1,090 (6,427)
CASH AND CASH EQUIVALENTS, beginning of period.............................................. 8,354 10,266
------- -------
CASH AND CASH EQUIVALENTS, end of period.................................................... $ 9,444 $ 3,839
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................................................. $ 149 $ 228
======= =======
Cash paid during the period for taxes..................................................... $ 160 $ 211
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Property acquired with capital leases..................................................... $ 11 $ 856
======= =======
Issuance of stock warrants................................................................ $ 373 $ --
======= =======
</TABLE>

The accompanying notes to financial statements are an integral
part of these statements.

5
<PAGE>

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The unaudited financial statements included herein reflect all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to fairly present the Company's financial position,
results of operations and cash flows for the periods presented. Certain
information and footnote disclosures normally included in audited financial
information prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. The results of operations for the period
ended June 30, 2000 are not necessarily indicative of the results to be expected
for any subsequent quarter or for the entire fiscal year ending December 31,
2000. These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1999,
which are included in the Company's Annual Report on Form 10-K.

NOTE 2 - EARNINGS PER SHARE

"Basic income (loss) per share" is determined by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during each period. "Diluted income (loss) per share" includes the
effects of potentially issuable common stock, but only if dilutive (i.e., a loss
per share is never reduced). The treasury stock method, using the average price
of the Company's common stock for the period, is applied to determine dilution
from options and warrants. The if-converted method is used for convertible
securities. Potentially dilutive common stock options and warrants that were
excluded from the calculation of diluted income per share because their effect
is antidilutive totaled 861,213 and 1,072,924 for the three months ended June
30, 2000 and 1999, respectively, and 824,380 and 1,132,317 for the six months
ended June 30, 2000 and 1999, respectively.

NOTE 3 - WARRANTS

During the second quarter, the Company issued a warrant to purchase 100,000
shares of the Company's common stock to an investor relations consulting firm
for services to be provided over one year. The Company recorded the fair value
of the warrant, totaling $273,000, as a prepaid expense which will be amortized
over the one-year service period on a straight-line basis.

The Company also issued a warrant to purchase 36,590 shares of the Company's
common stock to a marketing firm for services to be provided in the future. The
Company recorded the fair value of the warrant, totaling $100,000, as a prepaid
expense which will be expensed as services are provided.

NOTE 4 - REPORTABLE SEGMENTS

The Company has five reportable segments, or "business units": Incumbent Local
Exchange Carrier ("ILEC"), Competitive Local Exchange Carrier ("CLEC"),
Wireless, Direct, and Corporate. The Company measures its reportable business
units based on revenue and costs directly related to each business unit.
Substantially all of the Company's customers are in the United States. The
Company's business units are segmented based on the type of customer each
business unit serves. The ILEC, CLEC and Wireless business units address ILEC,
CLEC and wireless carriers, respectively. The Direct business unit addresses
sales, either directly or indirectly, to state and local government entities.
The Corporate business unit captures costs that are not directly related to a
specific Business Unit. These segments are managed separately because the nature
of and resources used for each segment is unique.

Revenue and costs are segregated in the Statement of Operations for the
reportable segments. The Company does not segregate assets between the segments
as it is impractical to do so.

6
<PAGE>

<TABLE>
<CAPTION>
For the Three Months Ending June 30:
------------- ----------------------------------------------------------------------------------
(dollars in thousands)

ILEC CLEC WIRELESS
-------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $7,111 $6,806 $1,710 $ 891 $ 1,034 $ 392

Direct costs 3,964 3,768 538 472 1,186 1,148
Sales and marketing 400 399 184 88 191 133
General and
administrative -- -- -- -- -- --
Research and
development 43 88 77 28 225 84
------ ------ ------ ----- ------- -------
Total 4,407 4,255 799 588 1,602 1,365

Operating income
(loss) 2,704 2,551 911 303 (568) (973)

Other income, net -- -- -- -- -- --
------ ------ ------ ------ ------- -------
Income (loss) before
income taxes 2,704 2,551 911 303 (568) (973)

Income tax benefit -- -- -- -- -- --
------ ------ ------ ------- ------- -------

Net income (loss)
from continuing
operations before
extraordinary item 2,704 2,551 911 303 (568) (973)

Loss from operations
of discontinued
division, net of tax -- -- -- -- -- --
------ ------ ------ ------ ------- -------

Net income (loss) $2,704 $2,551 $ 911 $ 303 ($ 568) ($ 973)
====== ====== ====== ===== ======= =======
------------------------------------------------------------------------------------------------

<CAPTION>
------------------------------------------------------------------------------------------------
DIRECT CORPORATE TOTAL
--------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 701 $ 100 $ -- $ -- $ 10,556 $8,189

Direct costs 1,587 402 -- -- 7,275 5,790
Sales and marketing 369 106 961 695 2,105 1,421
General and
administrative -- -- 1,956 1,158 1,956 1,158
Research and
development 208 233 624 -- 1,177 433
--------- ------- --------- -------- --------- -------
Total 2,164 741 3,541 1,853 12,513 8,802

Operating income
(loss) (1,463) (641) (3,541) (1,853) (1,957) (613)

Other income, net -- -- 215 116 215 116
--------- ------- --------- --------- --------- -------
Income (loss) before
income taxes (1,463) (641) (3,326) (1,737) (1,742) (497)

Income tax benefit -- -- -- 178 -- 178
--------- ------- --------- --------- -------- -------

Net income (loss)
from continuing
operations before
extraordinary item (1,463) (641) (3,326) (1,559) (1,742) (319)

Loss from operations
of discontinued
division, net of tax -- -- -- (15) -- (15)
--------- ------- --------- --------- --------- -------

Net income (loss) ($ 1,463) ($ 641) ($ 3,326) ($ 1,574) ($ 1,742) ($ 334)
========= ======= ========= ========= ========= =======
------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
For the Six Months Ending June 30:
------------------------------------------------------------------------------------------------
(dollars in thousands)
ILEC CLEC WIRELESS
--------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $13,769 $13,370 $3,409 $1,489 $ 1,715 $ 846

Direct costs 7,841 7,373 1,097 880 2,235 2,084
Sales and marketing 752 863 306 194 299 284
General and
administrative -- -- -- -- -- --
Research and
development 164 181 161 58 365 123
------- ------- ------ ------ --------- -----
Total 8,757 8,417 1,564 1,132 2,899 2,491

Operating income
(loss) 5,012 4,953 1,845 357 (1,184) (1,645)

Other income, net -- -- -- -- -- --
------- ------- ------ ------ -------- -----
Income (loss) before
income taxes 5,012 4,953 1,845 357 (1,184) (1,645)

Income tax benefit -- -- -- -- -- --
------- ------- ------ ------ -------- -----

Net income (loss)
from continuing
operations before
extraordinary item 5,012 4,953 1,845 357 (1,184) (1,645)

Loss from operations
of discontinued
division, net of tax -- -- -- -- -- --
------- ------- ------ ------ -------- -------

Net income (loss) $ 5,012 $ 4,953 $1,845 $ 357 ($ 1,184) ($1,645)
======= ======= ====== ====== ======== =======
-------------------------------------------------------------------------------------------------

<CAPTION>
--------------------------------------------------------------------------------------------------
DIRECT CORPORATE TOTAL
-----------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 988 $ 100 $ -- $ -- $ 19,881 $15,805

Direct costs 2,529 762 -- -- 13,702 11,099
Sales and marketing 682 156 1,418 1,204 3,457 2,701
General and
administrative -- -- 3,499 2,361 3,499 2,361
Research and
development 394 486 722 -- 1,806 848
--------- --------- --------- --------- --------- -------
Total 3,605 1,404 5,639 3,565 22,464 17,009

Operating income
(loss) (2,617) (1,304) (5,639) (3,565) (2,583) (1,204)

Other income, net -- -- 426 274 426 274
--------- --------- --------- --------- --------- -------
Income (loss) before
income taxes (2,617) (1,304) (5,213) (3,291) (2,157) (930)

Income tax benefit -- -- -- 354 -- 354
--------- --------- --------- --------- --------- -------

Net income (loss)
from continuing
operations before
extraordinary item (2,617) (1,304) (5,213) (2,937) (2,157) (576)

Loss from operations
of discontinued
division, net of tax -- -- -- (124) -- (124)
--------- --------- --------- --------- --------- -------

Net income (loss) ($ 2,617) ($ 1,304) ($ 5,213) ($ 3,061) ($ 2,157) ($ 700)
========= ========= ========= ========= ========= =======
--------------------------------------------------------------------------------------------------
</TABLE>

7
<PAGE>

Information for 1999 has been reclassified to reflect the realignment of various
business units. Licenses and implementation services are now included in the
ILEC Business Unit. ILEC, CLEC, Wireless and Direct were formerly included in
Data Management Services.

NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 133 and No. 137

In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value. In
June 1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - An amendment of FASB Statement No.
133." SFAS No. 137 delays the effective date of SFAS No. 133 to financial
quarters and financial years beginning after June 15, 2000. The Company does not
typically enter into arrangements that would fall under the scope of Statement
No. 133 and thus, management believes that Statement No. 133 will not
significantly affect the Company's financial condition and results of
operations.

Staff Accounting Bulletin No. 101

In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, "Revenue Recognition." SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in financial statements. The accounting impact of SAB 101 is required to be
determined no later than the Company's fourth fiscal quarter of 2000. If the
Company determines that its revenue recognition policies must change to be in
compliance with SAB 101, the implementation of SAB 101 will require the Company
to restate all of its previously reported 2000 quarterly results to reflect a
cumulative effect of change in accounting principle as if SAB 101 had been
implemented on January 1, 2000. The Company is currently reviewing SAB 101 to
determine what impact, if any, the adoption of SAB 101 will have on its
financial position and results of operations.

FASB Interpretation No. 44

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN No. 44"). FIN No. 44 clarifies the application of APB No. 25
for certain issues related to equity-based instruments issued to employees. FIN
No. 44 is effective on July 1, 2000, except for certain transactions, and will
be applied on a prospective basis. Management believes that FIN No. 44 will not
have a significant impact on the Company's results of operations and financial
position.

8
<PAGE>

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

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER
"ITEM 2A. FACTORS THAT MAY AFFECT FUTURE RESULTS" BELOW.

Overview

We are the leading provider of 9-1-1 data management services to ILECs,
CLECs and wireless carriers in the United States. We manage the data that
enables a 9-1-1 call to be routed to the appropriate public safety agency with
accurate and timely information about the caller's identification and location.
We were incorporated in July 1979 in the State of Colorado under the name
Systems Concepts of Colorado, Inc. and were reincorporated in September 1993 in
the State of Delaware under the name SCC Communications Corp. Prior to 1995,
substantially all of our revenue was derived from the sale of software licenses
and related implementation services to ILECs and public safety agencies. During
1994, we began investing in infrastructure to provide our 9-1-1 OSS solution to
telephone operating companies seeking to outsource such operations. We signed
our first 9-1-1 data management services contract in August 1994 and continue to
add to the number of records under management. We began to recognize revenue
from wireless carriers in the third quarter of 1997, and continue to increase
the number of live wireless subscribers managed. In addition, we signed a
contract with the General Services Commission of the State of Texas in November
1998, representing the first time that a state agency has endeavored to
centralize 9-1-1 OSS and data management services with a neutral third party.

Each of our Business Units provides an outsourcing solution for its
respective customer bases' 9-1-1 data management. Revenue generally includes a
non-recurring initial fee for the design and implementation of the solution,
conversion of the customer's data to our systems, hiring and training of
personnel, and other costs required to prepare for the processing of customer
data. Non-recurring fees are recognized on the percentage-of-completion method
over the period required to perform the tasks necessary to prepare for the
processing of customer data. Our contracts also separately allow for a monthly
service fee based on the number of subscriber records under management, which is
recognized in the period in which the services are rendered. Related costs are
expensed as they are incurred. We may also offer our customers enhanced products
or services, for which revenue is recognized in the period that the work is
performed. Our revenue breaks down as a percent of total revenue as follows:

<TABLE>
<CAPTION>
Three Months Six Months
------------ -----------
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
ILEC Business Unit 67% 83% 69% 85%
CLEC Business Unit 16% 11% 17% 9%
Wireless Business Unit 10% 5% 9% 5%
Direct Business Unit 7% 1% 5% 1%
</TABLE>

During the six months ended June 30, 2000 and 1999, we recognized
approximately 69% and 82%, respectively, of total revenue from Ameritech,
BellSouth Inc. and U S WEST, each of which accounted for greater than 10% of our
total revenue in such periods.

As of December 31, 1999, we had net operating loss carryforwards of $11.2
million available to offset future net income for U.S. federal income tax
purposes. Since we expect to incur losses in the near term related to
development costs for new commercial products, future taxable income may not be
sufficient to realize additional deferred tax assets that will be created by the
projected net operating losses. Consequently, we presently expect our statement
of operations will not reflect tax benefits for projected operating losses to be
incurred during 2000.

In June 1997, we sold the net assets of our Premise Products Division. The
sale of our Premise Products Division resulted in a net loss from the sale of
$2.0 million. Net loss from operations of this division, net of tax, totaled
$124,000 in the first six months of 1999, and is presented in our financial
statements as loss from operations of discontinued division. This loss resulted
from final closeout of unassigned contracts and the transition of customers to
the company that acquired this division.

9
<PAGE>

Historically, substantially all of our revenue has been generated from
sales to customers in the United States. However, we have generated revenue in
Canada and intend to enter additional international markets, which may require
significant management attention and financial resources. International sales
are subject to a variety of risks. See "Item 2A. Factors That May Affect Future
Results."

Our quarterly and annual operating results have varied significantly in the
past. The variation in operating results will likely continue and may intensify.
We believe that period to period comparisons of results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Our operating results may continue to fluctuate as a result of many
factors, including the length of the sales cycles for new or existing customers,
the size, timing or duration of significant customer contracts, fluctuations in
number of subscriber records under management, timing or duration of service
offerings, rate of adoption of wireless services by Public Safety Answering
Points, efforts expended to accelerate the introduction of certain new products,
our ability to hire, train and retain qualified personnel, increased
competition, changes in operating expenses, changes in our strategy, the
financial performance of our customers, changes in telecommunications
legislation and regulations that may affect the competitive environment for our
services, and general economic factors. Our contracts for 9-1-1 data management
services generally include a separate non-recurring fee for the design and
implementation of services, conversion of the customer's data to our systems,
hiring and training of personnel, and other costs required to prepare for the
processing of customer data, and therefore, we may recognize significantly
increased revenue for a short period of time upon commencing services for a new
customer.

Our expense levels are based in significant part on our expectations
regarding future revenue. Our revenue is difficult to forecast because the
market for our services is evolving rapidly and the length of our sales cycle,
the size and timing of significant customer contracts and license fees and the
timing of recognition of non-recurring initial fees vary substantially among
customers. Accordingly, we may be unable to adjust spending in a timely manner
to compensate for any unexpected shortfall in revenue. Any significant shortfall
could therefore have a material adverse effect on our business, financial
condition and results of operations. We expect to incur expenses of
approximately $10 million in 2000 for research, development and marketing to
expand our product offerings. As of June 30, 2000 we have invested approximately
$1.3 million. In addition, we hired additional employees in 1999 and year-to-
date 2000, and expect to continue hiring additional employees during the
remainder of 2000. We also began leasing office space in Texas in December 1999,
from which we will perform some of our operations. We cannot assure you that we
can report operating profits or that our investments in research and development
will generate future revenue. Failure to do so could have a material adverse
effect on our business, financial condition and results of operations.

We are currently reviewing the potential impact of adopting Staff
Accounting Bulletin No. 101, "Revenue Recognition." SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in our financial statements. We are required to determine the potential impact
of SAB 101 no later than fourth quarter of 2000. If we determine that our
revenue recognition policies will need to be changed to be in compliance with
SAB 101, we will be required to restate all of our previously reported 2000
quarterly results to reflect the cumulative change in accounting principle as if
SAB 101 had been implemented on January 1, 2000. See "Recently Issued Accounting
Pronouncements."

Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999

Total Company

Total revenue increased 29%, from $8.2 million in the second quarter of
1999 to $10.6 million in the second quarter of 2000. Total direct costs
increased 26%, from $5.8 million in the second quarter of 1999 to $7.3 million
in the second quarter of 2000, representing 70% and 69% of total revenue,
respectively.

ILEC Business Unit

ILEC revenue increased 4%, from $6.8 million in the second quarter of 1999
to $7.1 million in the second quarter of 2000. ILEC subscribers under management
grew to 84.4 million, an increase of 6% from June 30, 1999. The recurring
portion of ILEC revenue increased 3% from the second quarter of 1999 to the same
period in 2000. ILEC revenue increased due to an increase in the number of
records under management and non-recurring fees recognized for enhanced
services. ILEC direct costs increased 5%, from $3.8 million in the second
quarter of 1999 to $4.0 million in the second quarter of 2000, representing 55%
and 56% of ILEC revenue for such periods, respectively. Costs increased due to
the hiring of additional systems operations staff and increased systems
maintenance costs to accommodate growth. ILEC sales and marketing expenses of
$399,000 in the second quarter of 1999 are comparable to the sales and marketing
expenses of $400,000 in the second quarter of 2000, representing 6% of ILEC
revenue for both periods. ILEC research and development costs decreased 51%,
from $88,000 in the second quarter of 1999 to

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$43,000 in the second quarter of 2000, representing 1% of ILEC revenue for both
periods. ILEC research and development costs due to increased focus by the
Company's software engineering staff on projects for other business units.

CLEC Business Unit

CLEC revenue increased 92%, from $891,000 in the second quarter of 1999 to
$1.7 million in the second quarter of 2000. CLEC revenue increased due to an
increase in the number of records under management for new and existing
customers and additional non-recurring revenue recognized on new customers
signed in 2000. We now have 32 CLEC contracts, representing 4.1 million
subscribers. Approximately 87% of CLEC revenue in the second quarter of 2000 was
recurring.

CLEC direct costs increased 14%, from $472,000 in the second quarter of
1999 to $538,000 in the second quarter of 2000, representing 53% and 31% of CLEC
revenue for such periods, respectively. The dollar increase in CLEC costs is due
to the hiring of additional CLEC operations staff to assist with the continued
growth in records under management. The percent decrease in CLEC costs is due
mainly to volume efficiencies gained by the growth in records managed. CLEC
sales and marketing expenses increased 109%, from $88,000 in the second quarter
of 1999 to $184,000 in the second quarter of 2000, representing 10% and 11% of
CLEC revenue for such periods, respectively. The dollar increase in CLEC sales
and marketing expenses is due to the hiring of additional sales and marketing
personnel to accommodate the growth in the CLEC Business Unit and increased
direct marketing campaign costs. CLEC research and development costs increased
175%, from $28,000 in the second quarter of 1999 to $77,000 in the second
quarter of 2000, representing 3% and 5% of CLEC revenue for such periods,
respectively. CLEC research and development costs increased due to the
development of Local Number Portability (LNP) software applications.

Wireless Business Unit

Wireless revenue increased 164%, from $392,000 in the second quarter of
1999 to $1.0 million in the second quarter of 2000. Wireless revenue increased
due to one-time fees related to system capacity expansion to accommodate
wireless carriers and an increase in the number of records under management.
Wireless subscribers grew 94% from the first quarter of 2000 to 1.6 million.
Public safety agency requests for wireless services increased 8% from the first
quarter of 2000 to 3,530, covering approximately 18.3 million subscribers. We
signed 3 new wireless contracts in the second quarter of 2000, bringing our
total customers to 15. Our wireless customers represent approximately 33.3
million subscribers. Approximately 39% of wireless revenue in the second quarter
of 2000 was non-recurring due to heavy implementation activity.

Wireless costs increased 3%, from $1.1 million in the second quarter of
1999 to $1.2 million in the second quarter of 2000, representing 293% and 115%
of Wireless revenue for such periods, respectively. Costs increased due to the
hiring of additional systems operations staff and increased systems maintenance
and telephone line costs to accommodate growth. Wireless direct cost as a
percentage of Wireless revenue decreased as the increase in subscribers managed
grows to cover more of the infrastructure costs. Wireless sales and marketing
expenses increased 44%, from $133,000 in the second quarter of 1999 to $191,000
in the second quarter of 2000, representing 34% and 18% of Wireless revenue for
such periods, respectively. The increase in Wireless sales and marketing
expenses is due to the hiring of additional sales personnel in 2000. Wireless
research and development costs increased 168% from $84,000 in the second quarter
of 1999 to $225,000 in the second quarter of 2000, representing 21% and 22% of
Wireless revenue for such periods, respectively. Wireless research and
development costs increased due to the development of improvements to our
general wireless database application in 2000.

Direct Business Unit

Direct revenue increased from $100,000 in the second quarter of 1999 to
$701,000 in the second quarter of 2000. Direct revenue increased due to the
transition of records in the State of Texas, fees recognized for enhanced
services and recurring and non-recurring revenues related to our Emergency
Warning and Evacuation (EWE) product. Both the Texas contract and EWE were
launched in the beginning of 2000. The subscriber base in Texas increased to 5.0
million and EWE increased to 500,000. We now have five EWE customers. Based on
results to date, we believe we may have as many as 6.0 million records live in
Texas by the end of 2000. Direct costs increased from $402,000 in the second
quarter of 1999 to $1.6 million in the second quarter of 2000. Costs increased
due to the additional personnel and system infrastructure needed to implement
the State of Texas contract and to manage records that have been transitioned.
In addition, we opened an office in Texas in late 1999 to supplement our
operations. Direct sales and marketing expenses increased from $106,000 in the
second quarter of 1999 to $369,000 in the second quarter of 2000, representing
106% and 53% of Direct revenue for such periods, respectively. The increase in
sales and

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marketing costs is due to the hiring of additional sales personnel to support
the State of Texas contract and EWE. Direct research and development costs
decreased 10%, from $233,000 in the second quarter of 1999 to $208,000 in the
second quarter of 2000. Direct research and development costs decreased due to
the reduction in EWE application development after the product was launched.

Corporate Business Unit

Corporate general and administrative expenses increased 69%, from $1.2
million in the second quarter of 1999 to $2.0 million in the second quarter of
2000. Corporate general and administrative expenses increased due to the
addition of corporate legal personnel and outside legal fees to address
legislative and regulatory issues related to the Company's 9-1-1 SafteyNet
Product and other offerings, the hiring of additional human resources staff to
accommodate headcount growth in 2000, and corporate consulting costs. Corporate
sales and marketing expenses increased 38%, from $695,000 in the second quarter
of 1999 to $961,000 in the second quarter of 2000, representing 8% and 9% in
total revenue for such periods, respectively. Corporate sales and marketing
expenses increased due to national tradeshow costs, direct marketing costs
related to 9-1-1 SafetyNet, and public relations charges. Increase is partially
offset by the reallocation of certain resources from marketing-related
activities to legislative and regulatory affairs activities and the reduction in
headcount for general corporate product marketing. Corporate research and
development of $624,000 in the second quarter of 2000 represents labor and
associated travel and consulting costs related to network architecture of our 9-
1-1 SafetyNet product offering. During the second quarter of 2000, we signed our
first 9-1-1 SafetyNet customer. We currently estimate that our 9-1-1 SafetyNet
product will begin to generate revenue in the first half of 2001.

Net other income increased 85%, from $116,000 in the second quarter of 1999
to $215,000 in the second quarter of 2000, representing 1% and 2% of total
revenue for such periods, respectively. Other income increased due to interest
income earned from investments and the reduction in interest expense related to
the repayment of certain capital leases.

The benefit for income taxes decreased from $178,000 in the second quarter
of 1999 to zero in the second quarter of 2000. We expect to incur losses in the
near term related to development costs for new commercial products and future
taxable income may not be sufficient to realize additional deferred tax assets
that will be created by the projected net operating losses. Consequently, we
presently expect our statement of operations will not reflect tax benefits for
projected operating losses to be incurred during 2000.

The loss from operations of discontinued division, net of tax, for the
second quarter of 1999 of $15,000 represents the costs related to the final
closeout of unassigned contracts related to our Premise Products division, which
was sold in 1997, and the transition of customers to the company that acquired
this division.

Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999

Total Company

Total revenue increased 26%, from $15.8 million in the six months ended
June 30, 1999 to $19.9 million in the six months ended June 30, 2000. Eighty-
eight percent of revenue in the six months ended June 30, 2000 was recurring.
Total direct costs increased 23%, from $11.1 million in the six months ended
June 30, 1999 to $13.7 million in the six months ended June 30, 2000,
representing 70% and 69% of total revenue, respectively.

ILEC Business Unit

ILEC revenue increased 3%, from $13.4 million in the six months ended June
30, 1999 to $13.8 million in the six months ended June 30, 2000. The recurring
portion of ILEC revenue, approximately 95%, increased 4% in the six months ended
June 30, 1999 compared to the same period in 2000. ILEC revenue increased due to
an increase in the number of records under management, offset by a decrease in
non-recurring fees for enhanced services. ILEC direct costs increased 6%, from
$7.4 million in the six months ended June 30, 1999 to $7.8 million in the six
months ended June 30, 2000, representing 55% and 57% of ILEC revenue for such
periods, respectively. Costs increased due to the hiring of additional systems
operations staff and increased systems maintenance costs to accommodate growth.
ILEC sales and marketing expenses decreased 13%, from $863,000 in the six months
ended June 30, 1999 to $752,000 in the six months ended June 30, 2000,
representing 6% and 5% of ILEC revenue for such periods, respectively. The
decrease in sales and marketing costs is due to a reduction in product
management staff in late 1999 and early 2000. ILEC research and development
costs decreased 9%, from $181,000 in the six months ended June 30, 1999 to
$164,000 in the six months ended June 30, 2000, representing 1% of ILEC revenue
for both periods. ILEC research

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and development costs decreased due to increased focus by the Company's software
engineering staff on projects for other business units.

CLEC Business Unit

CLEC revenue increased 129%, from $1.5 million in the six months ended June
30, 1999 to $3.4 million in the six months ended June 30, 2000. CLEC revenue
increased due to an increase in the number of records under management for new
and existing customers and additional non-recurring revenue recognized on new
customers signed in 2000. CLEC direct costs increased 25%, from $880,000 in the
six months ended June 30, 1999 to $1.1 million in the six months ended June 30,
2000, representing 59% and 32% of CLEC revenue for such periods, respectively.
The dollar increase in CLEC costs is due to the hiring of additional CLEC
operations staff to assist with the continued growth in records under
management. The percent decrease in CLEC costs is due mainly to volume
efficiencies gained by the growth in records managed. CLEC sales and marketing
expenses increased 58%, from $194,000 in the six months ended June 30, 1999 to
$306,000 in the six months ended June 30, 2000, representing 13% and 9% of CLEC
revenue for such periods, respectively. The increase in CLEC sales and marketing
expenses is due to the hiring of additional sales and marketing personnel to
accommodate the growth in the CLEC Business Unit and increased direct marketing
campaign costs. CLEC research and development costs increased 178%, from $58,000
in the six months ended June 30, 1999 to $161,000 in the six months ended June
30, 2000, representing 4% and 5% of CLEC revenue for such periods, respectively.
CLEC research and development costs increased due to the development of Local
Number Portability (LNP) software applications.

Wireless Business Unit

Wireless revenue increased 103%, from $846,000 in the six months ended June
30, 1999 to $1.7 million in the six months ended June 30, 2000. Wireless revenue
increased due to an increase in the number of records under management and one-
time fees related to system capacity expansion to accommodate wireless carriers.
Wireless costs increased 7%, from $2.1 million in the six months ended June 30,
1999 to $2.2 million in the six months ended June 30, 2000. Costs increased due
to the hiring of additional systems operations staff and increased systems
maintenance and telephone line costs to accommodate growth. Wireless direct cost
as a percentage of Wireless revenue decreased as the increase in subscribers
managed grows to cover more of the infrastructure costs. Wireless sales and
marketing expenses increased 5%, from $284,000 in the six months ended June 30,
1999 to $299,000 in the six months ended June 30, 2000, representing 34% and 17%
of Wireless revenue for such periods, respectively. The increase in Wireless
sales and marketing expenses is due to the hiring of additional sales personnel
in 2000. Wireless research and development costs increased 197% from $123,000 in
the six months ended June 30, 1999 to $365,000 in the six months ended June 30,
2000, representing 15% and 21% of Wireless revenue for such periods,
respectively. Wireless research and development costs increased due to the
development of improvements to our general wireless database application in
2000.

Direct Business Unit

Direct revenue increased from $100,000 in the six months ended June 30,
1999 to $988,000 in the six months ended June 30, 2000. Direct revenue increased
due to the transition of records in the State of Texas beginning in 2000 and
delivery of the EWE product offering. Direct costs increased from $762,000 in
the six months ended June 30, 1999 to $2.5 million in the six months ended June
30, 2000. Costs increased due to the additional personnel and system
infrastructure needed to implement the State of Texas contract and to manage
records that have been transitioned. In addition, we opened an office in Texas
in late 1999 to supplement our operations. Direct sales and marketing expenses
increased from $156,000 in the six months ended June 30, 1999 to $682,000 in the
six months ended June 30, 2000, representing 156% and 69% of Direct revenue for
such periods, respectively. The increase in sales and marketing costs is due to
the hiring of additional sales personnel to support the State of Texas contract
and our EWE product. Direct research and development costs decreased 19%, from
$486,000 in the six months ended June 30, 1999 to $394,000 in the six months
ended June 30, 2000. Direct research and development costs decreased due to the
reduction in EWE application development in 2000 after the product was launched.

Corporate Business Unit

Corporate general and administrative expenses increased 48%, from $2.4
million in the six months ended June 30, 1999 to $3.5 million in the six months
ended June 30, 2000, representing 15% and 18% of total revenue for such period,
respectively. Corporate general and administrative expenses increased due to the
addition of corporate legal personnel and outside legal fees to address
legislative and regulatory issues, the hiring of additional human resources
staff to accommodate headcount growth in 2000, including growth related to 9-1-1
SafetyNet and corporate consulting costs. Corporate sales and marketing expenses
increased 18%, from $1.2 million in the six months ended

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June 30, 1999 to $1.4 million in the six months ended June 30, 2000,
representing 8% and 7% in total revenue for such periods, respectively.
Corporate sales and marketing expenses increased due to national tradeshow
costs, direct marketing related to 9-1-1 SafetyNet, and public relations
charges. Increase is partially offset by the reallocation of certain resources
from marketing-related activities to legislative and regulatory affairs
activities and the reduction in headcount for general corporate product
marketing. Corporate research and development of $722,000 in the six months
ended June 30, 2000 represents labor and associated travel and consulting costs
related to the network architecture of the 9-1-1 SafetyNet product offering.

Net other income increased 55%, from $274,000 in the six months ended June
30, 1999 to $426,000 in the six months ended June 30, 2000. Other income
increased due to interest income earned from investments and the reduction in
interest expense related to the repayment of certain capital leases.

The benefit for income taxes decreased from $354,000 in the six months
ended June 30, 1999 to zero in the six months ended June 30, 2000. We expect to
incur losses in the near term related to development costs for new commercial
products and future taxable income may not be sufficient to realize additional
deferred tax assets that will be created by the projected net operating losses.
Consequently, we presently expect our statement of operations will not reflect
tax benefits for projected operating losses to be incurred during 2000.

The loss from operations of discontinued division, net of tax, for the six
months ended June 30, 1999 of $124,000 represents the costs related to the final
closeout of unassigned contracts related to our Premise Products division, which
was sold in 1997, and the transition of customers to the company that acquired
this division.

Liquidity and Capital Resources

Since our inception we have funded our operations with cash provided by
operations, supplemented by equity and debt financing and leases on capital
equipment. As of June 30, 2000, we had $18.4 million in cash and cash
equivalents and investments in marketable securities.

We borrowed approximately $1.1 million under our capital lease line secured
by capital equipment in the six months ended June 30, 2000, and repaid $1.0
million and $956,000 of capital lease obligations during the six months ended
June 30, 2000 and 1999, respectively. Additionally, we used $2.1 million and
$1.5 million during the six months ended June 30, 2000 and 1999, respectively,
for the purchase of capital assets and software development. We anticipate that
our level of spending for capital expenditures in the six months ended June 30,
2000 will continue, although we currently have no material commitments for
capital expenditures.

We have a line of credit with a bank equal to $2.0 million, which is
available to meet operating needs. The interest rate on amounts borrowed under
the line of credit is equal to the bank's prime rate or the one, two or three
month Libor rate plus 2.25% per annum. The line of credit matures April 15, 2001
and is collateralized by certain of our assets. As of June 30, 2000, no
borrowings were outstanding on the line of credit.

We also have a $2.0 million capital lease line with a bank, which is
available to meet capital acquisition needs that arise from normal business
operations. The interest rate on capital leased under the lease line is equal to
the bank's cost of funds at the time of each lease. Separate lease schedules are
signed from time to time. Each lease schedule is collateralized by the assets
that are being leased. Each lease has its own termination date, typically 36
months. As of June 30, 2000, $1.7 million was outstanding on the capital lease
line.

We expect to incur research, development and marketing expenses of up to
$10 million on our 9-1-1 SafetyNet product. This may require up to $13 million
in cash due to the capital expenditure requirements. During the six months ended
June 30, 2000, we incurred expense of approximately $1.3 million on this
initiative.

Although we believe that our current cash and investments, cash generated
from operations and lease financing will be sufficient to fund our anticipated
working capital needs, research and development initiative and capital
expenditures for our core operations, we may seek to raise additional capital to
expand our 9-1-1 SafetyNet product offering. We may seek a new capital lease
line or other sources of debt or equity financing to fund this initiative. In
the event our plans or assumptions for our core operations change or prove to be
inaccurate, or if we consummate any unplanned acquisitions of businesses or
assets, we may be required to seek additional sources of capital. Sources of
additional capital may include public and private equity and debt financings,
sales of nonstrategic assets and other financing arrangements.

Recently Issued Accounting Pronouncements

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Statement of Financial Accounting Standards No. 133 and No. 137

In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value. In
June 1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - An amendment of FASB Statement No.
133." SFAS No. 137 delays the effective date of SFAS No. 133 to financial
quarters and financial years beginning after June 15, 2000. We do not typically
enter into arrangements that would fall under the scope of Statement No. 133 and
thus, management believes that Statement No. 133 will not significantly affect
our financial condition and results of operations.

Staff Accounting Bulletin No. 101

In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition." SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in financial statements. We are required to determine the potential impact of
SAB 101 no later than fourth quarter of 2000. If we determine that our revenue
recognition policies must change to be in compliance with SAB 101, the
implementation of SAB 101 will require us to restate all of our previously
reported 2000 quarterly results to reflect a cumulative effect of change in
accounting principle as if SAB 101 had been implemented on January 1, 2000. We
are currently reviewing SAB 101 to determine what impact, if any, the adoption
of SAB 101 will have on our financial position and results of operations.

FASB Interpretation No. 44

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ITEM 2A. FACTORS THAT MAY AFFECT FUTURE RESULTS

Our operating results fluctuate, and our stock price may be volatile as a
result.

Our quarterly revenue and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. We experienced a profit in
1998, but had a net loss of approximately $1.3 million in 1999 and a net loss of
$2.2 million for the six months ended June 30, 2000. Therefore, you should not
rely on period-to-period comparisons of revenue or operating results as an
indication of our future performance. If our quarterly revenue or operating
results fall below the expectations of the investors or securities analysts, the
price of our common stock could fall substantially.

Our operating results may continue to fluctuate as a result of many
factors, including:

. our planned investments in research, development and marketing to expand
our service offerings;
. the length of our sales cycle;
. the size, timing and duration of significant customer contracts;
the number of subscriber records under our management;
. we cannot predict the rate of adoption of wireless services by PSAPs;
. the timing of introduction and market acceptance of new products and
services by us and our competitors; and
. changes in telecommunications legislation and regulations.

Our contracts generally include a separate non-recurring fee for the design
and implementation of the 9-1-1 solution, conversion of the customer's data to
our systems, hiring and training of personnel, and other costs required to
prepare for the processing of customer data. Therefore, we may recognize
significantly increased revenue for a short period of time upon commencing
services for a new customer.

Our sales cycle is relatively long and difficult to predict.

Our potential customers typically commit significant resources to the
technical evaluation of our services and products, and we typically spend
substantial time, effort and money providing education regarding our 9-1-1
solution. The evaluation process often results in an extensive and lengthy sales
cycle, typically ranging between one month and two years, making it difficult
for us to forecast the timing and magnitude of sales contracts. Delays
associated with customers' internal approval and contracting procedures,
procurement practices, and testing and acceptance processes are common. For
example, customers' budgetary constraints and internal acceptance reviews may
cause potential customers to delay or forego a purchase. The delay or failure to
complete one or more large contracts could have a material adverse effect on our
business, financial condition and results of operations and cause our operating
results to vary significantly from quarter to quarter.

We depend on large contracts from a limited number of significant customers, and
the loss of any of those contracts would adversely affect our operating results.

We historically have depended on, and expect to continue to depend on,
large contracts from a limited number of significant customers. We provide our
services to a range of customers, including ILECs, CLECs, wireless carriers and
state and local government agencies. During the six months ended June 30, 2000,
we recognized approximately 69% of total revenue from continuing operations from
Ameritech, BellSouth Inc. and U S WEST, each of which accounted for greater than
10% of our revenue. During the six months ended June 30, 1999, we recognized
approximately 82% of total revenue from Ameritech, BellSouth Inc. and U S WEST,
each of which accounted for greater than 10% of our revenue. No other customers
accounted for more than 10% of our total revenue during those periods. We
believe that these customers will continue to represent a substantial portion of
our total revenue in the future. Certain of our contracts with these customers
allow them to cancel their contracts with us in the event of changes in
regulatory, legal, labor or business conditions. Our contracts with these
customers expire through 2005. The loss of any of these customers could have a
material adverse effect on our business, financial condition and results of
operations.

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Two of our significant customers, Ameritech and U S WEST, have entered into
merger agreements with companies that are not our customers. We cannot predict
what effect, if any, these acquisitions will have on us and we cannot assure you
that these acquisitions or any future consolidation in the telecommunications
industry will not have a material adverse effect on our business, financial
condition and results of operation.

None of our major customers has any obligation to purchase additional
products or additional services beyond those currently contemplated by their
existing contracts. Consequently, our failure to develop relationships with
significant new customers could have a material adverse effect on the rate of
growth in our revenue, if any. If we fail to monitor and maintain adequately the
quality or our product and services, expand the breadth of our services and
products, advance our technology or continue to price our services and products
competitively, one or more of our major customers may select alternative
providers or seek to develop services and products internally.

If we lose the services of George Heinrichs or other key personnel, our business
will suffer.

Our future success depends in large part on the continued service of our
key management, sales, product development and operational personnel, including
George Heinrichs, our President and Chief Executive Officer. We have not entered
into employment agreements with Mr. Heinrichs or any of our other key personnel.
Losing the services of one or more of these individuals might hinder our ability
to achieve our business objectives.

Our Chief Financial Officer, Carol Nelson, announced her resignation
effective September 30, 2000. Although we are actively seeking a successor CFO,
there can be no assurance that we will be able to replace Ms. Nelson within a
reasonable timeframe or that we will not experience significant interruption in
our business as a result of her departure. Ms. Nelson has an agreement that
provides for payments subsequent to the termination of her employment.

We must hire and retain qualified personnel in a competitive labor market.

Our success in large part depends on our ability to continue to attract,
motivate and retain highly qualified employees, including technical, managerial
and sales and marketing personnel. We expect to continue to expand the number of
employees engaged in all aspects of our business. Competition in the recruitment
of highly qualified personnel in the software and telecommunications services
industry is intense and has become particularly difficult in the Denver
metropolitan area. Our inability to hire and retain qualified personnel or the
loss of the services of key personnel could have a material adverse effect upon
our current business, development efforts and future business prospects.

Our business will be adversely affected if Public Safety Answering Points do not
demand E9-1-1 services at the rate we expect.

We expect the percentage of our revenue derived from the management of 9-1-
1 data records for wireless carriers to increase. Recognizing the public safety
need for improved wireless 9-1-1 service, the FCC issued Report and Order 94-102
on June 12, 1996 and subsequent orders in 1999 and 2000 that mandated the
adoption of 9-1-1 technology by wireless carriers in two phases. Phase I
requires wireless carriers to provide to requesting PSAPs at the time of a 9-1-1
call, tools to deliver the call to the appropriate PSAP and send the caller's
telephone number and location of the receiving cell site with the call. Phase II
requires wireless carriers to locate a 9-1-1 caller more accurately, subject to
FCC guidelines. However, under the FCC rules, wireless carriers are not required
to provide wireless 9-1-1 service without a PSAP request. To provide an
additional impetus for wireless 9-1-1 implementation, the Federal Wireless
Communications and Public Safety Act was signed into law in October 1999. This
legislation provides liability protection to wireless carriers that is in parity
with wireline carriers' liability protection. However, there is no assurance
that the legislation will have the desired effect of accelerating wireless E9-1-
1 deployment. The FCC continues to work with the wireless industry to facilitate
wireless E9-1-1 implementation. The FCC has outlined a phased implementation
schedule for Phase II. We believe that the technological challenges confronting
wireless carriers attempting to comply with Report and Order 94-102 will
encourage them to outsource their E9-1-1 services. If many wireless carriers
decide not to outsource such services, our business, financial condition and
results of operations could be materially and adversely affected. Due to cost
recovery, liability and operational issues, the number of PSAPs demanding
services complying with Report and Order 94-102 from wireless carriers has been
less than we anticipated. If the rate of adoption by PSAPs continues to be slow
because of cost recovery, liability or operational issues, extensions granted by
the FCC or other reasons, we will continue to experience delays in receiving
revenue under our current wireless contracts that, because we have already
incurred costs in expectation of such revenue, could have a material adverse
effect on our business, financial condition and results of operations.

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<PAGE>

Our market is characterized by rapid technological change, and we could lose our
competitive position and fail to grow our business if we do not develop and
offer new products and services.

The market for our services is characterized by rapid technological change,
frequent new product or service introductions, evolving industry standards and
changing customer needs. We launched our Emergency Warning and Evacuation, or
EWE, product, in the fourth quarter of 1999, which allows PSAPs to call all
numbers in a given area and warn citizens of imminent danger. We intend to
offer other new products in the future, including 9-1-1 SafetyNet. The
introduction of products and services embodying new technologies and the
emergence of new industry and technology standards can render existing products
and services obsolete and unmarketable in short periods of time. We expect other
vendors to regularly introduce new products and services, as well as
enhancements to their existing products and services, that will compete with the
services and products offered by us. As a result, the life cycles of our
services and products are difficult to estimate. We believe that our future
success will depend in large part on our ability to maintain and enhance our
current service and product offerings, to develop and regularly introduce new
services and products that will keep pace with technological advances and
satisfy evolving customer requirements, and to achieve acceptable levels of
sales of our new services and products through our current customers that resell
our solutions to their subscribers. However, we cannot assure you that we will
not experience difficulties that could delay or prevent the successful
development, introduction or marketing of such new services and products or that
our new services and products will adequately meet the requirements of the
marketplace and achieve market acceptance. Announcements of currently planned or
other new service and product offerings by us or our competitors may cause
customers to defer the purchase of our existing services and products. Our
inability to develop on a timely basis new services or products, or the failure
of such new services or products to achieve market acceptance, could have a
material adverse effect on our business, financial condition and results of
operations. The development of new, technologically advanced products and
services is a complex and uncertain process requiring high levels of innovation,
as well as the accurate anticipation of technological and market trends. We
cannot assure you that we will successfully develop, introduce or manage the
transition to new services and products. Furthermore, services and products such
as those offered by us may contain undetected or unresolved errors when they are
first introduced or as new versions are released. We cannot assure you that,
despite extensive testing by us, errors will not be found in new services and
products after commencement of commercial availability, resulting in delay in or
loss of market acceptance and sales, diversion of development resources, injury
to our reputation or increased service and warranty costs, any of which could
have a material adverse effect on our business, financial condition and results
of operations. Significant delays in meeting deadlines for announced service or
product introductions or performance problems with such products or upgrades
could result in an undermining of customer confidence in our services and
products, which would materially adversely affect our customer relationships as
well.

In addition, we plan to introduce transaction-based services and software
products to industries different from those we have traditionally supported. We
cannot assure you that we will be successful in developing and marketing these
new services and products or that our current or new services and products will
adequately meet the demands of our new markets. Because it is generally not
possible to predict the time required and costs involved in reaching certain
research, development and engineering objectives related to entering new
markets, actual development costs could exceed budgeted amounts and estimated
development schedules could require extensions. Furthermore, we cannot assure
you that we will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these services and
products. If we are unable to develop and introduce new services and products to
these new markets in a timely manner, or if a new release of a product or
service to such new markets does not achieve market acceptance, our business,
financial condition and results of operations could be materially adversely
affected.

Substantially all of our revenue is derived from our 9-1-1 data management
solution, and our operating results will depend upon our ability to continue to
sell this solution.

We currently derive substantially all of our revenue from the provisioning
of our 9-1-1 data management solution to ILECs, CLECs, wireless carriers and
state and local government agencies. Accordingly, we are susceptible to adverse
trends affecting this market segment, such as government regulation,
technological obsolescence and the entry of new competition. We expect that this
market will continue to account for substantially all of our revenue in the near
future. As a result, our future success will depend on our ability to continue
to sell our 9-1-1 solution, maintain and increase our market share by providing
other value-added services to the market, and successfully adapt our technology
and services to other related markets. We cannot assure you that markets for our
existing services and products will continue to expand or that we will be
successful in our efforts to penetrate new markets.

Our operating results could be adversely affected if we underestimate costs on
our fixed price contracts.

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<PAGE>

During the six months ended June 30, 2000 and the year ended December 31,
1999, approximately 88% of our revenue was generated on a fixed price per
subscriber basis. We generally enter into contracts with two- to ten-year terms
and we generally receive a fixed monthly fee based upon the number of
subscribers and upon the services selected by the customer. Therefore, our
failure to estimate accurately the resources required for a fixed price per
subscriber contract could have a material adverse effect on our business,
financial condition and results of operations.

We could incur substantial costs from product liability claims relating to our
software.

Because our services and products are utilized by our customers to provide
critical 9-1-1 services, the provisioning of services and licensing of software
by us may entail the risk of product liability and related claims. Our
agreements with our customers typically require us to indemnify our customers
for our own acts of negligence. Product liability insurance is expensive and may
not be available in the future. We cannot be sure that we will be able to
maintain or obtain insurance coverage at acceptable costs or in a sufficient
amount, that our insurer will not disclaim coverage as to a future claim or that
a product liability claim would not otherwise adversely affect our business,
operating results or financial condition.

Our success depends upon the continued growth of wireline and wireless
telecommunications markets.

We provide our 9-1-1 data management solution to telecommunications
carriers in the wireline and wireless markets. Although these markets have
experienced significant growth and have been characterized by increased
deregulation and competition in recent years, we cannot assure you that such
trends will continue at similar rates or that we will be able to market and sell
effectively our products and services in such markets. In addition, many of the
new entrants in the telecommunications market are companies that lack
significant financial and other resources. To cultivate relationships with such
new market entrants, we may be required to offer alternative pricing
arrangements, which may provide for deferred payments. However, we cannot assure
you that we will be able to develop such relationships or that new carriers that
become our customers will gain market acceptance for their telecommunications
services. If we permit customers that do not have adequate financial resources
to pay us for our services on a deferred basis, we ultimately may be unable to
collect payments for such services. Because we historically have depended on a
limited number of long-term customer relationships, our failure to develop
relationships with, make sales to, or collect payments from new
telecommunications carriers, or the failure of our customers to compete
effectively in the telecommunications market, could have a material adverse
effect on our business, financial condition and results of operations. In
addition, the telecommunications industry is experiencing substantial
consolidations and changes that are unpredictable, and any such consolidation or
change could have a material adverse effect on our business, financial condition
and results of operations.

Our business is subject to government regulation and other legal uncertainties,
which could adversely affect our operations.

The market for our services and products has been influenced by the
adoption of regulations under the Telecommunications Act of 1996, the duties
imposed on ILECs by the Telecommunications Act to open the local telephone
markets to competition, the Wireless Communications and Public Safety Act of
1999 related to LECs' responsibility to provide subscriber records to emergency
services providers, requirements in the various states, including Texas where we
are a regulated utility and a party to various Texas PUC dockets, and the
requirements imposed on wireless carriers by the FCC's Report and Order 94-102.
Therefore, any changes to such legal requirements, the adoption of new
regulations by federal or state regulatory authorities under these laws and
regulations or any legal challenges to them could have a material adverse effect
upon the market for our services and products. Although these laws and
regulations were designed or modified in some respects to expand competition in
the telecommunications industry, the realization of the objectives of these laws
and regulations is subject to many uncertainties, including judicial and
administrative proceedings designed to define rights and obligations, actions or
inactions by ILECs and other carriers that affect the pace at which changes
contemplated by these laws and regulations occur, resolution of questions
concerning which parties will finance such changes, and other regulatory,
economic and political factors.

We are aware of litigation challenging the validity of the
Telecommunications Act and the local telephone competition rules adopted by the
FCC to implement the Telecommunications Act, as well as certain administrative
rule makings either underway or anticipated with respect to other laws and
regulations. For example, the U.S. Supreme Court in AT&T v. Iowa invalidated the
unbundling requirements adopted by the FCC while upholding a portion of the
FCC's local competition rules. The FCC adopted new unbundling requirements on
September 15, 1999 to comply with the decision of the Supreme Court. The 8th
Circuit Court of Appeals has remanded to the FCC certain issues involving
collocation of equipment as well as TELRIC (Total Element Long Run Incremental
Cost) pricing that governs in part the method by which ILECs may charge
competitive carriers for interconnecting to the

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<PAGE>

ILEC network. The final impact of the application of these rules is not yet
known. Such litigation may serve to delay full implementation of these laws and
regulations, which could adversely affect demand for our services and products.
Any delays in the deadlines imposed by these laws and regulations, the FCC,
state utility commissions, or any invalidation, repeal or modification in the
requirements imposed by these laws or regulations, state utility commissions or
the FCC could have a material adverse effect on our business, financial
condition and results of operations. Moreover, customers may require, or we
otherwise may deem it necessary or advisable, that we modify our services and
products to address actual or anticipated changes in the regulatory environment.
Any other delays in implementation of these laws and regulations, or other
regulatory changes, could materially adversely affect our business, financial
condition and results of operations.

We signed a contract to provide 9-1-1 data management services to the
General Services Commission of the State of Texas. This contract was assigned by
the General Services Commission to the Texas Commission for State Emergency
Communications. As this is the first time that a state entity has endeavored to
centralize 9-1-1 OSS and data management services with a neutral third party,
federal and state regulations governing 9-1-1 service provisioning, which have
typically applied to local exchange services providers, are being challenged and
clarified for the first time. In accordance with Texas law, and on the
recommendation of the Texas Public Utilities Commission, we have been granted a
Service Provider Certificate of Operating Authority in the State of Texas. We
successfully completed the field trial required under the contract in July 1999
and are in the process of marketing our services to the state's public safety
agencies and implementing services to those who opt into the contract. Prior to
commencement of the field trial, SBC Communications, which historically has been
responsible for the provisioning of 9-1-1 OSS, data transport and data
management services in Texas, challenged whether we have a right to access SBC
Communications' source systems and 9-1-1 database, whether they must allow other
parties to interconnect to their selective routing switches and whether they are
obligated by law to unbundle components of their network functionality. An
interim agreement among the involved parties was reached in March 1999 that
allowed us to perform the field trial to test the interfacing technology
solutions in the Houston area. As part of the interim agreement, the legal
challenges and all related proceedings were placed in abeyance to permit the
parties to proceed with the field trial. Those matters are still held in
abeyance.

As required by the agreement, SBC Communications filed wireline and
wireless tariffs regarding its portion of the unbundled services. SBC
Communications failed to unbundle its tariffs in a manner that allowed the cost
of our solution to be competitively neutral to the grandfathered SBC
Communications' solution, and the tariffs were contested by the Texas Commission
for State Emergency Communications, us and various other parties. Subsequently,
the Texas PUC promulgated new rules pertaining to 9-1-1 provisioning in this
competitive environment which in many ways favor our position, and those rules
have had the effect of making SBC Communications' proposed tariffs invalid, thus
causing SBC to modify the tariffs and propose new tariffs that comply with the
PUC's new rules that embrace a competitive 9-1-1 market place. We are in the
process of reviewing those new proposed tariffs along with other interested
parties, and it is possible we will find it necessary or desirable to file
objections to the proposed tariffs. The outcome of the tariff filing is
uncertain, although the parties to the tariff matters had previously executed a
second interim agreement for both wireline and wireless services, which
continues, in the meantime, to set the rates to be charged to public safety
agencies who wish to procure our solution until a final tariff is determined. We
believe that these legal and technological issues and their associated cost
implications are likely to be readdressed by the PUC, which may yet decide on
these matters in 2000 but more likely in 2001. Until such resolution, this
interim tariff agreement will govern those rates and charges. We believe that
the services that we will provide under our contract with the General Services
Commission are permitted within the scope of the existing regulations and that
the outcome of the matter before the PUC will be favorable to us and the Texas
Commission for State Emergency Communications. However, we cannot assure you
that the Texas PUC will decide in favor of us and the Texas Commission for State
Emergency Communications or that SBC Communications will not resume its desire
to pursue this and other legal challenges on a longer term basis, thus causing
further delay of the commencement of the services by exercising its right to
appeal a PUC decision that favors us or the Texas Commission for State Emergency
Communications. If the PUC does not decide in our favor or places contingencies
on the manner in which the services are provided, we may be prohibited from
delivering our services to the State of Texas, may incur additional delays in
that regard, may expend significant resources to appeal the PUC's decision or
may expend additional costs to redesign the methodology by which the services
are provided. In addition, if SBC Communications exercises its right to appeal,
we may be required to spend significant resources to defend our right to provide
our services in the State of Texas. The tariff proceedings were put in abeyance
pending resolution of the PUC's new rule making which is now completed. We
expect that the PUC and/or the administrative law judge presiding over those
dockets, will soon cause the parties to take a position on the new SBC tariffs,
and as mentioned, we may seek to object to the new tariffs.

As part of our new initiatives to market and sell our 9-1-1 SafetyNet
products and services, we are in the process of obtaining certificates of
operating authority across the United States to operate as a

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telecommunications provider and to become a bona fide beneficiary of the
Telecommunications Act of 1996, including the right to interconnect with certain
incumbent 9-1-1 network providers. While these efforts and their relation to the
provision of telecommunications services may not fall within the express
provisions of the Act and the "well worn path" for traditional competitive
telecommunications providers, we believe that the Act, bolstered by events that
have occurred since its passage, clearly contemplate and support the extension
of the notion of competition to providers like us and our emergency services
initiatives. The success of our new initiatives depends largely on the success
of these legal, regulatory and contractual initiatives, and we can not make
assurances that they will be successful. Thus, the same kinds of delays or
problems outlined above regarding matters pending in the state of Texas may also
occur in other states, including all states which could have substantial and
material impacts on the success of our business.

9-1-1 services generally are funded by a locally imposed fee per subscriber
per month. A portion of this tax is paid to the local carrier providing the 9-1-
1 services. We generally receive a monthly fee per subscriber from our customers
for management of 9-1-1 data records, allowing the carrier to match our fixed
revenue stream for 9-1-1 services with a fixed cost for record management.
Changes by local governments in the funding mechanism for 9-1-1 services or the
parties responsible for the provision of such services could have a material
adverse effect on our business, financial condition and results of operations.

Our operating results could be adversely affected by any interruption of our
services because of system failure.

Our operations depend on our ability to maintain our computer and
telecommunications equipment and systems in effective working order, and to
protect our systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. Although all of our mission-
critical systems and equipment are designed with built-in redundancy and
security, we cannot assure you that a fire, natural disaster, power loss,
telecommunications failure or similar event would not result in an interruption
of our services. Any damage, failure or delay that causes interruptions in our
operations could have a material adverse effect on our business, financial
condition and results of operations. Furthermore, any future addition or
expansion of our facilities to increase capacity could increase our exposure to
damage from fire, natural disaster, power loss, telecommunications failure or
similar events. We cannot assure you that our property and business interruption
insurance will be adequate to compensate us for any losses that may occur in the
event of a system failure or that such insurance will continue to be available
to us at all or, if available, that it will be available on commercially
reasonable terms.

Our failure to manage our growth effectively could adversely affect our ability
to increase our revenue and could increase our operating expenses.

We have expanded our operations rapidly over the past several years,
placing significant demands on our administrative, operational and financial
personnel and systems. Additional expansion by us may further strain our
management, operational, financial reporting, and other systems and resources.
We cannot assure you that our systems, resources, procedures, controls and
existing space will be adequate to support such expansion of our operations. Our
future operating results will depend substantially on the ability of our
officers and key employees to manage changing business conditions and to
implement and improve our management, operational, financial control and other
reporting systems. In addition, our future operating results depend on our
ability to attract, train and retain qualified consulting, technical, sales,
financial, marketing and management personnel. Failure to hire, train or retain
qualified personnel necessary to keep pace with our development of products and
services could have a material adverse effect on our business, financial
condition and results of operations. Continued expansion will require our
management to:

. enhance management information and reporting systems;
. standardize implementation methodologies of our operations;
. further develop our infrastructure; and
. continue to maintain customer satisfaction.

If we are unable to respond to and manage changing business conditions, the
quality of our products and services, our ability to retain key personnel and
our business, financial condition and results of operation could be materially
adversely affected.

The market for 9-1-1 data management solutions is highly competitive, and we
could lose our market position if we fail to compete effectively.

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<PAGE>

The market for 9-1-1 data management solutions is intensely competitive and
we expect competition to increase in the future. We believe that the principal
competitive factors affecting the market for 9-1-1 data management services
include flexibility, reliability, manageability, technical features, wireless
support, performance, ease of use, price, scope of product offerings, and
customer service and support. We cannot assure you that we can maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, support service, technical and
other competitive resources.

Our principal competitors generally fall within one of three categories:

. internal development departments of major carriers or consulting firms that
support such departments;
. relatively smaller companies that offer applications featuring portions of
our comprehensive set of E9-1-1 solutions; and
. larger companies that are either in the process of entering our market or
have the potential to develop products and services that compete with our
service offerings.

There are a number of companies that market and sell various products and
services to telecommunications carriers, such as billing software and advanced
telecommunications equipment, that have been broadly adopted by our customers
and potential customers. In addition, vendors of telecommunications software and
hardware in the future may enhance their products to include functionality that
is currently provided by our solutions. The widespread inclusion of the
functionality of our service offerings as standard features of other
telecommunications software or hardware could render our services obsolete and
unmarketable, particularly if the quality of such functionality were comparable
to that of our services. Furthermore, even if the 9-1-1 functionality provided
as standard features by telecommunications software or networking hardware is
more limited than that of our services, we cannot assure you that a significant
number of customers would not elect to accept more limited functionality in lieu
of purchasing additional products or services.

Many of our competitors have longer operating histories, greater name
recognition, access to larger customer bases and significantly greater
financial, technical and marketing resources than we do. As a result, they may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion and sale
of their products and services, than us. If these companies were to introduce
products or services that effectively compete with our service offerings, they
could be in a position to substantially lower the price of their 9-1-1 products
and services or to bundle such products and services with their other product
and service offerings.

We may be unable to protect our proprietary technology rights.

Our success and our ability to compete depends significantly upon our
proprietary rights. We rely primarily on a combination of copyright, trademark
and trade secret laws, as well as confidentiality procedures and contractual
restrictions to establish and protect our proprietary rights. We cannot assure
you that such measures will be adequate to protect our proprietary rights.
Further, we may be subject to additional risks as we enter into transactions in
foreign countries where intellectual property laws are not well developed or are
difficult to enforce. Legal protections of our proprietary rights may be
ineffective in such countries. Litigation to defend and enforce our intellectual
property rights could result in substantial costs and diversion of resources,
and could have a material adverse effect on our business, financial condition
and results of operations, regardless of the final outcome of such litigation.
Despite our efforts to safeguard and maintain our proprietary rights, we cannot
assure you that we will be successful in doing so or that the steps taken by us
in this regard will be adequate to deter misappropriation or independent third-
party development of our technology, or to prevent an unauthorized third party
from copying or otherwise obtaining and using our technology. There also can be
no assurance that others will not independently develop similar technologies or
duplicate any technology developed by us. Any such events could have a material
adverse effect on our business, financial condition and results of operations.

Claims by other companies that our products infringe their proprietary rights
could adversely affect our financial condition.

As the number of entrants to our markets increases and the functionality of
our services and products increases and overlaps with the products and services
of other companies, we may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. In certain of
our customer agreements, we agree to indemnify our customers for any expenses or
liabilities resulting from claimed infringements of patents, trademarks or
copyrights of third parties. In some instances, the amount of the indemnities
may be greater than the revenue we received from the customer. Any claims or
litigation, with or without merit, could be time consuming, result in costly
litigation or require us to enter into royalty or licensing arrangements. Any
royalty or licensing arrangements, if

22
<PAGE>

required, may not be available on terms acceptable to us, if at all, and could
have a material adverse effect on our business, financial condition and results
of operations.

We face additional risks from any international operations we undertake.

Although substantially all of our revenue is generated from sales to
customers in the United States, we have generated revenue in Canada and intend
to enter additional international markets, which will require significant
management attention and financial resources. International sales are subject to
a variety of risks, including difficulties in establishing and managing
international distribution channels, and in translating products and related
materials into foreign languages. International operations are also subject to
difficulties in collecting accounts receivable, staffing, managing personnel and
enforcing intellectual property rights. Other factors that can adversely affect
international operations include fluctuations in the value of foreign currencies
and currency exchange rates, changes in import/export duties and quotas,
introduction of tariff or non-tariff barriers and economic or political changes
in international markets. We cannot assure you that these factors will not have
a material adverse effect on our future international sales and, consequently,
on our business, financial condition and results of operations. Furthermore, any
inability to obtain foreign regulatory approvals on a timely basis could have a
material adverse effect on our business, financial condition and results of
operations.

Acquisitions could cause financial or operational problems.

As part of our overall strategy, we regularly evaluate opportunities to
enter into strategic acquisitions, including potential business combinations and
significant investments in complementary companies, assets, products and
technologies. Acquisitions involve a number of operating risks that could
materially adversely affect our business, financial condition and results of
operations, including the diversion of management's attention to assimilate the
operations, products and personnel of the acquired companies, the amortization
of acquired intangible assets, and the potential loss of key employees of the
acquired companies. Furthermore, acquisitions may involve businesses in which we
lack experience. Because management has limited experience in acquisitions and
we have no experience in integrating acquired companies or technologies into our
operations, we cannot assure you that we will be able to manage one or more
acquisitions successfully, or that we will be able to integrate the operations,
products or personnel gained through any such acquisitions without a material
adverse effect on our business, financial condition and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States interest rates. These exposures are
directly related to our normal operating and funding activities. Historically
and as of June 30, 2000, we have not used derivative instruments or engaged in
hedging activities.

Interest Rate Risk

The interest payable on our line of credit is variable based on the
lender's prime rate or the one, two, or three month Libor rate plus 2.25% per
annum, and, therefore, is affected by changes in market interest rates. At June
30, 2000, no amounts were outstanding under our line of credit, however, we may
borrow up to 80% of qualified accounts receivable, not to exceed $2,000,000.
Rates on our capital lease line are also dependent on interest rates in effect
at the time the lease line is drawn upon. In addition, we invest excess funds in
high-grade treasury bonds and commercial paper on which we monitor interest
rates frequently and as the investments mature. We do not believe that
reasonably possible near-term changes in interest rates will result in a
material effect on our future earnings, fair values or cash flows.

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<PAGE>

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings.

We are not a party to any litigation that we believe could have a material
adverse effect on us or our business. Federal and state regulations governing 9-
1-1 service provisioning have typically applied to local exchange services
providers. We plan to provide 9-1-1 services directly to state and local
governments rather than local exchange carriers in certain areas. Since this is
the first time that such services have been provided in this manner, the
regulations are being challenged and clarified for the first time. We believe
that the services we provide are within the scope of the existing regulations
and that any challenges to the regulations would be decided in our favor.
However, if the regulations are challenged and are not decided in our favor, we
may be prohibited from expanding our services to certain markets.

Item 2 - Changes in Securities and Use of Proceeds.

On June 29, 1998, we consummated our initial public offering of our common
stock. The estimated net offering proceeds to us after deducting the foregoing
discounts, commissions, fees and expenses were $25,988,400, of which $3,510,400
relates to the exercise of the underwriters' over-allotment option on July 22,
1998. Through June 30, 2000, the proceeds of the offering have been applied as
follows:

Aggregate offering price $28,980,000

Direct and indirect payment to others for:
Underwriting discounts and commissions 2,028,600
Other offering expenses 963,000
Construction of building and facilities 300,000
Capital lease payment to receive discount 2,878,500
Repayment of indebtedness 4,610,000
9-1-1 SafetyNet initiative 1,300,000

None of such payments were direct or indirect payments to our directors,
officers, general partners or their associates or to persons owning 10% or more
of any class of our equity securities or to our affiliates. We expect to use up
to $13 million of our remaining net proceeds in 2000 for research, development
and marketing to expand our product offerings, as well as for general corporate
purposes, including working capital. A portion of the net proceeds also may be
used for the acquisition of businesses, products and technologies that are
complementary to ours. We invested a portion of the remaining proceeds in an
investment portfolio consisting mostly of high-grade bonds and commercial paper.

Item 3 - Defaults on Senior Securities.

None.

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

a) On June 27, 2000, we held our 2000 Annual Meeting of Stockholders (the
"Annual Meeting").

b) One matter voted on at the Annual Meeting was the election of seven
directors. The seven nominees, who were existing directors and nominees of
our Board of Directors, were re-elected at our Annual Meeting as directors,
receiving the number of votes for election and abstentions as set forth next
to their respective names below:

NOMINEE FOR DIRECTOR FOR WITHHELD ABSTAIN
-------------------- --- -------- -------
George K. Heinrichs 10,300,769 442,649 486,627
Stephen O. James 10,300,769 442,649 486,627
David Kronfeld 10,300,769 442,649 486,627
Phillip B. Livingston 10,300,769 442,649 486,627
Mary Beth Vitale 10,300,207 442,211 487,627
Winston J. Wade 10,300,207 442,211 487,627
Darrell A. Williams 10,300,769 442,649 486,627

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<PAGE>

c) The following additional matters were separately voted upon at the Annual
Meeting and received the votes of the holders of the number of shares of
our common stock voted in person or by proxy at the Annual Meeting and the
percentage of total votes cast as indicated below:

1. Creation of a classified board of directors by dividing the Board of
Directors into three classes with staggered terms:
For 5,626,341
Against 1,184,206
Broker non-votes 3,925,761
Abstain 493,737

2. Increase the authorized shares for the 1998 Stock Incentive Plan:
For 5,578,065
Against 1,202,878
Broker non-votes 3,925,761
Abstain 523,341

3. Ratification of selection of Arthur Andersen LLP as independent
accountants for 2000 fiscal year:
For 10,721,388
Against 18,480
Abstain 490,177

d) Not applicable.

Item 5 - Other Information.

None.

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

(a) Exhibits.
10.24 - Genesis Select Corporation and SCC Communications Corp.
Common Stock Purchase Warrant Agreement, dated April 19,
2000
10.25 - Leopard Communications and SCC Communications Corp.
Common Stock Purchase Warrant Agreement, dated April 19,
2000
10.26 - Employment Agreement between Carol Nelson and SCC
Communications Corp.
27.1 - Financial Data Schedule

(b) Reports on Form 8-K.
None.

25
<PAGE>

SIGNATURES

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

SCC Communications Corp.
(Registrant)

August 14, 2000 \s\ George K. Heinrichs
_________________ ______________________________
Date George K. Heinrichs, President
and Chief Executive Officer

August 14, 2000 \s\ Carol Nelson
_________________ ______________________________
Date Carol Nelson, Chief
Financial Officer