##### Table of Contents



As Filed with the Securities and Exchange
Commission on May 14, 2004








UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended February 29,
    2004                                             
|  
|or
|  
|o  |  | 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: 1-15045



---

Intervoice, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                      |  |                                            
|------------------------------------------------------------------------------------- |  | -------------------------------------------
|Texas                                                                                 |  | 75-1927578                                 
|(State of Incorporation)                                                              |  | (I.R.S. Employer
    Identification Number)
|17811 Waterview Parkway
    Dallas, Texas(Address of principal executive
    offices) |  | 75252(Zip Code)                            

Registrants telephone number, including
area code:

(972) 454-8000


Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act:

Title of Each Class

Common Stock, No Par Value

Preferred Share Purchase Rights


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 þ          No o

Indicate by check
mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     o

Indicate by check
mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the
Act).     Yes þ          No o

Aggregate Market
Value of Common Stock held by Nonaffiliates as of
August 29, 2003: $246,350,711

Number of Shares of
Common Stock Outstanding as of April 23, 2004: 35,927,021

Documents Incorporated by Reference

Listed below are
documents parts of which are incorporated herein by reference
and the part of this Report into which the document is
incorporated:

(1) Proxy
Statement for the 2004 Annual Meeting of
Shareholders  Part III.



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TABLE OF CONTENTS

|                                         |  |                                                                                                                      |  |      |    | 
|---------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                         |  |                                                                                                                      |  | Page
|                                         |  |                                                                                                                      |  |     
|PART I                                  
|Item 1.                                  |  | Business                                                                                                             |  |      | 2  | 
|                                         |  | Overview                                                                                                             |  |      | 2  | 
|                                         |  | Products and Services                                                                                                |  |      | 3  | 
|                                         |  | Markets                                                                                                              |  |      | 6  | 
|                                         |  | Competition                                                                                                          |  |      | 6  | 
|                                         |  | Sales and Marketing                                                                                                  |  |      | 7  | 
|                                         |  | Strategic Alliances                                                                                                  |  |      | 7  | 
|                                         |  | Backlog                                                                                                              |  |      | 8  | 
|                                         |  | Research and Development                                                                                             |  |      | 8  | 
|                                         |  | Proprietary Rights                                                                                                   |  |      | 8  | 
|                                         |  | Manufacturing and
    Facilities                                                                                     |  |      | 9  | 
|                                         |  | Employees                                                                                                            |  |      | 10 | 
|                                         |  | Merger with Brite Voice
    Systems, Inc.                                                                            |  |      | 10 | 
|                                         |  | Availability of Company
    Filings with the SEC                                                                     |  |      | 10 | 
|Item 2.                                  |  | Properties                                                                                                           |  |      | 10 | 
|Item 3.                                  |  | Legal Proceedings                                                                                                    |  |      | 10 | 
|Item 4.                                  |  | Submission of Matters to a
    Vote of Security Holders                                                              |  |      | 12 | 
|PART II                                 
|Item 5.                                  |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |  |      | 13 | 
|Item 6.                                  |  | Selected Financial Data                                                                                              |  |      | 14 | 
|Item 7.                                  |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |  |      | 15 | 
|Item 7A.                                 |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                       |  |      | 34 | 
|Item 8.                                  |  | Financial Statements and
    Supplementary Data                                                                      |  |      | 36 | 
|Item 9.                                  |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                             |  |      | 71 | 
|Item 9A.                                 |  | Controls and Procedures                                                                                              |  |      | 71 | 
|PART III                                
|Item 10.                                 |  | Directors and Executive
    Officers of the Registrant                                                               |  |      | 71 | 
|Item 11.                                 |  | Executive Compensation                                                                                               |  |      | 71 | 
|Item 12.                                 |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters               |  |      | 71 | 
|Item 13.                                 |  | Certain Relationships and
    Related Transactions                                                                   |  |      | 71 | 
|Item 14.                                 |  | Principal Accountant Fees
    and Services                                                                           |  |      | 71 | 
|PART IV                                 
|Item 15.                                 |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                                 |  |      | 72 | 
|Code of Ethics                          
|Subsidiaries                            
|Consent of Independent Auditors         
|Certification of Chief Executive Officer
|Certification of Chief Financial Officer
|Certification of Chief Executive Officer
|Certification of Chief Financial Officer



1



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##### Table of Contents






PART I






|        |         
|------- | --------
|Item 1. | Business



Overview

With the worlds largest installed-systems
base and the experience gained from deploying more than 23,000
systems around the world, Intervoice, Inc. is a world leader in
providing converged voice and data solutions for enterprises and
network operators. Intervoice provides demonstrable return on
investment (ROI) by combining the latest in information and
communication technologies with the power of the human voice to
increase employee productivity, workplace efficiency, corporate
profitability, and customer satisfaction.

Founded in 1983, Intervoice is headquartered in
Dallas with offices in Europe, the Middle East, South America
and Asia Pacific. Intervoice offers enterprises, network
operators and developers a flexible, scalable integration
platform, a powerful development environment and comprehensive
services and support. The Company delivers proven technology
solutions, extensive tools and components, a range of custom and
packaged deployment applications, and flexible support and
managed service options. For the fiscal year ended
February 29, 2004, the Company reported revenues of
approximately $165.3 million, with solutions and recurring
services sales representing approximately 51% and 49% of
revenues, respectively.

Intervoice serves customers in a wide variety of
industries, both in the U.S. and in international markets.
Intervoice products, marketed under the Omvia® brand, and
Intervoice services are used by network operators, governments,
and utilities, plus companies in financial services, healthcare,
travel and other industries. In addition, companies in all
industries rely on Intervoice in their call centers and human
resource departments, and application developers depend on
Intervoice to provide tools, components and a reliable
environment for their development activity.

Intervoice solutions, whether deployed in a
traditional or open-standards environment, deliver measurable
benefit for enterprises, network operators and developers.
Because most customer contacts still take place via
telephone-based conversations, and because customer service
offers a prime opportunity to reinforce corporate messaging,
voice automation from Intervoice helps organizations of all
kinds improve branding and market differentiation which can lead
to improved customer satisfaction. The messaging services and
prepaid transactions supported by Omvia solutions help network
operators open new markets and new revenue streams. Intervoice
solutions also support increased automation of routine customer
service calls for enterprises and network operators, delivering
improvements in operational efficiency and productivity, and
allowing agents to pursue up-selling, cross-selling and other
revenue generating activities. Intervoice products and services
provide a number of cost saving opportunities, including reduced
labor costs, more economic service provisioning and accelerated
ROI. In addition, the ready access to people and information
afforded by Intervoice solutions translates into a more positive
caller experience, enhanced customer satisfaction and reduced
subscriber churn.

The Intervoice Omvia® Voice Framework is
built on an open standards, distributed architecture and
provides a comprehensive platform that allows organizations to
connect, develop, run, manage and report on voice-driven
solutions. The Company offers a wide range of voice-driven
technology, including messaging, payment and portal solutions
with expertise in voice development, management and application
solutions. The Company also offers solutions that include
extensive professional services, such as speech prototyping,
remote monitoring, disaster recovery, system installation and
integration, technical training and solutions tuning. Customers
can access a comprehensive Omvia Voice Framework solution, or
select specific modules that offer tools or services to meet
their unique requirements.

Intervoice is committed to delivering end-to-end
solutions that are compliant with open standards that are
hardware independent and that integrate seamlessly with other
systems, software and standards. Intervoice supports standards
including VoiceXML (Voice eXtensible Mark-up Language) and SALT
(Speech Application Language Tags) specifications for
voice-enabled web applications, and J2EE and
Microsofts®.NET for enterprise software
architectures. The Company continuously assesses evolving
industry standards and is actively involved in

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industry associations such as the VoiceXML Forum
and the SALT Forum, as well as network-focused organizations
such as the 3GPP and the GSM Association.


Intervoice delivers unique value through the
integration of industry standard hardware and software provided
through its numerous alliance partners. These strategic
relationships are an integral part of the Intervoice product
strategy, creating voice automation solutions tailored to meet
each customers specific business needs. Intervoice has
forged alliances with leading technology companies, including
Intel, HP, BEA, ScanSoft, Nuance and others. Through a strategic
alliance with Microsoft, Intervoice is making it faster, easier
and more economical to build and deliver open, standards-based
enterprise telephony and multi-modal speech solutions based on
SALT standards.




Products and Services

The Company is a leader in providing converged
voice and data solutions and related services. As used herein,
solutions sales include the sale of hardware and/or software and
the related professional services associated with designing,
integrating, and installing custom applications to address
customers business needs. Recurring services include a
suite of maintenance and software upgrade offerings and the
provision of customized solutions to customers on a managed
service (outsourced) basis.

Solutions



| |                      
| | ---------------------
| | Omvia Voice Framework

The Omvia Voice Framework is an advanced
software-based platform that can be deployed to create and
manage voice-based solutions for both network and enterprise
environments. The Omvia Voice Framework delivers a flexible,
modular and highly scalable design (built upon open industry
standards including VoiceXML, SALT, VoIP, SS7 and others) that
encourages the seamless integration of Web- and enterprise-based
systems into intuitive speech-enabled solutions with a clear
business ROI.

Companies in a wide range of industries have
leveraged the Omvia Voice Framework to drive operational
efficiencies and to open robust new revenue streams through the
creation of new service and transactional opportunities. The
solution can be deployed to more quickly and easily develop,
implement and manage next-generation voice applications and to
add human voice-based interfaces to existing web- and
enterprise-based resources. The Omvia Voice Framework can be
used to automate many basic communications tasks, thereby
measurably reducing customer service costs while at the same
time improving customer satisfaction and loyalty by delivering
more consistent, high quality service.

The Omvia Voice Framework delivers a true
end-to-end converged voice and data solution, and supports
best-of-class deployments through Intervoice alliance
partnerships with the leading names in speech technology. Omvia
Voice Framework modules can be implemented individually to meet
specific requirements, or applied as a comprehensive solution to
achieve enterprise-class voice automation results.

The modules include leading technologies, proven
applications, an award-winning development environment, and
intuitive management tools that are backed by comprehensive
professional consultation services and technical support, and
can even be deployed as a hosted option through
Intervoices managed services offerings.



| |                      
| | ---------------------
| | Professional Services

The Company offers the services of over
130 engineers and specialists and has designed and
developed over 5,000 custom voice-enabled information solutions.
Intervoice provides its customers with access to a
state-of-the-art usability testing lab, as well as analysis
based on caller goal completion rates and its patent-pending
Usability Grade Testing Metric. Customer surveys consistently
demonstrate a high level of satisfaction with the services
provided by Intervoice.

In order to assure an excellent response from an
Interactive Voice Response (IVR) solution, Intervoice offers its
customers a single source for system design, development and
implementation. Intervoice professional services

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offers a portfolio of services designed to
address fundamental business processes associated with building,
implementing and optimizing speech applications to best suit the
customers needs and leverage their ROI. For example,
Intervoice provides Voice User Interface (VUI) Design and
Usability Testing offerings which enhance transaction resolution
rates and customers brands and images through their
customers calling experiences.


With Intervoice Professional Services Suite,
customers will have professionally developed applications
enabling them to:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | Enhance public perception and create customer
    loyalty                         
|
| |  | Increase consumer adoption of automated solutions                                 
|
| |  | Support strategic business goals and reinforce
    branding and imaging strategies
|
| |  | Better understand their own and their
    callers goals                          
|
| |  | Increase sales and/or reduce operating costs                                      
|
| |  | Improve overall customer service operations
    efficiency and productivity.      

The Companys services include identifying
and designing appropriate customer applications, complete
project management of a customer application, adjustments to
user interfaces and vocabularies (of speech-driven
applications), customer application specification development
and consulting, installation services, technical support, and
customer training.

Specific service deliverables can include Speech
Opportunity Assessments and Strategy Blueprints, Usability
Evaluations, application development, voice user interfaces,
identification of voice talent, installation, project
management, training and optimization. The Intervoice
professional services are designed to reduce the time and cost
of speech automation deployments, to improve customer
communication and satisfaction, and to drive higher ROI
performance through increased transaction resolution rates.

Solutions Categories



| |                                                      
| | -----------------------------------------------------
| | Omvia Interactive Voice Response and Omvia
    Portal

Intervoice is a recognized pioneer in the
creation and refinement of Interactive Voice Response (IVR)
solutions. The Companys speech-enabled IVR solutions allow
organizations of all kinds to automate their communications,
reduce costs and improve interactions with customers and
partners. Intervoice solutions are transforming the way in which
people and information connect, and allowing companies to
communicate through voice, web, email and facsimile with callers
using telephones, PCs, mobile phones or PDAs.

Providing customer access to information when,
where, and how they want it is at the core of Intervoice IVR and
speech-enabled IVR solutions. As speech recognition and
text-to-speech technologies are added as natural user
interfaces, these systems evolve to allow for the automation of
interactions previously seen as too complex for a traditional
DTMF (touch-tone) interface. Businesses now use these systems to
automate access to account information, allow secure access to
sensitive information through voice verification, change or
correct name and address information, receive stock quotes and
execute securities trades. Enterprise-wide applications also
enable customer access to order products, activate accounts, pay
bills, enroll for college courses, apply for jobs, re-charge
prepaid accounts and many other increasingly complex
interactions.



| |                
| | ---------------
| | Omvia Messaging

Intervoice messaging solutions include voicemail,
unified communications, short message service (SMS) and
call notification. The Companys messaging suite
incorporates a range of advanced features, including intelligent
call return, mailbox-to-mailbox messaging, universal mailboxes
and conditional personal greetings. Network operators now view
messaging as a proven way to increase revenue per customer and
build subscriber counts, loyalty and usage.

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The Omvia suite of messaging solutions includes:
Speech Retrieval, which allows customers to deliver an engaging
speech-enabled solution to their subscribers; Virtual Messaging,
a media-independent message deposit utility that allows
subscribers to record a voice message and have it delivered as a
voicemail, email, Multi-Media Messaging Service (MMS) or
animated message; Communicator, which lets end users create
their own address books, store contact information, and initiate
calls with voice dialing; and Personal Ring Tone, which offers
subscribers a selection of ring tones, including popular songs
and sounds.

Modular Omvia Messaging delivers
revenue-generating value added services in a truly open,
non-proprietary environment. It offers interlocking components
that can be configured to provide specific messaging
applications. Omvia Messaging allows network operators to bring
next generation functionality to legacy voicemail systems, to
open new market segments and to exploit new sources of messaging
revenues.



| |              
| | -------------
| | Omvia Payment

Intervoice provides a range of payment products
and services that allows network operators to offer prepaid and
postpaid services. Operators can offer prepaid telephony
services to facilitate subscriber acquisition and usage in
selected niche markets and where collection might be an issue.
Intervoice supports a wide range of prepaid services, including
prepaid calling cards, prepaid residential, prepaid wireless and
automated operator services. Intervoice prepaid solutions
integrate seamlessly with other telco-grade, revenue-generating
applications, including voicemail delivered by the Intervoice
Omvia platform.

Omvia Intelligent Network Prepaid (IN) can
be deployed to provide enhanced flexibility and efficiency in
both wireline and wireless networks. Network operators now use
IN Prepaid solutions to manage rapid subscriber growth, to
provide cost-effective roaming, and to boost subscriber
satisfaction.

Operators can deploy postpaid services to support
branded long-distance calling services to retail and wholesale
customers, and to allow consumers to pay for calls using credit
or debit cards or collect call arrangements. Intervoice
Automated Operator Services (AOS) and Postpaid Calling
Cards allow network operators to offer privately branded
long-distance calling services to both retail and wholesale
customers.



| |                    
| | -------------------
| | Developer Solutions

Intervoice also offers a wide range of resources,
tools and support designed to help web and IVR developers create
interactive voice applications using VoiceXML and SALT. These
solutions can be used to extend existing web applications to the
telephone, to integrate call center and web technologies, and to
unify web and telephony infrastructures and skills.

These solutions include a number of valuable,
easy-to-implement packaged applications, marketed as Omvia Voice
Express, including solutions for telephony integration, location
automation, auto-attendant with Voice Activated Dialing
(VAD) and Personal Information Management (PIM), survey
automation and PIN/password reset.

Recurring Services



| |                              
| | -----------------------------
| | Customer and Software Support

Intervoice offers the services and support needed
to keep its solutions running at peak efficiency. Intervoice
understands customers requirements to protect their
investment through world-class technical support that is
accessible, effective and responsive to the customers
business requirements and objectives.

To provide this long term support, Intervoice
maintains a customer support organization known as
RealCare®. The RealCare® support organization provides
comprehensive hardware and software support and maintenance
services on up to a 24x7x365 basis. RealCare allows Intervoice
customers to reduce production costs and extend the useful lives
of their systems, while driving new revenue and improving
customer loyalty and satisfaction.

RealCare offers a wide variety of service
options, including: Maintenance and Technical Support for
anywhere/ anytime tech support from an international team of
voice application specialists; Remote Monitor-

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ing Services that can be combined with various
warranty and post-warranty plans to monitor the
heartbeat of a voice solution; Software Services
Program, a subscription-based service that provides convenient,
cost-effective upgrade solutions; and a Disaster Recovery
service that includes full planning, support and system
redundancy for key business systems.




| |                 
| | ----------------
| | Managed Services

All Intervoice products and support services are
available for purchase or as a component of a flexible Managed
Services solution. The Company offers a suite of Managed
Services designed to give enterprises and network operators
access to leading edge solutions while reducing the cost and
risk of deploying state-of-the-art voice automation. Hosted
applications also enable incremental and rapid integration of
emerging technologies, as well as easier migration to
speech-enabled services employing VoiceXML and SALT, and
next-generation network environments such as 2.5G, 3G, GPRS, IN
and SIP-based VoIP.

Intervoice supplies managed services for some of
the worlds largest financial institutions and network
operators with highly stringent network uptime and performance
demands. Intervoice supports these customers from secure,
inter-networked hosting locations in Cambridge and Manchester in
the U.K., and Orlando, Florida and Dallas, Texas in the U.S.




Markets

Intervoice provides the platform, software and
services necessary to create and support interactive speech
enabled technology solutions for customers in the enterprise,
network operator and developer markets.

The enterprise market is characterized by an
ongoing drive to improve customer service and satisfaction while
controlling the cost of communications. Automated communications
are increasingly the norm, with consumers beginning to show a
marked preference for well-designed self-service solutions.
Organizations in a wide range of industries are responding by
deploying converged speech and data technologies. Intervoice
technologies continue to evolve to meet the needs of the
enterprise marketplace.

Network operators seek services that generate
immediate subscriber uptake and accelerated ROI while
controlling capital and operational expenditures. Network
operators view voicemail, text messaging, multimedia messaging,
information portals, personal alerts and other enhanced services
as clear opportunities to increase subscriber counts, loyalty
and usage. Intervoice network solutions are designed to support
network operator needs for rapid, lower-risk ROI that extends
the useful life of existing network infrastructure.

The increasing acceptance of open,
standards-based solutions continues to spur the growth of the
developer market. Intervoice has joined other industry leaders
to support the introduction and refinement of industry
standards, including VoiceXML and SALT. The introduction of
increasingly capable service creation environments and tools can
be expected to spur further growth in the developer marketplace.




Competition

The enterprise market is fragmented and highly
competitive. The Companys major competitors in this market
are Nortel, Genesys, Avaya, IBM, Aspect Communications and
Edify. The principal competitive factors in this market include
breadth and depth of solution, product features, product
scalability and reliability, client services, the ability to
implement solutions, and the creation of a referenceable
customer base. The Company believes that its long history and
unmatched product line of speech-enabled solutions, combined
with its professional and technical services and its extensive
customer base, allow it to compete favorably in this market. The
market is evolving rapidly, however, and the Company anticipates
intensified competition not only from traditional IVR vendors
but also from emerging vendors with non-traditional technologies
and solutions.

Competition in the enhanced network services
market ranges from large telecommunication suppliers offering
turnkey, multi-application solutions to niche
companies that specialize in a particular enhanced service such
as prepaid, voicemail or voice services such as voice activated
dialing. The Companys primary

6



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competitors in this market are suppliers such as
Comverse Technology and Lucent Technologies that provide a suite
of enhanced services.


Smaller niche players that compete with the
Company in various geographies and/or products include TellMe,
Be Vocal, Nuance, Boston Communications Group and Huawei.

The Company believes that, with its current suite
of integrated and interoperable payment, messaging and portal
services, open platform, its flexible business models, and its
professional and technical service offerings, it compares
favorably with its competition. Nevertheless, the Company
anticipates that competition will continue from existing and new
competitors, some of which have greater financial, technological
and marketing resources and greater market share than the
Company.




Sales and Marketing

Intervoice markets its products directly, with a
global sales force, and through more than 70 domestic and
international distributors. The Company enters into arrangements
with distributors to broaden distribution channels, to increase
its sales penetration to specific markets and industries and to
provide certain customer services. Distributors are selected
based on their access to the markets, industries and customers
that are candidates for Intervoice products. The Intervoice
direct sales force consists of approximately 70 sales directors
and representatives worldwide. During fiscal 2004, approximately
75% and 25% of total Company solutions revenue were attributable
to direct sales to end-users and to sales to distributors,
respectively.

Major domestic distributors include Aurum
Technology, Liberty/ FiTech, EDS, Fiserv, Nextira One, Norstan,
Siemens Business Communications, Sprint and Symitar Systems.
Major international distributors include Adamnet (Japan),
Ericsson (Worldwide), IVRS (Hong Kong, China), Loxbit
(Thailand), Norstan (Canada), Promotora Kranon (Mexico), Siemens
AG (Worldwide), Switch (Chile), Tatung (Taiwan) and Telia
Promotor (Sweden).

Subsidiaries of the Company maintain offices in
the U.K., Germany, Switzerland, the Netherlands, the United Arab
Emirates, and South Africa to support sales throughout Europe,
the Middle East and Africa. A company office located in
Singapore supports sales in the Pacific Rim. Latin American
sales are supported from the Companys Dallas headquarters
and through a regional office in Brazil.

International revenues were 41% of total revenues
in fiscal 2004 and 2003 and 44% in fiscal 2002. See
Cautionary Disclosures To Qualify Forward-Looking
Statements under Item 7  Managements
Discussion and Analysis of Financial Condition and Results of
Operations for a discussion of risks attendant to the
Companys international operations.

See Sales in Item 7 
Managements Discussion and Analysis of Financial Condition
and Results of Operations for additional information on sales by
product line and geographic area and concentration of revenue.




Strategic Alliances

Intervoice continues to build strategic partner
relationships with leading companies in key industries. The
Company has established partnerships with software and
technology solution partners, system integration partners and
niche market partners. These alliances enhance the
Companys value proposition as delivered through the Omvia
Voice Framework, strengthen its ability to deliver end-to-end
solutions, and extend its market reach.

In October 2003, Intervoice announced the
addition of Intel® NetstructureTM DM/ V-A
Resource Series telephony boards supporting both SALT and
VoiceXML to its Omvia Voice Framework suite for the development,
deployment and management of voice solutions. This partnership
will allow Intervoice customers to select other powerful
telephony boards from Intel as part of their speech-activated
solutions.

Intervoice continues to collaborate with
Microsoft in a joint technology and marketing alliance to help
make speech recognition solutions mainstream with the
implementation of SALT standards-based solutions incorporated in
Microsofts operating software. In fiscal 2004, Intervoice
introduced its Telephony Interface

7



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##### Table of Contents



Manager (TIM) software product and
pre-configured hardware platform for the deployment of speech
applications in the Microsoft Speech Server Beta program.
Intervoice has also partnered with HP and Intel to refine the
hardware needed to develop, test and deploy SALT-based speech
solutions.


The Company continues to work closely with
leaders of the speech technology industry. Intervoice partners
with ScanSoft to develop and bring to market speech recognition
and text-to-speech solutions. The Company leverages Nuance
speech software solutions to give people access to information
and services anywhere, anytime and from any phone.




Backlog

The Companys solutions backlog at
February 29/28, 2004, 2003 and 2002, which does not include
the contracted value of future maintenance and managed services
to be recognized by the Company, was approximately
$32 million, $34 million and $26 million,
respectively. The Company expects all existing backlog to be
delivered within fiscal 2005. Due to customer demand, some of
the Companys sales are completed in the same fiscal
quarter as ordered. Thus, the Companys backlog at any
particular date may not be indicative of actual sales for any
future period.




Research and Development

Research and development expenses were
approximately $15 million, $23 million and
$29 million during fiscal 2004, 2003 and 2002,
respectively, and included the design of new products and the
enhancement of existing products.

The Companys research and development
spending is focused in four key areas. First, software tools are
being developed to aid in the development, deployment and
management of customer applications incorporating speech
recognition and text-to-speech technologies. Next, server-based
software platforms are being developed for runtime services for
the management of contact center resources and speech
applications. Software platforms are being developed for
deployment and management of wireless and wireline network
operator applications. These software platforms are designed to
operate in both J2EE and Microsofts®.NET enterprise
computing environments. Third, media servers and voice
browsers based on open standards such as SALT and VoiceXML
are being developed. Finally, the Company is developing
packaged, speech enabled applications for the network operator
and enterprise markets. These include a range of vertical and
horizontal applications that are designed to greatly enhance
customer ROI by providing many commonly used, configurable
functions that can be more quickly deployed than custom
applications.

The Company expects to maintain a strong
commitment to research and development to remain at the
forefront of technology development in its markets, which is
essential to the continued improvement of the Companys
position in the industry.




Proprietary Rights

The Company believes that its existing patent,
copyright, license and other proprietary rights in its products
and technologies are material to the conduct of its business. To
protect these proprietary rights, the Company relies on a
combination of patent, trademark, trade secret, copyright and
other proprietary rights laws, nondisclosure safeguards and
license agreements. As of February 29, 2004, the Company
owned 68 patents and had 22 pending applications for
patents in the United States. In addition, the Company has
registered Intervoice as a trademark in the United
States. Currently, in the United States, the Company has 22
registered trademarks and service marks. Some of the
Companys patents and marks are also registered in certain
foreign countries. The Company also has five registered
copyrights in the United States. The Companys software and
other products are generally licensed to customers pursuant to a
nontransferable license agreement that restricts the use of the
software and other products to the customers internal
purposes. Although the Companys license agreements
prohibit a customer from disclosing proprietary information
contained in the Companys products to any other person, it
is technologically possible for competitors of the Company to
copy aspects of the Companys products in violation of the
Companys rights. Furthermore, even in cases where patents
are granted, the detection and policing of the unauthorized use
of the patented

8



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technology is difficult. Moreover, judicial
enforcement of copyrights may be uncertain, particularly in
foreign countries. The occurrence of the unauthorized use of the
Companys proprietary information by the Companys
competitors could have a material adverse effect on the
Companys business, operating results and financial
condition.


The Company provides its customers a qualified
indemnity against the infringement of third party intellectual
property rights. From time to time various owners of patents and
copyrighted works send the Company or its customers letters
alleging that the Companys products do or might infringe
upon the owners intellectual property rights, and/or
suggesting that the Company or its customers should negotiate a
license or cross-license agreement with the owner. The
Companys policy is to never knowingly infringe upon any
third partys intellectual property rights. Accordingly,
the Company forwards any such allegation or licensing request to
its outside legal counsel for their review and opinion. The
Company generally attempts to resolve any such matter by
informing the owner of its position concerning non-infringement
or invalidity, and/or, if appropriate, negotiating a license or
cross-license agreement. Even though the Company attempts to
resolve these matters without litigation, it is always possible
that the owner of the patent or copyrighted works will institute
litigation. Owners of patent(s) and/or copyrighted work(s) have
previously instituted litigation against the Company alleging
infringement of their intellectual property rights, although no
such litigation is currently pending against the Company. As
noted above, the Company currently has a portfolio of 68
patents, and it has applied for and will continue to apply for
and receive a number of additional patents to reflect its
technological innovations. The Company believes that its patent
portfolio could allow it to assert counterclaims for
infringement against certain owners of intellectual property
rights if those owners were to sue the Company for infringement.
In certain situations, it might be beneficial for the Company to
cross-license certain of its patents for other patents which are
relevant to the call automation industry. See
Item 3.  Legal Proceedings for a discussion of
certain patent matters.

The Company believes that software and technology
companies, including the Company and others in the
Companys industry, increasingly may become subject to
infringement claims. Such claims may require the Company to
enter into costly license agreements, or result in even more
costly litigation. To the extent the Company requires a
licensing arrangement, the arrangement may not be available at
all, or, if available, may be very expensive or even
prohibitively expensive. As with any legal proceeding, there is
no guarantee that the Company will prevail in any litigation
instituted against the Company asserting infringement of
intellectual property rights. To the extent the Company suffers
an adverse judgment, it might have to pay substantial damages,
discontinue the use and sale of infringing products, repurchase
infringing products from the Companys customers pursuant
to indemnity obligations, expend significant resources to
acquire non-infringing alternatives, and/or obtain licenses to
the intellectual property that has been infringed upon. As with
licensing arrangements, non-infringing substitute technologies
may not be available, and if available, may be very expensive,
or even prohibitively expensive, to implement. Accordingly, for
all of the foregoing reasons, a claim of infringement could
ultimately have a material adverse effect on the Companys
business, financial condition and results of operations.




Manufacturing and Facilities

The Companys manufacturing operations
consist primarily of the final assembly, integration and
extensive testing and quality control of subassemblies, host
computer platforms, operating software and the Companys
run time software. The Company currently uses third parties to
perform printed circuit board assembly, sheet metal fabrication
and customer-site service and repair. Although the Company
generally uses standard parts and components for its products,
some of its components, including semi-conductors and, in
particular, digital signal processors manufactured by Texas
Instruments, are available only from a small number of vendors.
Likewise, the Company licenses speech recognition technology
from a small number of vendors. As the Company continues to
migrate to open, standards-based systems, it will become
increasingly dependent on its component suppliers and software
vendors. To date, the Company has been able to obtain adequate
supplies of needed components and licenses in a timely manner.
If the Companys significant vendors are unable or cease to
supply components or licenses at current levels, the Company may
not be able to obtain these items from another source or at
historical prices. Consequently, the Company would be unable

9



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to provide products and services to its customers
or generate historical operating margins, which would negatively
impact its business and operating results.





Employees

As of April 23, 2004, the Company had 734
employees.




Merger with Brite Voice Systems,
Inc.

During the second quarter of fiscal 2000, the
Company acquired all of the outstanding stock of Brite Voice
Systems, Inc. in a series of transactions accounted for as a
purchase business combination. The Company entered into a
$125 million term loan and borrowed an additional
$10 million under a related revolving credit facility to
finance the merger. All such indebtedness has been repaid or
refinanced as of February 29, 2004. See Liquidity and
Capital Resources in Part II, Item 7 
Managements Discussion and Analysis of Financial Condition
and Results of Operations for a discussion of the Companys
current credit facilities.




Availability of Company Filings with the
SEC

The Companys Internet website is
www.intervoice.com. The Company makes available through its
Internet website its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after it electronically
files such material with, or furnishes it to, the Securities and
Exchange Commission (SEC).






|        |           
|------- | ----------
|Item 2. | Properties

The Company owns approximately
225,000 square feet of manufacturing and office facilities
in Dallas, Texas. The Company leases approximately
216,000 square feet of office space as follows:

|                                           |  |             |         | 
|------------------------------------------ |  | ----------- | ------- | 
|                                           |  | Square Feet
|                                           |  |            
|Allen, Texas                               |  |             | 130,000 | 
|Orlando, Florida                           |  |             | 34,000  | 
|Manchester, United Kingdom                 |  |             | 27,000  | 
|Cambridge, United Kingdom                  |  |             | 12,000  | 
|Other domestic and international locations |  |             | 13,000  | 

During the fourth quarter of fiscal 2002, the
Company announced that it would forego expansion into existing
leased space in Allen, Texas. As of February 29, 2004, the
Company had sub-leased approximately 34,000 square feet of
such space. The Allen, Texas lease expires in June 2005.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Intellectual Property Matters

From time to time Ronald A. Katz Technology
Licensing L.P. (RAKTL) has sent letters to certain
customers of the Company suggesting that the customer should
negotiate a license agreement to cover the practice of certain
patents owned by RAKTL. In the letters, RAKTL has alleged that
certain of its patents pertain to certain enhanced services
offered by network providers, including prepaid card and
wireless services and postpaid card services. RAKTL has further
alleged that certain of its patents pertain to certain call
processing applications, including applications for call centers
that route calls using a called partys DNIS identification
number. As a result of the correspondence, an increasing number
of the Companys customers have had discussions, or are in
discussions, with RAKTL. Certain products offered by the Company
can be programmed and configured to provide enhanced services to
network providers and call processing applications for call
centers. The Companys contracts with customers usually
include a qualified obligation to indemnify and defend customers
against claims that products as delivered by the Company
infringe a third partys patent.

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None of the Companys customers have
notified the Company that RAKTL has claimed that any product
provided by the Company infringes any claims of any RAKTL
patent. Accordingly, the Company has not been required to defend
any customers against a claim of infringement under a RAKTL
patent. The Company has, however, received letters from
customers notifying the Company of the efforts by RAKTL to
license its patent portfolio and reminding the Company of its
potential obligations under the indemnification provisions of
the applicable agreements in the event that a claim is asserted.
In response to correspondence from RAKTL, a few customers have
attempted to tender to the Company the defense of its products
under contractual indemnity provisions. The Company has informed
these customers that while it fully intends to honor any
contractual indemnity provisions, it does not believe it
currently has any obligation to provide such a defense because
RAKTL does not appear to have made a claim that a Company
product infringes a patent. Some of these customers have
disagreed with the Company and believe that the correspondence
from RAKTL can be construed as claim(s) against the
Companys products. One such customer who had attempted to
tender the defense of its products to the Company recently
informed the Company that the customer had entered into an
agreement to license certain rights under the RAKTL patents and
demanded the Company indemnify the customer for unspecified
amounts, including attorneys fees, paid in connection with
the license agreement. The Company has notified the customer
that the Company believes it does not have any indemnity
obligation in connection with the license agreement.

Even though RAKTL has not alleged that a product
provided by the Company infringes a RAKTL patent, it is always
possible that RAKTL may do so. In the event that a Company
product becomes the subject of litigation, a customer could
attempt to invoke the Companys indemnity obligations under
the applicable agreement. As with most sales contracts with
suppliers of computerized equipment, the Companys
contractual indemnity obligations are generally limited to the
products and services provided by the Company, and generally
require the customer to allow the Company to have control over
any litigation and settlement negotiations with the patent
holder. The customers who have received letters from RAKTL
generally have multiple suppliers of the types of products that
might potentially be subject to claims by RAKTL.

Even though no claims have been made that a
specific product offered by the Company infringes any claim
under the RAKTL patent portfolio, the Company has received
opinions from its outside patent counsel that certain products
and applications offered by the Company do not infringe certain
claims of the RAKTL patents. The Company has also received
opinions from its outside counsel that certain claims under the
RAKTL patent portfolio are invalid or unenforceable.
Furthermore, based on the reviews by outside counsel, the
Company is not aware of any valid and enforceable claims under
the RAKTL portfolio that are infringed by the Companys
products. If the Company does become involved in litigation in
connection with the RAKTL patent portfolio, under a contractual
indemnity or any other legal theory, the Company intends to
vigorously contest the claims and to assert appropriate
defenses. An increasing number of companies, including some
large, well known companies and some customers of the Company,
have already licensed certain rights under the RAKTL patent
portfolio. RAKTL has previously announced license agreements
with, among others, AT&T Corp., Microsoft Corporation and
International Business Machines Corporation.

Pending Litigation

David Barrie, et al., on Behalf of
Themselves and All Others Similarly Situated v.
InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D,
pending in the United States District Court, Northern District
of Texas, Dallas Division:

Several related class action lawsuits were filed
in the United States District Court for the Northern District of
Texas on behalf of purchasers of common stock of the Company
during the period from October 12, 1999 through
June 6, 2000 (the Class Period).
Plaintiffs have filed claims, which were consolidated into one
proceeding, under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and the Securities and Exchange
Commission Rule 10b-5 against the Company as well as
certain named current and former officers and directors of the
Company on behalf of the alleged class members. In the
complaint, Plaintiffs claim that the Company and the named
current and former officers and directors issued false and
misleading statements during the Class Period concerning
the financial condition of the Company, the results

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of the Companys merger with Brite and the
alleged future business projections of the Company. Plaintiffs
have asserted that these alleged statements resulted in
artificially inflated stock prices.


The Company believes that it and its officers
complied with their obligations under the securities laws and
has vigorously defended the lawsuit. The Company responded to
this complaint by filing a motion to dismiss the complaint in
the consolidated proceeding. The Company asserted that the
complaint lacked the degree of specificity and factual support
to meet the pleading standards applicable to federal securities
litigation. On this basis, the Company requested that the United
States District Court for the Northern District of Texas dismiss
the complaint in its entirety. Plaintiffs responded to the
Companys request for dismissal. On August 8, 2002,
the Court entered an order granting the Companys motion to
dismiss the class action lawsuit. In the order dismissing the
lawsuit, the Court granted plaintiffs an opportunity to
reinstate the lawsuit by filing an amended complaint.

Plaintiffs filed an amended complaint on
September 23, 2002. The Company filed a motion to dismiss
the amended complaint, and plaintiffs filed a response in
opposition to the Companys motion to dismiss. On
September 15, 2003, the Court granted the Companys
motion to dismiss the amended class action complaint. Unlike the
Courts prior order dismissing the original class action
complaint, the order dismissing the amended complaint did not
grant plaintiffs an opportunity to reinstate the lawsuit by
filing a new amended complaint. On October 9, 2003, the
plaintiffs filed a notice of appeal to the Fifth Circuit Court
of Appeals from the trial courts order of dismissal
entered on September 15, 2003. The plaintiffs filed their
appellant brief on February 20, 2004, and the Company filed
its brief in opposition to the plaintiffs appeal on
May 10, 2004.






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

Not applicable.

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PART II






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities

Common Stock

The Companys outstanding shares of common
stock are quoted on the Nasdaq National Market under the symbol
INTV. The Company has not paid any cash dividends since its
incorporation. The credit agreement evidencing the
Companys debt facilities contains a contractual limitation
on the Company which restricts its ability to pay a dividend in
cash, stock or any other property in excess of $6.0 million
in any fiscal year. The Company does not anticipate paying cash
dividends in the foreseeable future.

High and low share prices as reported on the
Nasdaq National Market are shown below for the Companys
fiscal quarters during fiscal 2004 and 2003.

|                    |  |      |       |     |  |   |      | 
|------------------- |  | ---- | ----- | --- |  | - | ---- | 
|                    |  | High |       | Low
|                    |  |      |       |    
|Fiscal 2004 Quarter |  |      |       |     |  |   |      | 
|1st                 |  | $    | 3.63  |     |  | $ | 1.51 | 
|2nd                 |  | $    | 8.22  |     |  | $ | 3.26 | 
|3rd                 |  | $    | 11.02 |     |  | $ | 7.46 | 
|4th                 |  | $    | 13.56 |     |  | $ | 9.56 | 
|                   
|Fiscal 2003 Quarter |  |      |       |     |  |   |      | 
|1st                 |  | $    | 6.40  |     |  | $ | 3.06 | 
|2nd                 |  | $    | 3.09  |     |  | $ | 0.98 | 
|3rd                 |  | $    | 2.30  |     |  | $ | 1.30 | 
|4th                 |  | $    | 3.19  |     |  | $ | 1.66 | 

On April 23, 2004, there were
711 shareholders of record and approximately 12,100
beneficial shareholders of the Company. The closing price of the
Common Stock on that date was $14.98.

Information regarding securities authorized for
issuance under the Companys equity compensation plans is
incorporated by reference to Item 12 of this
Form 10-K, which in turn incorporates by reference a
section of the Companys definitive proxy statement.

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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected consolidated financial
data should be read in conjunction with the Companys
consolidated financial statements and related notes included
elsewhere herein and in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations set forth in Item 7.

|                                                                                   |                                                                                    |                                      |       |        |  |         |       |          |   |           |       |       |   |   |       |       |   |   |       |       |  
|---------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------ | ----- | ------ |  | ------- | ----- | -------- | - | --------- | ----- | ----- | - | - | ----- | ----- | - | - | ----- | ----- | -
|                                                                                   |                                                                                    |                                     
|                                                                                   |                                                                                    | Fiscal Year Ended February 29/28    
|                                                                                   |                                                                                    |                                     
|                                                                                   |                                                                                    | 2004*                                |       | 2003** |  | 2002*** |       | 2001**** |   | 2000*****
|                                                                                   |                                                                                    |                                      |       |        |  |         |       |          |   |          
|                                                                                   |                                                                                    |                                     
|                                                                                   |                                                                                    | (In millions, except per share data)
|Sales                                                                              |                                                                                    | $                                    | 165.3 |        |  | $       | 156.2 |          |   | $         | 211.6 |       |   | $ | 274.7 |       |   | $ | 286.2 |      
|Income (Loss) from Operations                                                      |                                                                                    |                                      | 18.8  |        |  |         | (44.1 | )        |   |           | (51.6 | )     |   |   | 0.4   |       |   |   | 0.3   |      
|Income (Loss) Before the Cumulative Effect of a
    Change in Accounting Principle |                                                                                    |                                      | 11.3  |        |  |         | (50.6 | )        |   |           | (44.7 | )     |   |   | 9.5   |       |   |   | (14.8 | )    
|Net Income (Loss)                                                                  |                                                                                    |                                      | 11.3  |        |  |         | (66.4 | )        |   |           | (44.7 | )     |   |   | (2.3  | )     |   |   | (14.8 | )    
|Total Assets                                                                       |                                                                                    |                                      | 113.7 |        |  |         | 101.0 |          |   |           | 175.4 |       |   |   | 256.8 |       |   |   | 303.0 |      
|Current Portion of Long Term Debt                                                  |                                                                                    |                                      |      |        |  |         | 3.3   |          |   |           | 6.0   |       |   |   | 18.5  |       |   |   | 25.0  |      
|Long Term Debt, Net of Current Portion                                             |                                                                                    |                                      | 13.1  |        |  |         | 15.8  |          |   |           | 24.0  |       |   |   | 31.1  |       |   |   | 75.0  |      
|Per Diluted Common Share:                                                          |                                                                                    |                                      |       |        |  |         |       |          |   |           |       |       |   |   |       |       |   |   |       |      
|                                                                                   | Income (Loss) Before the Cumulative Effect of a
    Change in Accounting Principle |                                      |       | 0.32   |  |         |       | (1.49    | ) |           |       | (1.34 | ) |   |       | 0.28  |   |   |       | (0.49 | )
|                                                                                   | Net Income (Loss)                                                                  |                                      |       | 0.32   |  |         |       | (1.95    | ) |           |       | (1.34 | ) |   |       | (0.07 | ) |   |       | (0.49 | )
|Shares Used in Per Diluted Common Share
    Calculation                            |                                                                                    |                                      | 35.7  |        |  |         | 34.0  |          |   |           | 33.4  |       |   |   | 34.3  |       |   |   | 30.5  |      



---



|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*     | The fiscal 2004 income from operations was
    impacted by special charges of $2.2 million related to a
    workforce reduction and a separation agreement with the
    Companys former Chief Financial Officer (See Special
    Charges under Item 7).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     
|**    | The fiscal 2003 loss from operations was impacted
    by special charges of $34.3 million related to staffing
    reductions, facilities closures, the write down of excess
    inventories, costs associated with loss contracts, loss on early
    extinguishment of debt, and impairment of certain intangible
    assets. (See Special Charges and Amortization
    and Impairment of Goodwill and Acquired Intangible Assets
    under Item 7.) The fiscal 2003 net loss was also
    increased as a result of a $15.8 million charge for the
    cumulative effect of a change in accounting principle associated
    with the Companys adoption of Statement of Financial
    Accounting Standards No. 142 Accounting for Goodwill
    and Other Intangible Assets. Fiscal 2003 results benefited
    from a change in the U.S. federal tax law that allowed the
    Company to recognize net tax benefits of approximately
    $3.0 million.
|     
|***   | The fiscal 2002 loss from operations was impacted
    by special charges of $33.4 million related to the
    streamlining of product lines, the write down of excess
    inventories and non-productive assets, the closure of certain
    facilities, and staffing reductions (see Special
    Charges under Item 7). The classification of debt
    outstanding at February 28, 2002 was based on refinancing
    transactions completed subsequent to February 28, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|     
|****  | The fiscal 2001 income from operations was
    impacted by special charges of $8.2 million related to
    changes in the Companys organizational structure and
    product offerings. Income before the cumulative effect of a
    change in accounting principle was impacted by those special
    charges of $8.2 million ($5.4 million net of taxes)
    and by a $21.4 million ($13.8 million net of taxes)
    gain on the sale of SpeechWorks International, Inc. common
    stock. Sales, income from operations, income before the
    cumulative effect of a change in accounting principle and net
    loss also were affected by the Companys adoption of Staff
    Accounting Bulletin No. 101 (SAB 101) effective
    March 1, 2000. During fiscal 2001, the Company recognized
    $22.4 million in revenue whose contribution to income was
    included in the cumulative effect adjustment as of March 1,
    2000.                     
|     
|***** | During the second quarter of fiscal 2000, the
    Company acquired all of the outstanding stock of Brite Voice
    Systems, Inc. in a series of transactions accounted for as a
    purchase business combination. Fiscal                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2000 results reflect the results of operations of
    Brite beginning June 1, 1999. Fiscal 2000 income from
    operations and net loss were impacted by special charges of
    $15.0 million relating to the establishment of a
    comprehensive cross-license agreement with an affiliate of
    Lucent Technologies, Inc., provisions for inventories and
    certain intangible assets made obsolete by the Companys
    merger with Brite, severance payments to employees of the
    Company made redundant as a result of the merger with Brite, and
    charges to bad debts relating to the impairment of certain
    foreign accounts receivables, and the cancellation of certain
    customer trade-in obligations. The Company also wrote off
    $30.1 million of the acquisition cost for Brite as
    in-process research and development.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Cautionary Disclosures to Qualify
Forward-Looking Statements

This report on Form 10-K includes
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. All statements other than statements of historical
facts included in this Form 10-K, including, without
limitation, statements contained in this Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Notes to Consolidated Financial
Statements located elsewhere herein regarding the
Companys financial position, business strategy, plans and
objectives of management of the Company for future operations,
and industry conditions, are forward-looking statements.
Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In
addition to important factors described elsewhere in this
report, the Company cautions current and potential investors
that the following important risk factors, among others,
sometimes have affected, and in the future could affect, the
Companys actual results and could cause such results
during fiscal 2005, and beyond, to differ materially from those
expressed in any forward-looking statements made by or on behalf
of the Company:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company is prone to quarterly sales
    fluctuations.Some of the
    Companys transactions are completed in the same fiscal
    quarter as ordered. The quantity and size of large sales (sales
    valued at approximately $2.0 million or more) during any
    quarter can cause wide variations in the Companys
    quarterly sales and earnings, as such sales are unevenly
    distributed throughout the fiscal year. The Companys
    accuracy in estimating future sales is largely dependent on its
    ability to successfully qualify, estimate and close system sales
    from its pipeline of sales opportunities during a
    quarter. No matter how promising a pipeline opportunity may
    appear, there is no assurance it will ever result in a sale.
    Accordingly, the Companys actual sales for any fiscal
    reporting period may be significantly different from any
    estimate of sales for such period. See the discussion entitled
    Sales in this Item 7 for a discussion of the
    Companys system for estimating sales and trends in its
    business.
|
| |  | The Companys financing agreements
    include significant financial and operating covenants and
    default provisions.In addition to
    obligations requiring the monthly payment of interest, the
    Companys line of credit agreement and its mortgage loan
    facility contain significant financial covenants, operating
    covenants and default provisions. If the Company does not comply
    with any of these covenants and default provisions, the
    Companys secured lenders can accelerate all indebtedness
    outstanding under the facilities and foreclose on a significant
    portion of the Companys assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The Company is subject to potential and
    pending lawsuits and other claims.The
    Company is subject to certain potential and pending lawsuits and
    other claims discussed in Item 3 Legal
    Proceedings. The Company believes the pending lawsuit to
    which it is subject is without merit and intends to defend the
    matter vigorously. The Company may not prevail in the pending
    litigation or other matters. There can be no assurance that
    expenses, including any potential settlement or judgment,
    related to any lawsuit would not be material to the
    Companys financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The Company faces intense competition based on
    product capabilities and experiences ever increasing demands
    from its actual and prospective customers for its products to be
    compatible with a variety of rapidly proliferating computing,
    telephony and computer networking technologies and
    standards.The ultimate success of the
    Companys products is dependent, to a large degree, on the
    Company allocating                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | its resources to developing and improving
    products compatible with those technologies, standards and
    functionalities that ultimately become widely accepted by the
    Companys actual and prospective customers. The
    Companys success is also dependent, to a large degree, on
    the Companys ability to implement arrangements with other
    vendors with complementary product offerings to provide actual
    and prospective customers greater functionality and to ensure
    that the Companys products are compatible with the
    increased variety of technologies and standards. The principal
    competitors for the Companys solutions include Genesys,
    Avaya, IBM, Nortel, Aspect Communications, Edify, Comverse
    Technology and Lucent Technologies. Many of the Companys
    competitors have greater financial, technological and marketing
    resources than the Company. Although the Company has committed
    substantial resources to enhance its existing products and to
    develop and market new products, it may not be successful.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The Company may not be successful in
    transitioning to an open, standards-based business
    model.The Company has historically
    provided complete, bundled hardware and software systems using
    internally developed components to address its customers
    total business needs. Increasingly, the markets for the
    Companys products are requiring a shift to the development
    of products and services based on an open, standards-based
    architecture such as the J2EE and Microsofts®.NET
    environments utilizing VoiceXML and/or SALT standards. Such an
    open, standards-based approach allows customers to independently
    purchase and combine hardware components, standardized software
    modules, and customization, installation and integration
    services from individual vendors deemed to offer the best value
    in the particular class of product or service. In such an
    environment, the Company believes it may sell less hardware and
    fewer bundled systems and may become increasingly dependent on
    its development and sale of software application packages,
    customized software and consulting and integration services.
    This shift will place new challenges on the Companys
    management to transition its products and to hire and retain the
    mix of personnel necessary to respond to this business
    environment, to adapt to the changing expense structure that the
    new environment may tend to foster, and to increase sales of
    services, customized software and application packages to offset
    reduced sales of hardware and bundled systems. If the Company is
    unsuccessful in resolving one or more of these challenges, the
    Companys revenues and profitability could decline.
|
| |  | The Company may incur additional expense as
    open standards evolve over time.Open
    standards are relatively new to the Companys industry, and
    such standards continue to evolve. Furthermore, some of the
    technologies that are incorporated in the Companys
    products are subject to different and competing open standards,
    and the ultimate success or failure of some of these competing
    standards remains uncertain. The Company is not in a position to
    control, know or necessarily forecast changes that may be made
    to existing open standards in the future or the potential
    adoption of new open standards. Accordingly, it will remain
    difficult for the Company to estimate the level of R&D
    expenditures that will be necessary in future periods to comply
    with existing standards and, potentially, to migrate to new open
    standards.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The Company may not be able to retain its
    customer base and, in particular, its more significant
    customers.The Companys success
    depends substantially on retaining its significant customers.
    The loss of one of the Companys significant customers
    could negatively impact the Companys results of
    operations. The Companys installed base of customers
    generally is not contractually obligated to place further
    solutions orders with the Company or to extend their services
    contracts with the Company at the expiration of their current
    contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The Company will be harmed if it loses key
    business and technical personnel.The
    Company relies upon the services of a relatively small number of
    key technical and senior management personnel, most of whom do
    not have employment contracts. If the Company were to lose any
    of its key technical, project management, or senior management
    personnel, replacing them could be difficult and costly. If it
    were unable to successfully and promptly replace such personnel,
    the business could be materially harmed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If requirements relating to the accounting
    treatment for employee stock options are changed, the Company
    may be forced to change its compensation
    practices.The Company currently
    accounts for the issuance of stock options using the intrinsic
    value method as defined in Accounting Principles Board
    (APB) Opinion No. 25, Accounting for
    Stock Issued to Employees. The Financial Accounting
    Standards Board has issued an exposure draft that requires
    companies to include a compensation expense in their statements
    of operations relating to the issuance of employee stock
    options. The change in accounting for stock options is presently
    anticipated to become effective for the Companys fiscal
    year beginning March 1, 2005. If this change is adopted,
    the Company will incur additional expense if it continues to use
    stock options as part of its compensation strategy.
    Alternatively, the Company could decide to decrease or eliminate
    the use of employee stock options as an element of its overall
    compensation plan. Such an action, however, could affect the
    Companys ability to retain existing employees and attract
    qualified candidates for open positions, and/or it could
    increase the cash compensation the Company would have to pay.
|
| |  | The Companys reliance on significant
    vendor relationships could result in significant expense or an
    inability to serve its customers if it loses these
    relationships.Although the Company
    generally uses standard parts and components for its products,
    some of its components, including semi-conductors and, in
    particular, digital signal processors manufactured by Texas
    Instruments, are available only from a small number of vendors.
    Likewise, the Company licenses speech recognition technology
    from a small number of vendors. As the Company continues to
    migrate to open, standards-based systems, it will become
    increasingly dependent on its component suppliers and software
    vendors. To date, the Company has been able to obtain adequate
    supplies of needed components and licenses in a timely manner.
    If the Companys significant vendors are unable or cease to
    supply components or licenses at current levels, the Company may
    not be able to obtain these items from another source or at
    historical prices. Consequently, the Company would be unable to
    provide products and to service its customers or to generate
    historical operating margins, which would negatively impact its
    business and operating results.                               
|
| |  | If third parties assert claims that the
    Companys products or services infringe on their technology
    and related intellectual property rights, whether the claims are
    made directly against the Company or against the Companys
    customers, the Company could incur substantial costs to defend
    these claims.If any of these claims
    is ultimately successful, a third party could require the
    Company to pay substantial damages, discontinue the use and sale
    of infringing products, expend significant resources to acquire
    non-infringing alternatives, and/or obtain licenses to use the
    infringed intellectual property rights. Moreover, where the
    claims are asserted with respect to the Companys
    customers, additional expenses may be involved in indemnifying
    the customer and/or designing and providing non-infringing
    products.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The Company is exposed to risks related to its
    international operations that could increase its costs and hurt
    its business.The Companys
    products are currently sold in more than 75 countries. The
    Companys international sales, as a percentage of total
    Company sales, were 41% in fiscal 2004 and 2003 and 44% in
    fiscal 2002. International sales are subject to certain risks,
    including:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



| |   |                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fluctuations in currency exchange rates;                                                                                                                                                                                                                     
| |  | the difficulty and expense of maintaining foreign
    offices and distribution channels;                                                                                                                                                                     
| |  | tariffs and other barriers to trade;                                                                                                                                                                                                                         
| |  | greater difficulty in protecting and enforcing
    intellectual property rights;                                                                                                                                                                             
| |  | general economic and political conditions in each
    country;                                                                                                                                                                                               
| |  | loss of revenue, property and equipment from
    expropriation;                                                                                                                                                                                              
| |  | import and export licensing requirements; and                                                                                                                                                                                                                
| |  | additional expenses and risks inherent in
    conducting operations in geographically distant locations,
    including risks arising from customers speaking different
    languages and having different cultural approaches to the
    conduct of business.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys inability to meet
    contracted performance targets could subject it to significant
    penalties.Many of the Companys
    contracts, particularly for managed services, foreign contracts
    and contracts with telecommunication companies, include
    provisions for the assessment of liquidated damages for delayed
    project completion and/or for the Companys failure to
    achieve certain minimum

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | service levels. The Company has had to pay
    liquidated damages in the past and may have to pay additional
    liquidated damages in the future. Any such future liquidated
    damages could be significant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The Company is exposed to general economic
    conditions that may harm its business.Although the general level of business activity rebounded during
    the Companys fiscal year ended February 29, 2004, the
    Company has been affected by the general economic downturn of
    the preceding several years, including, particularly, the
    downturn in the telecommunications markets. If United States or
    global economic conditions deteriorate again in the future, it
    is possible that capital spending for advanced technology such
    as that offered by the Company will again decline. If such
    unfavorable economic conditions were to occur in the United
    States or internationally, such conditions could have a material
    adverse impact on the Companys business, operating results
    and financial condition.                                                                    
|
| |  | Increasing consolidation in the
    telecommunications and financial industries could affect the
    Companys revenues and
    profitability.The majority of the
    Companys significant customers are in the
    telecommunications and financial industries, which are
    undergoing increasing consolidation as a result of merger and
    acquisition activity. This activity involving the Companys
    significant customers could decrease the number of customers
    purchasing the Companys products and/or delay purchases of
    the Companys products by customers that are in the process
    of reviewing their strategic alternatives in light of a pending
    merger or acquisition. If the Company has fewer customers or its
    customers delay purchases of the Companys products as a
    result of merger and acquisition activity, the Companys
    revenues and profitability could decline.
|
| |  | The occurrence of force majeure events could
    impact the Companys results from
    operations.The occurrence of one or
    more of the following events could potentially cause the Company
    to incur significant losses: acts of God, war, riot, embargoes,
    acts of civil or military authorities, acts of terrorism or
    sabotage, shortage of supply or delay in delivery by the
    Companys vendors, the spread of SARS or other diseases,
    fire, flood, explosion, earthquake, accident, strikes,
    radiation, inability to secure transportation, failure of
    communications, failure of utilities or similar events.                                                                                                                                                                                                                                                                             

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Results of Operations

The following table presents certain items as a
percentage of sales for the Companys last three fiscal
years.

|                                                                                                    |  |                           |       |        |  |         |       |   |  |  |       |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------- | ----- | ------ |  | ------- | ----- | - |  |  | ----- | -
|                                                                                                    |  |                          
|                                                                                                    |  | Year Ended February 29/28
|                                                                                                    |  |                          
|                                                                                                    |  | 2004*                     |       | 2003** |  | 2002***
|                                                                                                    |  |                           |       |        |  |        
|Sales                                                                                               |  |                           | 100.0 | %      |  |         | 100.0 | % |  |  | 100.0 | %
|Cost of Goods Sold                                                                                  |  |                           | 45.5  |        |  |         | 56.3  |   |  |  | 59.3  |  
|                                                                                                    |  |                           |       |        |  |         |       |   |  |  |       |  
|Gross Margin                                                                                        |  |                           | 54.5  |        |  |         | 43.7  |   |  |  | 40.7  |  
|                                                                                                    |  |                           |       |        |  |         |       |   |  |  |       |  
|Research and Development Expenses                                                                   |  |                           | 9.2   |        |  |         | 14.5  |   |  |  | 13.8  |  
|Selling, General and Administrative Expenses                                                        |  |                           | 32.2  |        |  |         | 42.2  |   |  |  | 39.4  |  
|Amortization of Goodwill and Acquisition Related
    Intangible Assets                              |  |                           | 1.7   |        |  |         | 4.5   |   |  |  | 6.3   |  
|Impairment of Goodwill and Acquisition Related
    Intangible Assets                                |  |                           |      |        |  |         | 10.7  |   |  |  | 5.5   |  
|                                                                                                    |  |                           |       |        |  |         |       |   |  |  |       |  
|Operating Income (Loss)                                                                             |  |                           | 11.4  |        |  |         | (28.2 | ) |  |  | (24.3 | )
|Other Income (Expense), Net                                                                         |  |                           | 2.5   |        |  |         | (4.6  | ) |  |  | (1.7  | )
|                                                                                                    |  |                           |       |        |  |         |       |   |  |  |       |  
|Income (Loss) Before Income Taxes and the
    Cumulative Effect of a Change in Accounting Principle |  |                           | 8.9   |        |  |         | (32.8 | ) |  |  | (26.0 | )
|Income Taxes (Benefit)                                                                              |  |                           | 2.0   |        |  |         | (0.5  | ) |  |  | (4.9  | )
|                                                                                                    |  |                           |       |        |  |         |       |   |  |  |       |  
|Income (Loss) Before the Cumulative Effect of a
    Change in Accounting Principle                  |  |                           | 6.9   |        |  |         | (32.3 | ) |  |  | (21.1 | )
|                                                                                                    |  |                           |       |        |  |         |       |   |  |  |       |  



---



| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | The fiscal 2004 income from operations was
    impacted by special charges of $2.2 million (1.3% of sales)
    related to a workforce reduction and a separation agreement with
    the Companys former Chief Financial Officer (See
    Special Charges under Item 7).



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ** | The fiscal 2003 loss from operations was impacted
    by special charges of $34.3 million (22.0% of sales)
    related to staffing reductions, facilities closures, the write
    down of excess inventories, costs associated with loss
    contracts, loss on early extinguishment of debt, and impairment
    of certain intangible assets. (See Special Charges
    and Amortization and Impairment of Goodwill and Acquired
    Intangible Assets under Item 7.) Fiscal 2003 results
    benefited from a change in the U.S. federal tax law that
    allowed it to recognize net tax benefits of approximately
    $3.0 million (1.9% of sales).



|    |                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*** | The fiscal 2002 loss from operations was impacted
    by special charges of $33.4 million (15.8% of sales)
    related to the streamlining of product lines, the write down of
    excess inventories and non-productive assets, the closure of
    certain facilities, and staffing reductions (See Special
    Charges under Item 7).

Critical Accounting Policies

In preparing its consolidated financial
statements in conformity with accounting principles generally
accepted in the United States, the Company uses estimates and
projections that affect the reported amounts and related
disclosures and that may vary from actual results. The Company
considers the following accounting policies to be both those
most important to the portrayal of its financial condition and
those that require the most subjective judgment. If actual
results differ significantly from managements estimates
and projections, there could be a material effect on the
Companys financial statements.



| |                    
| | -------------------
| | Revenue Recognition

The Company recognizes revenue from the sale of
hardware and software solutions, from the delivery of
maintenance and other customer services associated with
installed solutions and from the provision of its enhanced
telecommunications services and IVR applications on a managed
service basis. The Companys policies for revenue
recognition follow the guidance in Statement of Position
No. 97-2 Software Revenue Recognition, as
amended (SOP 97-2), SEC Staff Accounting Bulletin
No. 104 (SAB 104) and EITF 00-21

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Revenue Arrangements with Multiple
Deliverables. If contracts include multiple elements, each
element of the arrangement is separately identified and
accounted for based on the relative fair value of such element
as evidenced by vendor specific objective evidence. Revenue is
not recognized on any element of the arrangement if undelivered
elements are essential to the functionality of the delivered
elements.


Sale of Hardware and Software
Solutions:Many of the Companys
sales are of customized software or customized hardware/
software solutions. Such solutions incorporate newly designed
software and/or standard building blocks of hardware and
software which have been significantly modified, configured and
assembled to match unique customer requirements defined at the
beginning of each project. Sales of these customized solutions
are accounted for using contract accounting principles under
either the percentage of completion (POC) or completed contract
methodology as further described below. In other instances,
particularly in situations where the Company sells to
distributors or where the Company is supplying only additional
product capacity (i.e., similar hardware and software solutions
to what is already in place) for an existing customer, the
Company may sell solutions that do not require significant
customization. In those situations, revenue is recognized when
there is persuasive evidence that an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. Typically, this is at shipment when
there is no installation obligation or at the completion of
minor post-shipment installation obligations.

Generally, the Company uses POC accounting for
its more complex custom solutions. In determining whether a
particular sale qualifies for POC treatment, the Company
considers multiple factors including the value of the contract
and the degree of customization inherent in the project.
Projects normally must have an aggregate value of more than
$500,000 to qualify for POC treatment. For a project accounted
for under the POC method, the Company recognizes revenue as work
progresses over the life of the project based on a comparison of
actual labor inputs (labor hours worked) to current estimates of
total labor inputs required to complete the project. Project
estimates are reviewed and updated on a quarterly basis.

The terms of most POC projects require customers
to make interim progress payments during the course of the
project. Such payments and a written customer acknowledgement at
the completion of the project, usually following a final
customer test phase, document the customers acceptance of
the project. In some circumstances, the passage of a
contractually defined time period or the customers use of
the system in a live operating environment may also constitute
final acceptance of a project.

The Company uses completed contract accounting
for smaller custom projects not meeting the POC thresholds
described above. The Company also uses completed contract
accounting in situations where the technical requirements of a
project are so complex or are so dependent on the development of
new technologies or the unique application of existing
technologies that the Companys ability to make reasonable
estimates is in doubt or where a sale is subject to unusual
inherent hazards that make the Companys
estimates doubtful. Such hazards are unrelated to, or only
incidentally related to, the Companys typical activities
and include situations where the enforceability of a contract is
suspect, completion of the contract is subject to pending
litigation, or where the systems produced are subject to
condemnation or expropriation risks. These latter situations are
extremely rare. For all completed contract sales, the Company
recognizes revenue upon customer acceptance as evidenced by a
written customer acknowledgement, the passage of a contractually
defined time period or the customers use of the solutions
in a live operating environment.

The Company generates a significant percentage of
its sales, particularly sales of enhanced telecommunications
services solutions, outside the United States. Customers in
certain countries are subject to significant economic and
political challenges that affect their cash flow, and many
customers outside the United States are generally accustomed to
vendor financing in the form of extended payment terms. To
remain competitive in markets outside the United States, the
Company may offer selected customers such payment terms. In all
cases, however, the Company only recognizes revenue at such time
as its solutions or service fee is fixed or determinable,
collectibility is probable and all other criteria for revenue
recognition have been met. In some limited cases, this policy
may result in the Company recognizing revenue on a cash
basis, limiting revenue recognition on certain sales of
solutions and/or services to the actual cash received to date
from the customer, provided that all other revenue recognition
criteria have been satisfied.

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Sale of Maintenance and Other Customer
Services:The Company recognizes
revenue from maintenance and other customer services when the
services are performed or ratably over the related contract
period. All significant costs and expenses associated with
maintenance contracts are expensed as incurred. This
approximates a ratable recognition of expenses over the contract
period.

Sale of Managed
Services:The Company can provide
enhanced communications solutions to customers on an outsourced
basis through its managed service business. While specific
arrangements can vary, the Company generally builds a customized
system to address a specific customers business need and
then owns, monitors, and maintains that system, ensuring that it
processes the customers business transactions in
accordance with defined specifications. For its services, the
Company generally receives a one-time setup fee paid at the
beginning of the contract and a service fee paid monthly over
the life of the contract. Most contracts range from 12 to
36 months in length.

The Company combines the setup fee and the total
service fee to be received from the customer and recognizes
revenue ratably over the term of the managed service contract.
The Company capitalizes the cost of the computer system(s) and
related applications used to provide the service and depreciates
such costs over the contract life (for assets unique to the
individual contract) or the life of the equipment (for assets
common to the general managed service operations or for assets
whose useful lives are shorter than the related contract term).
All labor and other period costs required to provide the service
are expensed as incurred.

Loss Contracts:The
Company updates its estimates of the costs necessary to complete
all customer contracts in process on a quarterly basis. Whenever
current estimates indicate that the Company will incur a loss on
the completion of a contract, the Company immediately records a
provision for such loss as part of the current period cost of
goods sold.



| |            
| | -----------
| | Inventories

Inventories are valued at the lower of cost or
market. Inventories are recorded at standard cost which
approximates actual cost determined on a first-in, first-out
basis. The Company periodically reviews its inventories for
unsaleable or obsolete items and for items held in excess
quantities based on current and projected usage. Adjustments are
made where necessary to reduce the carrying value of individual
items to reflect the lower of cost or market, and any such
adjustments create a new carrying value for the affected items.



| |                                   
| | ----------------------------------
| | Intangible Assets and
    Goodwill

Intangible Assets:Intangible assets are comprised of separately identifiable
intangible assets arising out of the Companys fiscal 2000
acquisition of Brite Voice Systems, Inc., and certain
capitalized purchased software. Intangible assets are being
amortized using the straight-line method over each assets
estimated useful life. Such lives range from five to twelve
years. The Company reviews its intangible assets for possible
impairment when events and circumstances indicate that the
assets might be impaired and the undiscounted projected cash
flows associated with such assets are less than the carrying
amounts of the assets. In those situations, the Company
recognizes an impairment loss on the intangible asset equal to
the excess of the carrying amount of the asset over the
assets fair value, generally determined based upon
discounted estimates of future cash flows.

The cost of internally developed software
products and substantial enhancements to existing software
products for sale are expensed until technological feasibility
is established, at which time any additional costs would be
capitalized in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86. Technological feasibility of
a computer software product is established when the Company has
completed all planning, designing, coding, and testing
activities that are necessary to establish that the product can
be produced to meet its design specifications including
functions, features, and technical performance requirements. No
costs have been capitalized to date for internally developed
software products and enhancements as the Companys current
process for developing software is essentially completed
concurrently with the establishment of technological
feasibility. The Company capitalizes purchased software upon
acquisition when

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##### Table of Contents



such software is technologically feasible or if
it has an alternative future use, such as use of the software in
different products or resale of the purchased software.


Goodwill:The
Companys goodwill also results from its fiscal 2000
purchase of Brite Voice Systems, Inc. Under the provisions of
SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets,
which the Company adopted on March 1, 2002, goodwill is
presumed to have an indefinite life and is not subject to annual
amortization. Goodwill is subjected, however, to tests for
impairment on at least an annual basis and more frequently if
triggering events are identified on an interim basis. The
impairment review follows the two-step approach defined in
SFAS No. 142. The first step compares the fair value
of the Company with its carrying amount, including goodwill. If
the fair value exceeds the carrying amount, goodwill is
considered not impaired. If the carrying amount exceeds fair
value, the Company must compare the implied fair value of
goodwill with the carrying amount of that goodwill. If the
carrying amount of goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized in an amount
equal to the lesser of that excess or the carrying amount of
goodwill.



| |             
| | ------------
| | Income Taxes

Deferred income taxes are recognized using the
liability method and reflect the tax impact of temporary
differences between the amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax
laws and regulations. The Company provides a valuation allowance
for deferred tax assets in circumstances where it does not
consider realization of such assets to be more likely than not.
This is a highly subjective assessment and requires the Company
to evaluate the predictability of future taxable income while
considering the significant losses the Company incurred in
fiscal 2003 and 2002. In general, the Company does not
anticipate reversing valuation allowances associated with
deferred tax assets of its U.S. and U.K. operations until the
earlier of the time that the underlying deferred tax assets are
realized or the time at which the respective taxable
entities actual results have demonstrated a sustained
profitability and their projected results support the
Companys ability to realize the deferred tax assets
currently being reserved.

Sales

The Company is a leader in providing converged
voice and data solutions and related services. As used herein,
solutions sales include the sale of hardware and/or software and
the related professional services associated with designing,
integrating, and installing custom applications to address
customers business needs. Recurring services include a
suite of maintenance and software upgrade offerings and the
provision of customized solutions to customers on a managed
service (outsourced) basis. The Companys solutions
product line includes IVR/portal solutions, messaging solutions,
and payment solutions. In prior years, the Company identified
its sales of solutions and related services as being sales to
the Enterprise and Network markets. Generally sales of
IVR/portal solutions and related services were made to
Enterprise customers, while sales of messaging and payment
solutions were made to Network customers. Beginning in fiscal
2004, the Company determined that product line distinction
provided the most meaningful breakdown of quarterly and annual
sales activity and began capturing and reporting its activity in
that manner. The Company is not able to provide the historical
breakdown of Network system sales into its messaging and payment
systems components.

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The Companys sales by product line for
fiscal 2004, 2003 and 2002 were as follows (in millions):

|                                                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|------------------------------------------------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                     |  | 2004 |       | 2003 |  | 2002
|                                                                                     |  |      |       |      |  |     
|IVR/portal solution sales (Enterprise systems
    sales prior to fiscal 2004)        |  | $    | 54.2  |      |  | $    | 52.4  |  |  | $ | 77.6  | 
|Messaging solution sales (included in Network
    system sales prior to fiscal 2004) |  |      | 10.8  |      |  |      |      |  |  |   |      | 
|Payment solution sales (included in Network
    system sales prior to fiscal 2004)   |  |      | 18.6  |      |  |      |      |  |  |   |      | 
|Network system sales                                                                 |  |      |      |      |  |      | 32.3  |  |  |   | 48.8  | 
|                                                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|Total solution sales                                                                 |  |      | 83.6  |      |  |      | 84.7  |  |  |   | 126.4 | 
|                                                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|Maintenance and related services sales                                               |  |      | 57.0  |      |  |      | 49.7  |  |  |   | 47.3  | 
|Managed services sales                                                               |  |      | 24.7  |      |  |      | 21.8  |  |  |   | 37.9  | 
|                                                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|Total recurring services sales                                                       |  |      | 81.7  |      |  |      | 71.5  |  |  |   | 85.2  | 
|                                                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|Total Company Sales                                                                  |  | $    | 165.3 |      |  | $    | 156.2 |  |  | $ | 211.6 | 
|                                                                                     |  |      |       |      |  |      |       |  |  |   |       | 

The Company assigns revenues to geographic
locations based on the location of the customer. The
Companys net sales by geographic area for fiscal years
2004, 2003 and 2002 were as follows (in millions):

|                               |       |      |      |       |  |      |      |       |  |   |       |       | 
|------------------------------ | ----- | ---- | ---- | ----- |  | ---- | ---- | ----- |  | - | ----- | ----- | 
|                               |       | 2004 |      | 2003  |  | 2002
|                               |       |      |      |       |  |     
|North America                  |       | $    | 97.7 |       |  | $    | 91.5 |       |  | $ | 118.8 |      
|Central and South America      |       |      | 7.5  |       |  |      | 6.1  |       |  |   | 7.4   |      
|Pacific Rim                    |       |      | 2.5  |       |  |      | 2.9  |       |  |   | 5.5   |      
|Europe, Middle East and Africa |       |      | 57.6 |       |  |      | 55.7 |       |  |   | 79.9  |      
|                               |       |      |      |       |  |      |      |       |  |   |       |      
|                               | Total |      | $    | 165.3 |  |      | $    | 156.2 |  |   | $     | 211.6 | 
|                               |       |      |      |       |  |      |      |       |  |   |       |      

International sales constituted 41% of total
Company sales in fiscal 2004 and 2003 and 44% in fiscal 2002.

Total Company sales increased 6% in fiscal 2004
and declined 26% in fiscal 2003 when compared to sales of the
preceding year. The increase in sales in fiscal 2004 was
comprised of a 1% decrease in solutions sales and a 14% increase
in recurring services sales. The Companys fiscal 2004
sales of IVR/ Portal solutions grew approximately 3%, but such
growth was offset by continuing softness in sales of messaging
and payment solutions which decreased approximately 9% as
compared to fiscal 2003 levels. The sale of such solutions
continues to be affected by the overall decline in the market
for telecommunications equipment which the Company has
experienced over the past two years. The increase in recurring
services sales is made up of growth of approximately 15% in the
sales of maintenance and related services and growth of
approximately 13% in managed services sales. Managed services
sales during fiscal 2004 included $5.7 million relating to
services performed for an international managed services
customer for which the Company recognizes revenue on a cash
basis as compared to $2.9 million of similar sales to the
same customer included in fiscal 2003. Changes in foreign
currency exchange rates from fiscal 2003 to 2004, including
particularly the devaluation of the U.S. dollar as compared
to the British pound, served to increase sales for fiscal 2004
by approximately $2.7 million. Changes to such exchange
rates between fiscal 2002 and 2003 had no material effect on
fiscal 2003 sales.

The decrease in sales in fiscal 2003 was
comprised of a decrease in solutions sales of approximately 33%
and a 16% decline in services sales. The reduced levels of
solutions sales continued to reflect the previously reported
sharp declines in the Companys primary markets during
fiscal 2003 and 2002. The decline in services sales was
primarily attributable to decreased managed service revenues
resulting from a decrease in the volume of activity processed
under certain of the Companys contracts, including,
particularly, its contract with O2, formerly BT Cellnet, offset
by 5% growth in the sale of customer support services.

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The Company has historically made significant
sales of solutions, customer services and managed services to
O2, formerly BT Cellnet. Such combined purchases accounted for
10%, 11% and 15% of the Companys total sales during fiscal
2004, 2003, and 2002, respectively. No other customer accounted
for 10% or more of the Companys sales during fiscal 2004,
2003, or 2002.

The Company uses a system combining estimated
sales from its recurring services contracts,
pipeline of solution sales opportunities, and
backlog of committed solution orders to estimate sales and
trends in its business. For the years ended February 29,
2004 and February 28, 2003, sales were sourced as follows:

|                                                                                                 |  |                       |      |      |  |  |      | 
|------------------------------------------------------------------------------------------------ |  | --------------------- | ---- | ---- |  |  | ---- | 
|                                                                                                 |  |                      
|                                                                                                 |  | Year Ended           
|                                                                                                 |  | February 29/28       
|                                                                                                 |  |                      
|                                                                                                 |  | 2004                  |      | 2003
|                                                                                                 |  |                       |      |     
|                                                                                                 |  |                      
|                                                                                                 |  | (Based on Averages of
|                                                                                                 |  | Quarterly Activity)  
|Sales from recurring service and support
    contracts, including contracts for managed services |  |                       | 49%  |      |  |  | 46%  | 
|Sales from solutions backlog                                                                     |  |                       | 36%  |      |  |  | 29%  | 
|Sales from the pipeline                                                                          |  |                       | 15%  |      |  |  | 25%  | 
|                                                                                                 |  |                       |      |      |  |  |      | 
|                                                                                                 |  |                       | 100% |      |  |  | 100% | 
|                                                                                                 |  |                       |      |      |  |  |      | 

The Companys service and support contracts
range in original duration from one month to five years, with
most managed service contracts having initial terms of two to
three years and most maintenance and related contracts having
initial terms of one year. Because many of the longer duration
contracts give customers early cancellation privileges, the
Company does not consider its book of services contracts to be
reportable backlog, and a portion of the potential revenue
reflected in the contract values may never be realized.
Nevertheless, it is easier for the Company to estimate service
and support sales than to estimate solution sales for the next
quarter because the service and support contracts generally span
multiple quarters and revenues recognized under each contract
are generally similar from one quarter to the next.

The Companys backlog is made up of customer
orders for solutions for which it has received complete purchase
orders and which the Company expects to ship within twelve
months. At February 29/28, 2004, 2003 and 2002, the
Companys backlog of solutions sales was approximately
$31.7 million, $33.5 million and $26 million,
respectively.

The Companys pipeline of opportunities for
solutions sales is the aggregation of its sales opportunities,
with each opportunity evaluated for the date the potential
customer will make a purchase decision, competitive risks, and
the potential amount of any resulting sale. No matter how
promising a pipeline opportunity may appear, there is no
assurance it will ever result in a sale. While this pipeline may
provide the Company some sales guidelines in its business
planning and budgeting, pipeline estimates are necessarily
speculative and may not consistently correlate to solutions
revenues in a particular quarter or over a longer period of
time. While the Company knows the amount of solutions backlog
available at the beginning of a quarter, it must speculate on
its pipeline of solutions opportunities for the quarter. The
Companys accuracy in estimating total solutions sales for
future fiscal quarters is, therefore, highly dependent upon its
ability to successfully estimate which pipeline opportunities
will close during the quarter.

The Company is prone to quarterly sales
fluctuations. Some of the Companys transactions are
completed in the same fiscal quarter as ordered. The quantity
and size of large sales (sales valued at approximately
$2.0 million or more) during any quarter can cause wide
variations in the Companys quarterly sales and earnings,
as such sales are unevenly distributed throughout the fiscal
year.

To compete effectively in its target markets in
fiscal 2005 and beyond, the Company believes it must continue to
transition its products and services to an open, standards-based
business model. The Company has historically provided complete,
bundled hardware and software systems using internally developed
components to address its customers total business needs.
Increasingly, the markets for the Companys products are
requiring a shift to the development of products and services
based on an open, standards-based architecture such as the J2EE
and Microsofts®.NET environments utilizing VoiceXML
and/or SALT standards. Such an

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open, standards-based approach allows customers
to independently purchase and combine hardware components,
standardized software modules, and customization, installation
and integration services from individual vendors deemed to offer
the best value in the particular class of product or service. In
such an environment, the Company believes it may sell less
hardware and fewer bundled systems and may become increasingly
dependent on its development and sale of software application
packages, customized software and consulting and integration
services. This shift will place new challenges on the
Companys management to transition its products and to hire
and retain the mix of personnel necessary to respond to this
business environment, to adapt to the changing expense structure
that the new environment may tend to foster, and to increase
sales of services, customized software and application packages
to offset reduced sales of hardware and bundled systems.


Special Charges



| |            
| | -----------
| | Fiscal 2004

During fiscal 2004, the Company incurred
severance charges of approximately $1.4 million in
connection with a reduction in workforce affecting 56 positions.
In addition, the Company incurred cash and non-cash charges
totaling approximately $0.5 million and $0.3 million,
respectively, under the terms of a separation agreement with the
Companys former Chief Financial Officer who resigned to
pursue other opportunities.

The following table summarizes the effect on
reported operating results by financial statement category of
all special charge activities for fiscal 2004 (in millions).

|                                        |  |            |     |             |  |                |     |       |  |   |     |  |  |   |     | 
|--------------------------------------- |  | ---------- | --- | ----------- |  | -------------- | --- | ----- |  | - | --- |  |  | - | --- | 
|                                        |  |            |     |             |  | Selling,       |     |      
|                                        |  | Cost of    |     | Research &  |  | General &      |     |      
|                                        |  | Goods Sold |     | Development |  | Administrative |     | Total
|                                        |  |            |     |             |  |                |     |      
|Severance payments and related benefits |  | $          | 0.6 |             |  | $              | 0.2 |       |  | $ | 0.6 |  |  | $ | 1.4 | 
|Separation settlement                   |  |            |    |             |  |                |    |       |  |   | 0.8 |  |  |   | 0.8 | 
|                                        |  |            |     |             |  |                |     |       |  |   |     |  |  |   |     | 
|Total                                   |  | $          | 0.6 |             |  | $              | 0.2 |       |  | $ | 1.4 |  |  | $ | 2.2 | 
|                                        |  |            |     |             |  |                |     |       |  |   |     |  |  |   |     | 

As of February 29, 2004, all cash charges
had been paid.



| |            
| | -----------
| | Fiscal 2003

During fiscal 2003, the Company continued to
implement actions designed to lower cost and improve operational
efficiency in response to continued softness in the primary
markets for its products. It also reviewed its intangible assets
for evidence of impairment in light of changes in its business
and continued weakness in the world-wide telecommunications
networks markets. (See Amortization and Impairment of
Goodwill and Acquired Intangible Assets.)

The following table summarizes the effect of the
special charges on fiscal 2003 operations by financial statement
category (in millions).

|                                        |       |            |     |             |  |      |     |          |  |               |     |       |  |   |     |     |  |   |      |      |  |   |      |      | 
|--------------------------------------- | ----- | ---------- | --- | ----------- |  | ---- | --- | -------- |  | ------------- | --- | ----- |  | - | --- | --- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                                        |       | Cost of    |     | Research &  |  |      |     | Other    |  | Impairment of |     |      
|                                        |       | Goods Sold |     | Development |  | SG&A |     | Expenses |  | Intangibles   |     | Total
|                                        |       |            |     |             |  |      |     |          |  |               |     |      
|Write down of intangible assets         |       | $          |    |             |  | $    |    |          |  | $             |    |       |  | $ |    |     |  | $ | 16.7 |      |  | $ | 16.7 |     
|Severance payments and related benefits |       |            | 2.3 |             |  |      | 0.8 |          |  |               | 3.1 |       |  |   |    |     |  |   |     |      |  |   | 6.2  |     
|Facilities closures                     |       |            | 0.2 |             |  |      | 0.1 |          |  |               | 0.4 |       |  |   |    |     |  |   |     |      |  |   | 0.7  |     
|Write down of excess inventories        |       |            | 4.1 |             |  |      |    |          |  |               |    |       |  |   |    |     |  |   |     |      |  |   | 4.1  |     
|Costs associated with loss contracts    |       |            | 4.7 |             |  |      |    |          |  |               |    |       |  |   |    |     |  |   |     |      |  |   | 4.7  |     
|Loss on early extinguishment of debt    |       |            |    |             |  |      |    |          |  |               |    |       |  |   | 1.9 |     |  |   |     |      |  |   | 1.9  |     
|                                        |       |            |     |             |  |      |     |          |  |               |     |       |  |   |     |     |  |   |      |      |  |   |      |     
|                                        | Total |            | $   | 11.3        |  |      | $   | 0.9      |  |               | $   | 3.5   |  |   | $   | 1.9 |  |   | $    | 16.7 |  |   | $    | 34.3 | 
|                                        |       |            |     |             |  |      |     |          |  |               |     |       |  |   |     |     |  |   |      |      |  |   |      |     

The severance and related costs recognized during
fiscal 2003 related to three separate workforce reductions that
affected a total of 273 employees. One of the reductions was
associated with the Companys

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consolidation of its separate Enterprise and
Networks divisions into a single, integrated organizational
structure. The charge also included costs associated with the
resignation of the Networks division president during the first
quarter of fiscal 2003. Costs related to facilities closures
included $0.4 million for the closure of the Companys
leased facility in Chicago, Illinois and $0.3 million
associated with the closure of a portion of the Companys
leased facilities in Manchester, United Kingdom. The downsizing
of the leased space in Manchester followed from the
Companys decision to consolidate virtually all of its
manufacturing operations into its Dallas, Texas facilities. The
inventory adjustments reflected the Companys continued
assessment of its inventory levels in light of sales
projections, the decision to eliminate the U.K. manufacturing
operation and the consolidation of the business units. The
charges for loss contracts reflected the costs incurred on two
contracts which were expected to result in net losses to the
Company upon completion. The loss on early extinguishment of
debt included $1.4 million in non-cash charges to write-off
unamortized debt discount and unamortized debt issue costs and
$0.5 million in prepayment premiums. As of
February 29, 2004, all cash charges had been paid.




| |            
| | -----------
| | Fiscal 2002

During the fourth quarter of fiscal 2002, the
Company performed a comprehensive review of the positioning of
its product lines, including lines brought forward from its
merger with Brite, reevaluated its physical plant needs, and
reviewed its aggregate staffing levels. Based on these reviews,
the Company took a number of strategic actions designed to lower
costs and streamline product offerings. As a result of these
actions, the Company incurred special charges of approximately
$33.4 million, including $16.4 million for the write
down of intangible assets and inventories associated with
discontinued product lines, $6.5 million for the write down
of excess inventories, $5.2 million for severance payments
and related benefits, $4.2 million for facilities closures,
and $1.1 million relating to the write down of
non-productive fixed assets.

The following table summarizes the effect of
these special charges on fiscal 2002 operations by financial
statement category (in millions).

|                                                                                               |       |            |     |             |  |      |     |               |  |       |     |     |  |   |      |      |  |   |      |      | 
|---------------------------------------------------------------------------------------------- | ----- | ---------- | --- | ----------- |  | ---- | --- | ------------- |  | ----- | --- | --- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                                                                                               |       | Cost of    |     | Research &  |  |      |     | Impairment of |  |      
|                                                                                               |       | Goods Sold |     | Development |  | SG&A |     | Intangibles   |  | Total
|                                                                                               |       |            |     |             |  |      |     |               |  |      
|Write down of intangible assets and inventories
    associated with discontinued product lines |       | $          | 4.4 |             |  | $    |    |               |  | $     | 0.3 |     |  | $ | 11.7 |      |  | $ | 16.4 |     
|Write down of excess inventories                                                               |       |            | 6.5 |             |  |      |    |               |  |       |    |     |  |   |     |      |  |   | 6.5  |     
|Severance payments and related benefit                                                         |       |            | 2.2 |             |  |      | 0.8 |               |  |       | 2.2 |     |  |   |     |      |  |   | 5.2  |     
|Facilities closures                                                                            |       |            |    |             |  |      |    |               |  |       | 4.2 |     |  |   |     |      |  |   | 4.2  |     
|Write down of non-productive fixed assets                                                      |       |            | 0.3 |             |  |      | 0.7 |               |  |       | 0.1 |     |  |   |     |      |  |   | 1.1  |     
|                                                                                               |       |            |     |             |  |      |     |               |  |       |     |     |  |   |      |      |  |   |      |     
|                                                                                               | Total |            | $   | 13.4        |  |      | $   | 1.5           |  |       | $   | 6.8 |  |   | $    | 11.7 |  |   | $    | 33.4 | 
|                                                                                               |       |            |     |             |  |      |     |               |  |       |     |     |  |   |      |      |  |   |      |     

The $11.7 million write down of intangible
assets reflected the impairment of the Brite tradename, the
impairment of certain IVR technology acquired as part of the
Brite acquisition and the impairment of related goodwill (See
Amortization and Impairment of Goodwill and Acquired
Intangible Assets). The $4.4 million write down of
inventories and $0.3 million charge to selling, general and
administrative (SG&A) expenses related to the
Companys decision to discontinue sales of certain earlier
versions of its payment and messaging systems that ran on a
different hardware platform than that used by the current
versions of those systems. The additional writedown of
inventories totaling approximately $6.5 million related to
items which the Company could continue to use in certain sales
situations but which, given the slowdown in market demand, it
held in excess quantities at year end.

As part of its fiscal 2002 initiatives, the
Company announced plans to forego expansion into existing leased
space in Allen, Texas and to close its Jacksonville, Florida and
Wichita, Kansas locations. As a result of these actions, the
Company recorded charges of approximately $4.2 million,
including approximately $3.8 million accrued for future
lease commitments and approximately $0.4 million for
accelerated depreciation expense arising from a reassessment of
the useful lives of certain related property and equipment. As
part of its overall facilities assessment, the Company also
identified and wrote off approximately $1.1 million of

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fixed assets no longer being used by the Company.
The Company completed the sale of its Wichita, Kansas office
building on May 31, 2002. The $2.0 million in gross
proceeds was used to pay down amounts outstanding under the
Companys then outstanding revolving credit facility. As of
February 29, 2004, approximately $1.0 million of the
accrued lease costs remain unpaid.


The severance and related costs recognized in the
fourth quarter of fiscal 2002 were associated with two workforce
reductions that affected 198 employees. As of
February 29, 2004, all cash charges had been paid.

Cost of Goods Sold

Cost of goods sold was $75.3 million (45.5%
of sales), $88.0 million (56.3% of sales) and
$125.6 million (59.3% of sales) in fiscal 2004, 2003 and
2002, respectively. During fiscal 2004, 2003 and 2002, the
Company incurred special charges to cost of goods sold totaling
$0.6 million (0.3% of sales), $11.3 million (7.2% of
sales) and $13.4 million (6.3% of sales), respectively, as
described in the preceding Special Charges section.
The decrease in the cost of goods sold percentage relating to
other than special charges for fiscal 2004 is attributable to
the benefit from the Companys cost cutting initiative from
the prior year as well as differences in the sales channel mix
over the time frames. The cash basis services revenue recognized
during fiscal 2004 as compared to fiscal 2003 also affected the
calculation. The decrease in the cost of goods sold percentage
relating to other than special charges for fiscal 2003 is
attributable to actions taken by the Company to reduce the fixed
labor cost component of total cost. The Company reduced
manufacturing headcount by 70 from ending fiscal 2002 levels,
consolidated its manufacturing operations in a single location,
and consolidated certain customer service and managed service
support centers.

Research and Development

Research and development expenses during fiscal
2004, 2003 and 2002 were approximately $15.2 million (9.2%
of sales), $22.6 million (14.5% of sales), and
$29.3 million (13.8% of sales), respectively. The Company
incurred special charges of $0.2 million (0.1% of sales),
$0.9 million (0.6% of sales) and $1.5 million (0.7% of
sales) in fiscal 2004, 2003 and 2002, respectively, as described
in Special Charges above. Expenses were down in
fiscal 2004 and fiscal 2003 from prior year levels as a result
of the Companys cost reduction initiatives and, in fiscal
2004, as a result of the reassignment of certain resources from
R&D to direct customer service activities (cost of goods
sold) in connection with the Companys fiscal 2003
reorganization. Recurring research and development expenses
included the design of new products and the enhancement of
existing products.

The Companys research and development
spending is focused in four key areas. First, software tools are
being developed to aid in the development, deployment and
management of customer applications incorporating speech
recognition and text-to-speech technologies. Next, server-based
software platforms are being developed for runtime services for
the management of contact center resources and speech
applications. Software platforms are being developed for
deployment and management of wireless and wireline network
operator applications. These software platforms are designed to
operate in both J2EE and Microsofts®.NET enterprise
computing environments. Third, media servers and voice
browsers based on open standards such as SALT and VoiceXML
are being developed. Finally, the Company is developing
packaged, speech enabled applications for the network operator
and enterprise markets. These include a range of vertical and
horizontal applications that are designed to greatly enhance
customer return on investment by providing many commonly used,
configurable functions that can be more quickly deployed than
custom applications.

The Company expects to maintain a strong
commitment to research and development to remain at the
forefront of technology development in its business markets,
which is essential to the continued improvement of the
Companys position in the industry.

Selling, General and Administrative

SG&A expenses totaled $53.2 million
(32.2% of sales), $65.9 million (42.2% of sales), and
$83.3 million (39.4% of sales), in fiscal 2004, 2003 and
2002, respectively. Such amounts included special charges of
$1.4 million (0.8% of sales), $3.5 million (2.2% of
sales) and $6.8 million (3.2% of sales), respectively, as

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described in Special Charges above.
SG&A expenses declined in fiscal 2004 and 2003 from prior
year levels primarily as a result of cost control initiatives
implemented by the Company over the three-year period.


Amortization and Impairment of Goodwill and
Acquired Intangible Assets

In connection with its purchase of Brite in
fiscal 2000, the Company recorded intangible assets and goodwill
totaling $103.8 million. These assets were assigned useful
lives ranging from 5 to 10 years. For the fiscal years
ended February 29/28, 2004, 2003 and 2002, the Company
recognized amortization and impairment expense related to these
assets as follows (in millions):

|                                                                                                                                   |                                                                                    |      |     |      |  |      |      |      |  |   |      |      | 
|---------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ---- | --- | ---- |  | ---- | ---- | ---- |  | - | ---- | ---- | 
|                                                                                                                                   |                                                                                    | 2004 |     | 2003 |  | 2002
|                                                                                                                                   |                                                                                    |      |     |      |  |     
|Amortization of goodwill                                                                                                           |                                                                                    | $    |    |      |  | $    |     |      |  | $ | 2.6  |     
|Amortization of other acquisition related
    intangible assets                                                                    |                                                                                    |      | 2.8 |      |  |      | 7.1  |      |  |   | 10.8 |     
|                                                                                                                                   |                                                                                    |      |     |      |  |      |      |      |  |   |      |     
|                                                                                                                                   | Total amortization of goodwill and other
    acquisition related intangible assets |      |     | 2.8  |  |      |      | 7.1  |  |   |      | 13.4 | 
|                                                                                                                                   |                                                                                    |      |     |      |  |      |      |      |  |   |      |     
|Impairment of other acquisition related
    intangible assets as described below                                                   |                                                                                    |      |    |      |  |      | 16.7 |      |  |   | 8.0  |     
|Impairment of goodwill in connection with the
    impairment of other acquisition related intangible assets as
    described below |                                                                                    |      |    |      |  |      |     |      |  |   | 3.7  |     
|                                                                                                                                   |                                                                                    |      |     |      |  |      |      |      |  |   |      |     
|                                                                                                                                   | Total impairment charged to operating income                                       |      |     |     |  |      |      | 16.7 |  |   |      | 11.7 | 
|                                                                                                                                   |                                                                                    |      |     |      |  |      |      |      |  |   |      |     
|Total amortization and impairment charged to
    operating income                                                                  |                                                                                    | $    | 2.8 |      |  | $    | 23.8 |      |  | $ | 25.1 |     
|                                                                                                                                   |                                                                                    |      |     |      |  |      |      |      |  |   |      |     
|Impairment of goodwill in connection with the
    adoption of SFAS No. 142 as described below                                      |                                                                                    | $    |    |      |  | $    | 15.8 |      |  | $ |     |     
|                                                                                                                                   |                                                                                    |      |     |      |  |      |      |      |  |   |      |     

Effective March 1, 2002, the Company adopted
Statements of Financial Accounting Standards No. 141,
Business Combinations, and No. 142, Goodwill and Other
Intangible Assets (the Statements). Statement
No. 141 refines the definition of what assets may be
considered as separately identified intangible assets apart from
goodwill. Statement No. 142 provides that goodwill and
intangible assets deemed to have indefinite lives will no longer
be amortized, but will be subject to impairment tests on at
least an annual basis.

In adopting the Statements, the Company first
reclassified $2.7 million of intangible assets associated
with its assembled workforce (net of related deferred taxes of
$1.4 million) to goodwill because such assets did not meet
the new criteria for separate identification. The Company then
allocated its adjusted goodwill balance of $19.2 million to
its then existing Enterprise and Networks divisions and
completed the transitional impairment tests required by
Statement No. 142. The fair values of the reporting units
were estimated using a combination of the expected present
values of future cash flows and an assessment of comparable
market values. As a result of these tests, the Company
determined that the goodwill associated with its Networks
division was fully impaired, and, accordingly, it recognized a
non-cash, goodwill impairment charge of $15.8 million as
the cumulative effect on prior years of this change in
accounting principle. This impairment resulted primarily from
the significant decline in Networks sales and profitability
during the fourth quarter of fiscal 2002 and related reduced
forecasts for the divisions sales and profitability.
Effective August 1, 2002, the Company combined its
divisions into a single integrated organizational structure in
order to address changing market demands and global customer
requirements. The Company conducted its required annual test of
goodwill impairment during the fourth quarters of fiscal 2004
and 2003. No additional impairment of goodwill was indicated.
Accordingly, at February 29, 2004, the Companys
remaining acquired goodwill totaled $3.4 million.

During fiscal 2003, the Company was adversely
affected by continuing softness in the general
U.S. economy, by extreme softness in the worldwide
network/telecommunications market and by political tensions in
parts of South America and the Middle East. The Company
experienced a second year of declining network revenue and
significantly reduced its estimates of near term growth in
revenue and net income for its networks based products. As a
result, the Company determined that a triggering event, as
defined in

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SFAS No. 144, had occurred during the
fourth quarter of fiscal 2003 and, accordingly, the Company
evaluated its intangible assets for evidence of impairment.
Based on the results of its review, the Company recognized
impairment charges of $14.2 million and $2.5 million,
respectively, to reduce the carrying value of its customer
relations and developed technology intangible assets to their
respective fair values, which were based on estimated discounted
future cash flows.


During the fourth quarter of fiscal 2002, the
Company performed a comprehensive review of the positioning of
all product lines, including lines brought forward from its
fiscal 2000 merger with Brite. As a result of decisions made
during that review, the Company performed impairment tests in
accordance with its stated policies on the Brite tradename and
on certain of the developed technology associated with the Brite
acquisition. Based on these tests, the Company recorded
impairment charges of $4.8 million and $3.2 million,
respectively, to reduce the carrying value of these intangible
assets and an additional charge of $3.7 million to reduce
the carrying value of goodwill associated with the impaired
assets.

At February 29, 2004, the Company had
$6.4 million in net intangible assets other than goodwill
which will be subject to amortization in future periods. The
estimated amortization expense attributable to the
Companys intangible assets for each of the next five years
and thereafter is as follows (in millions):

|            |  |   |     | 
|----------- |  | - | --- | 
|Fiscal 2005 |  | $ | 1.7 | 
|Fiscal 2006 |  | $ | 1.2 | 
|Fiscal 2007 |  | $ | 1.1 | 
|Fiscal 2008 |  | $ | 1.1 | 
|Fiscal 2009 |  | $ | 1.0 | 
|Thereafter  |  | $ | 0.3 | 

Other Income (Expense)

Other income (expense) during fiscal 2004,
2003 and 2002 was comprised primarily of interest income on cash
and cash equivalents, foreign currency transaction losses
totaling approximately ($2.3) million and
($0.9) million in fiscal 2004 and 2003, respectively, and a
foreign currency transaction gain of approximately
$0.1 million in fiscal 2002.

Interest Expense

The Company incurred interest expense of
approximately $2.0 million, $4.7 million and
$4.9 million during fiscal 2004, 2003 and 2002,
respectively. Substantially all of this expense relates to the
Companys long term borrowings initially obtained in
connection with the Brite merger and subsequently refinanced
(See Liquidity and Capital Resources for a
description of the Companys long term borrowings). The
reduction in interest expense from fiscal 2002 through fiscal
2004 is primarily attributable to the lower levels of debt
outstanding in successive years, partially offset in fiscal 2003
by additional costs arising from the amortization of debt
issuance costs and debt discounts associated with financings
undertaken during that year. Borrowings under all credit
agreements totaled $13.1 million, $19.1 million and
$30.0 million at February 29/28, 2004, 2003 and 2002,
respectively. Assuming principal payments in accordance with the
Companys existing financing agreements and interest rates
consistent with current market rates, the Company expects its
fiscal 2005 interest expense to be approximately
$1.0 million.

From July 1999 through October 2001, the Company
used interest rate swap arrangements to hedge the variability of
interest payments on its then existing variable rate credit
facilities. While in effect, the swap arrangements essentially
converted the Companys outstanding floating rate debt to a
fixed rate basis. Of the $4.9 million total interest
expense in fiscal 2002, approximately $1.5 million was
attributable to net settlements under the interest rate swap
arrangements. The Company terminated its swap arrangements in
October 2001 in response to the continued downward movement in
interest rates during fiscal 2002 and had no derivative
contracts in place as of February 29/28, 2004 and 2003.

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Income Taxes

The Companys income tax expense for fiscal
2004 totaled $3.4 million or 23% of pretax income. This
percentage differs from the U.S. statutory rate of 35%
primarily as a result of the taxability in the U.S. of
certain dividends deemed to have been received from the
Companys foreign subsidiaries, the use of certain fully
reserved net operating losses carried forward from prior years
and the favorable resolution of certain tax contingencies and
amounts payable for foreign taxes. The Companys income tax
benefit for fiscal 2003 and 2002 as a percent of pretax loss
also differs significantly from the federal statutory rate of
35% primarily as a result of benefits recognized in fiscal 2003
as a result of a change in U.S. tax law, operating losses
and credit carryforwards generated but not benefited,
non-deductible amortization of goodwill resulting from the
merger with Brite, and various U.S. tax credits.

The Companys U.S. taxable income for
fiscal 2004 included distributions deemed to have been made to
the Company as an U.S. entity from several of its foreign
subsidiaries, including, particularly, its U.K. subsidiary. Such
deemed distributions stemmed from the existence of intercompany
debt owed by the U.S. entity to certain of its foreign
subsidiaries and from the pledging of certain U.K. assets as
collateral for the Companys term loan which was
outstanding for a portion of the year.

During fiscal 2004, the Company used net
operating losses carried forward from previous years to reduce
its current taxes payable in the U.S. The use of these
losses and the related reversal of previously established
valuation allowances associated with the loss carryforwards
reduced the Companys U.S. and consolidated tax provisions
for fiscal 2004 and also gave rise to $1.0 million in
credits to equity for portions of the loss carryforwards related
to stock option and other equity issues.

During fiscal 2004, the Company reached final
settlement with the Internal Revenue Service regarding
previously disclosed audits of the Companys federal income
tax returns for its fiscal years 2000 and 2001. In the
settlement, the Company lost the ability to carry back
approximately $5.4 million in net operating losses
generated in fiscal 2001 and repaid approximately
$2.1 million of refunds previously received from the IRS
plus approximately $0.5 million in accrued interest. The
final settlements had been anticipated in the Companys
fiscal 2003 net tax provision and had no material effect on
the tax provision or net income for fiscal 2004.

During fiscal 2004, the Companys wholly
owned subsidiary, Brite Voice Systems, Inc. (Brite),
reached final settlement with the IRS regarding a disputed
Notice of Deficiency relating to Brites August 1999
federal income tax return. As a result of the settlement, the
Company reversed approximately $1.2 million of taxes
payable it had accrued in prior years in response to the IRS
challenge.

During fiscal 2003, United States tax law was
amended to allow companies which incurred net operating losses
in 2001 and 2002 to carry such losses back a maximum of five
years instead of the maximum of two years previously allowed. As
a result of this change, during the first quarter of fiscal
2003, the Company used $21.5 million of its previously
reported net operating loss carryforwards and $0.4 million
of its previously reported tax credit carryforwards and
recognized a one-time tax benefit of $7.9 million, of which
$2.2 million was recognized as additional capital
associated with previous stock option exercises. Also during
fiscal 2003, the Company became aware of the audit issues
described above associated with its fiscal 2000 and 2001
U.S. tax returns and recorded a charge of approximately
$2.7 million as part of its tax provision for the year.

In fiscal 2002, the Company did not provide a
valuation allowance for deferred assets associated with its
foreign subsidiaries. In providing such a reserve during fiscal
2003, the Company recognized tax expense totaling
$0.8 million to increase the valuation allowance for net
foreign deferred tax assets that existed at February 28,
2002. Also during fiscal 2003, and as further discussed in
Note C to the Companys consolidated financial
statements, the Company reduced its deferred tax liabilities by
$1.4 million in connection with the reclassification of its
assembled workforce intangible asset to goodwill. As a result of
this transaction, the Company increased the valuation allowance
associated with its U.S. net deferred tax asset by
$1.4 million.

At February 29, 2004, the Company had
U.S. net operating loss carryforwards totaling
$0.3 million. This amount, if not used, will expire in
2023. At February 29, 2004, the Company also had
$3.8 million, $1.6 million and $0.6 million in US
research and development, foreign tax credit and alternative
minimum tax

30



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credit carryforwards, respectively, and
$1.3 million in UK foreign tax credit carryforwards.
If unused, the R&D tax credit carryforwards will begin to
expire in 2019, and the foreign tax credit carryforwards will
begin to expire in 2005.


During fiscal 2003 and fiscal 2002, the Company
established a valuation allowance against its net deferred tax
assets, including its net operating loss carryforwards and tax
credit carryforwards. Although the Company earned a profit in
fiscal 2004 and was able to use some previously reserved net
operating loss carryforwards, the Company believes the existence
of losses in its U.S. operations in recent years and the
dependency of its international subsidiaries on continuing
U.S. operations prevent it from concluding that it is more
likely than not that its deferred tax assets will be realized.
This is a highly subjective assessment and requires the Company
to evaluate the predictability of future taxable income while
considering the significant losses the Company incurred in
fiscal 2003 and 2002. In general, the Company does not
anticipate reversing valuation allowances associated with
deferred tax assets of its U.S. and U.K. operations until the
earlier of the time that the underlying deferred tax assets are
realized or the time at which the respective taxable
entities actual results have demonstrated a sustained
profitability and their projected results support the
Companys ability to realize the deferred tax assets
currently being reserved.

Income (Loss) From Operations and Net Income
(Loss)

The Company generated income from operations of
$18.8 million and net income of $11.3 million during
fiscal 2004. Its loss from operations, loss before the
cumulative effect of a change in accounting principle and net
loss totaled ($44.1) million, ($50.6) million and
($66.4) million, respectively in fiscal 2003. In fiscal
2002, the Company generated an operating loss of
($51.6) million and a net loss of ($44.7) million.

During fiscal 2004, 2003 and 2002, the Company
incurred special charges, as previously described in this
Item 7, totaling $2.2 million, $34.3 million and
$33.4 million, respectively. In fiscal 2003, the Company
benefited from a change in the U.S. federal tax law that
allowed it to recognize net tax benefits of approximately
$3.0 million.

In fiscal 2004, the Company combined improvements
in the overall economic environment, improving markets for its
IVR/portal products, the Companys focus on speech
solutions and open architecture, the Companys focus on its
recurring services offerings and its multi-year efforts to
reduce operating cost and enhance efficiency to produce a return
to profitability. The Companys losses in fiscal 2003 and
fiscal 2002 were primarily attributable to the significant
decline in the Companys sales volumes from 2001 levels and
to the significant restructuring and other special charges
incurred by the Company in its efforts to adjust its operations
to the rapidly changing market for its products. While the
Company benefited throughout fiscal 2003 and 2002 from the
cumulative effect of these efforts, its aggregate costs were too
high to allow the Company to operate profitably in these years
in the face of the sharp downturn in sales activity.

The cumulative effect of a change in accounting
principle on prior years associated with the Companys
adoption of SFAS No. 142 resulted in a charge to
income in fiscal 2003 of $15.8 million. Assuming the
accounting change had been applied retroactively by the Company
to prior periods, pro forma net loss for fiscal 2002 would
have been ($40.3) million, and net loss per common share
would have been ($1.21).

Liquidity and Capital Resources



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company had $40.9 million in cash and
cash equivalents at February 29, 2004, an increase of
$14.7 million over ending fiscal 2003 balances. Borrowings
under the Companys long-term credit facilities totaled
$13.1 million at February 29, 2004, a reduction of
$6.0 million from fiscal 2003 ending balances.

Operating cash flow for fiscal 2004 totaled
$19.1 million and was favorably impacted by the
Companys profitability for the year, including its
collection of $5.7 million from an international managed
services customer for which the Company recognizes revenue on a
cash basis, and by its continuing focus on operating expense
control and balance sheet management. The Companys days
sales outstanding (DSOs) of accounts receivable was
56 days, down slightly from 61 days at
February 28, 2003.

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For sales of certain of its more complex,
customized solutions (generally ones with a sales price of
$500,000 or more), the Company recognizes revenue based on a
percentage of completion methodology. Unbilled receivables
accrued under this methodology totaled $8.8 million (34.0%
of total net receivables) at February 29, 2004 as compared
to $4.9 million (19.0% of total receivables) at
February 28, 2003. The Company expects to bill and collect
unbilled receivables as of February 29, 2004 within the
next twelve months.

While the Company continues to focus on the level
of its investment in accounts receivable, it now generates a
significant percentage of its sales, particularly sales of
enhanced telecommunications services solutions, outside the
United States. Customers in certain countries are subject to
significant economic and political challenges that affect their
cash flow, and many customers outside the United States are
generally accustomed to vendor financing in the form of extended
payment terms. To remain competitive in markets outside the
United States, the Company may offer selected customers such
payment terms. In all cases, however, the Company only
recognizes revenue at such time as its solution or service fee
is fixed or determinable, collectibility is probable and all
other criteria for revenue recognition have been met. In some
limited cases, this policy may result in the Company recognizing
revenue on a cash basis, limiting revenue
recognition on certain sales of solutions and/or services to the
actual cash received to date from the customer, provided that
all other revenue recognition criteria have been satisfied.

The Company used $5.5 million of cash in net
investing activities during fiscal 2004. Of this amount,
$2.2 million was used to purchase equipment to be used in
the Companys expanding managed services business and
$3.3 million was used for replacement or expansion of the
Companys computing infrastructure. The Company anticipates
spending up to $6.6 million for the purchase of equipment
in fiscal 2005. As further described below, the Company is
prohibited by the terms of its line of credit agreement from
spending more than $8.0 million on capital expenditures in
a fiscal year without the advance approval of its lender.

During fiscal 2004, the Companys financing
activities provided $0.5 million in net cash flow. In
response to the Companys return to profitability and to
related favorable movement in its stock price, the
Companys option holders exercised options for
1.6 million shares of common stock and, in so doing,
provided the Company with $9.3 million of cash. The Company
used a portion of these funds to make $3.0 million in
scheduled payments and an additional $3.0 million in
discretionary payments under its mortgage and term loans. In
addition, the Company used its improved financial condition to
facilitate the refinancing of approximately $4.6 million
outstanding under its term loan and revolving credit agreement
into a new line of credit agreement as further described below.



| |                   
| | ------------------
| | New Line of Credit

In January 2004, the Company entered into a new
credit agreement with a lender which provided for a revolving
line of credit equal to the lesser of $5.5 million or a
defined borrowing base comprised of eligible U.S. accounts
receivable and $2.8 million of cash collateral
($11.0 million at February 29, 2004). Borrowings under
the revolving line of credit will accrue interest at the prime
rate plus 0.25% or at the London Inter-bank Offering Rate plus
1.75%. The Company may borrow, partially or wholly repay its
outstanding borrowings without penalty, and reborrow under the
agreement so long as the total outstanding borrowings do not
exceed the available borrowing base. The revolving line of
credit agreement expires on January 31, 2007.

The new credit agreement contains terms,
conditions and representations that are generally customary for
asset-based credit facilities including requirements that the
Company comply with certain significant financial and operating
covenants. In particular, the Company will have to maintain
income after taxes of not less than $1.00 for any fiscal year
and for any two consecutive fiscal quarters. The Company will
also have to maintain a Fixed Charge Ratio (EBITDA divided by
Fixed Charges, as such terms are defined in the agreement) for
each prior four quarter period of at least 1.5 to 1.0, and a
total Funded Debt (as such term is defined in the agreement) to
EBITDA ratio of not greater than 1.5 to 1.0 as of each fiscal
year end. In addition, the Company is prohibited from making
capital expenditures in excess of $8.0 million in any
fiscal year, from incurring more than $3.0 million in new
purchase money and bank indebtedness and from incurring operating

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lease expense (other than for building rents) in
excess of $3.0 million for any fiscal year, all without
prior lender approval.


Borrowings under the new credit agreement are
secured by first liens on the Companys accounts
receivable, general intangibles, equipment and inventory. The
new agreement also requires the Company to maintain a minimum
balance of $2.8 million in a cash collateral account to
further secure the loan. This cash account is included in Other
Assets in the accompanying consolidated balance sheets. The
agreement also contains cross-default provisions with respect to
the mortgage loan on the Companys headquarters, such that
an event of default under the mortgage loan creates a default
under the new credit agreement. As of February 29, 2004,
the Company was in compliance with all financial and operating
conditions under the credit agreement.



| |              
| | -------------
| | Mortgage Loan

At February 29, 2004, the Company had
$8.5 million outstanding under a mortgage loan secured by a
first lien on the Companys Dallas headquarters. The
mortgage loan bears interest, payable monthly, at the greater of
10.5% or the prime rate plus 2%. The principal balance is due in
May 2005. Under the loan, the Company must have at least
$5.0 million in net equity at the end of each of its fiscal
quarters beginning with the quarter ending August 31, 2004.
The Company made elective principal payments of
$2.0 million during fiscal 2004 and an additional elective
principal payment of $0.5 million during March 2004. The
Company expects to refinance the mortgage loan prior to its
maturity in May 2005.



| |         
| | --------
| | Warrants

In connection with a sale of convertible notes
during fiscal 2003, which notes were subsequently redeemed in
full for cash prior to the fiscal 2003 year end, the
Company issued warrants to the buyers. The warrants give the
holders the right to purchase from the Company, for a period of
three years, an aggregate of 621,304 shares of the
Companys common stock for $4.0238 per share as of the
date of issuance. Under certain circumstances, this
purchase may be accomplished through a cashless
exercise. Both the number of warrants and the exercise price of
the warrants are subject to antidilution adjustments as set
forth in the warrants. The Companys obligations under the
warrants remain in force and are unaffected by the redemption of
the convertible notes.



| |                              
| | -----------------------------
| | Summary of Future Obligations

The following table summarizes the Companys
obligations and commitments as of February 29, 2004, to be
paid in fiscal 2005 through 2009 (in millions):

|                                                   |  |                                   |     |      |  |      |      |      |  |      |     |  |  |   |     |  |  |   |     | 
|-------------------------------------------------- |  | --------------------------------- | --- | ---- |  | ---- | ---- | ---- |  | ---- | --- |  |  | - | --- |  |  | - | --- | 
|                                                   |  |                                  
|                                                   |  | Payments Due By Period           
|                                                   |  | Fiscal Year Ending February 29/28
|                                                   |  |                                  
|Nature of commitment                               |  | 2005                              |     | 2006 |  | 2007 |      | 2008 |  | 2009
|                                                   |  |                                   |     |      |  |      |      |      |  |     
|Long-term debt, excluding related interest amounts |  | $                                 |    |      |  | $    | 8.5  |      |  | $    | 4.6 |  |  | $ |    |  |  | $ |    | 
|Operating lease payments                           |  |                                   | 3.1 |      |  |      | 2.2  |      |  |      | 1.4 |  |  |   | 1.1 |  |  |   | 0.8 | 
|Firm purchase commitments                          |  |                                   | 0.7 |      |  |      | 0.9  |      |  |      |    |  |  |   |    |  |  |   |    | 
|                                                   |  |                                   |     |      |  |      |      |      |  |      |     |  |  |   |     |  |  |   |     | 
|Total obligations and commitments                  |  | $                                 | 3.8 |      |  | $    | 11.6 |      |  | $    | 6.0 |  |  | $ | 1.1 |  |  | $ | 0.8 | 
|                                                   |  |                                   |     |      |  |      |      |      |  |      |     |  |  |   |     |  |  |   |     | 

Most of the Companys purchases are executed
under cancellable purchase orders. The firm purchase commitments
shown above are comprised of non-cancellable commitments for
certain communications charges and royalties.

The Company believes its cash reserves and
internally generated cash flow along with any cash availability
under its line of credit will be sufficient to meet its
operating cash requirements for the next twelve months. The
Company believes it will be able to repay or refinance its
long-term debt as such debt becomes due in fiscal 2006 and
fiscal 2007.

33



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| |                    
| | -------------------
| | Impact of Inflation

The Company does not expect any significant
short-term impact of inflation on its financial condition.
Technological advances should continue to reduce costs in the
computer and communications industries. Further, the Company
presently is not bound by long term fixed price sales contracts.
The absence of such contracts should reduce the Companys
exposure to inflationary effects.

Selected Quarterly Financial Data
(Unaudited)

|                             |  |                                      |      |            |  |              |      |              |  |   |      |  |  |   |      | 
|---------------------------- |  | ------------------------------------ | ---- | ---------- |  | ------------ | ---- | ------------ |  | - | ---- |  |  | - | ---- | 
|                             |  |                                     
|                             |  | Three Months Ended                  
|                             |  |                                     
|                             |  | May 31,                              |      | August 31, |  | November 30, |      | February 29,
|Fiscal 2004*                 |  | 2003                                 |      | 2003       |  | 2003         |      | 2004        
|                             |  |                                      |      |            |  |              |      |             
|                             |  |                                     
|                             |  | (In millions, except per share data)
|Sales                        |  | $                                    | 38.4 |            |  | $            | 41.6 |              |  | $ | 41.8 |  |  | $ | 43.5 | 
|Gross profit                 |  |                                      | 20.5 |            |  |              | 22.9 |              |  |   | 22.8 |  |  |   | 23.9 | 
|Income from operations       |  |                                      | 2.4  |            |  |              | 5.4  |              |  |   | 4.9  |  |  |   | 6.2  | 
|Net income                   |  |                                      | 0.9  |            |  |              | 3.6  |              |  |   | 3.6  |  |  |   | 3.2  | 
|Net income per diluted share |  |                                      | 0.03 |            |  |              | 0.10 |              |  |   | 0.10 |  |  |   | 0.09 | 

|                                                                                            |  |                                      |       |            |  |              |       |              |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------------------------- |  | ------------------------------------ | ----- | ---------- |  | ------------ | ----- | ------------ |  | - | ----- | - |  | - | ----- | -
|                                                                                            |  |                                     
|                                                                                            |  | Three Months Ended                  
|                                                                                            |  |                                     
|                                                                                            |  | May 31,                              |       | August 31, |  | November 30, |       | February 28,
|Fiscal 2003**                                                                               |  | 2002                                 |       | 2002       |  | 2002         |       | 2003        
|                                                                                            |  |                                      |       |            |  |              |       |             
|                                                                                            |  |                                     
|                                                                                            |  | (In millions, except per share data)
|Sales                                                                                       |  | $                                    | 38.4  |            |  | $            | 35.6  |              |  | $ | 44.0  |   |  | $ | 38.2  |  
|Gross profit                                                                                |  |                                      | 15.6  |            |  |              | 10.9  |              |  |   | 21.7  |   |  |   | 20.0  |  
|Loss from operations                                                                        |  |                                      | (9.8  | )          |  |              | (15.8 | )            |  |   | (0.9  | ) |  |   | (17.6 | )
|Loss before the cumulative effect of a change in
    accounting principle                   |  |                                      | (8.7  | )          |  |              | (16.3 | )            |  |   | (7.8  | ) |  |   | (17.8 | )
|Net loss                                                                                    |  |                                      | (24.5 | )          |  |              | (16.3 | )            |  |   | (7.8  | ) |  |   | (17.8 | )
|Loss before the cumulative effect of a change in
    accounting principle per diluted share |  |                                      | (0.26 | )          |  |              | (0.48 | )            |  |   | (0.23 | ) |  |   | (0.52 | )
|Loss per diluted share                                                                      |  |                                      | (0.72 | )          |  |              | (0.48 | )            |  |   | (0.23 | ) |  |   | (0.52 | )



---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | During fiscal 2004, the Company incurred special
    charges of $1.4 million and $0.8 million,
    respectively, in its first and second quarters. The special
    charges included $1.4 million of severance and related
    benefit costs and $0.8 million under the terms of a
    separation agreement with the Companys former Chief
    Financial Officer. (See Special Charges.) Operating
    income in the fourth quarter benefited from the reversal of
    previously accrued contractual claims totaling $0.8 million.



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | During fiscal 2003, the Company incurred special
    charges of $2.6 million, $10.1 million,
    $4.9 million and $16.7 million, respectively, in its
    first, second, third and fourth fiscal quarters. The special
    charges included $6.2 million of severance and related
    benefit costs, $0.7 million related to facilities closures,
    $4.1 million write down of excess inventories,
    $4.7 million of charges for contracts expected to result in
    losses to the Company, $1.9 million loss on early
    extinguishment of debt, and $16.7 million related to
    impairment of certain intangible assets. (See Special
    Charges.) The Company benefited from a change in the
    U.S. federal tax law that allowed it to recognize net tax
    benefits of approximately $3.0 million.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

The Company invests cash balances in excess of
operating requirements in short-term securities that generally
have maturities of 90 days or less. The carrying value of
these securities approximates market value, and there is no
long-term interest rate risk associated with this investment.

34



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At February 29, 2004, the Companys
outstanding long-term debt was comprised of the following (in
millions):

|                                                                                                                                                                                                                                                       |  |                   |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ---- | 
|                                                                                                                                                                                                                                                       |  | February 29, 2004
|                                                                                                                                                                                                                                                       |  |                  
|Mortgage loan, bearing interest payable monthly
    at the greater of 10.5% or the prime rate plus 2.0%; principal
    due May 28, 2005                                                                                                                |  | $                 | 8.5  | 
|Revolving line of credit, interest payable
    monthly, accruing at a rate equal to the prime rate plus 0.25%
    or at the London Inter-Bank Offering Rate plus 1.75%; (2.875% at
    February 29, 2004), line of credit expires January 31,
    2007 |  |                   | 4.6  | 
|                                                                                                                                                                                                                                                       |  |                   |      | 
|                                                                                                                                                                                                                                                       |  | $                 | 13.1 | 
|                                                                                                                                                                                                                                                       |  |                   |      | 

The following table provides information about
the Companys credit agreements that are sensitive to
changes in interest rates. For the credit agreements, the table
presents cash flows for scheduled principal payments and related
weighted-average interest rates by expected maturity dates.
Weighted-average variable rates are based on rates in effect as
of February 29, 2004.

|                                         |  |                       |     |      |  |      |     |   |  |   |     |  
|---------------------------------------- |  | --------------------- | --- | ---- |  | ---- | --- | - |  | - | --- | -
|                                         |  |                      
|                                         |  | Fiscal               
|                                         |  |                      
|                                         |  | 2005                  |     | 2006 |  | 2007
|                                         |  |                       |     |      |  |     
|                                         |  |                      
|                                         |  | (Dollars in millions)
|Long-term debt variable rate U.S. $      |  | $                     | 0.0 |      |  | $    | 8.5 |   |  | $ | 4.6 |  
|Projected weighted average interest rate |  |                       | 7.8 | %    |  |      | 5.3 | % |  |   | 2.9 | %



| |                       
| | ----------------------
| | Foreign Currency Risks

The Company transacts business in certain foreign
currencies including, particularly, the British pound and the
Euro. The Companys primary software application
development, research and development and other administrative
activities are conducted from offices in the United States and
the United Kingdom, and its primary manufacturing operations are
conducted in the United States. Virtually all sales arranged
through the Companys U.S. offices are denominated in
U.S. dollars, which is the functional and reporting
currency of the U.S. entity. Sales arranged through the
Companys U.K. subsidiary are denominated in various
currencies, including the British pound, the U.S. dollar
and the Euro; however, the U.K. subsidiarys functional
currency is the British pound.

For the fiscal year ended February 29, 2004,
sales originating from the Companys U.K. subsidiary
represented approximately 34% of consolidated sales. As a result
of its international operations, the Company is subject to
exposure from adverse movements in certain foreign currency
exchange rates. The Company has not historically used foreign
currency options or forward contracts to hedge its currency
exposures because of variability in the timing of cash flows
associated with its larger contracts and it did not have any
such hedge instruments in place at February 29, 2004.
Rather, the Company attempts to mitigate its foreign currency
risk by generally transacting business in the functional
currency of each of its major subsidiaries, thus creating
natural hedges by paying expenses incurred in the local currency
in which revenues will be received.

As noted above, the Companys operating
results are exposed to changes in certain exchange rates
including, particularly, those between the U.S. dollar, the
British pound and the Euro. When the U.S. dollar
strengthens against the other currencies, the Companys
sales are negatively affected upon the translation of U.K.
operating results to the reporting currency. The effect of these
changes on the Companys operating profits varies depending
on the level of British pound denominated expenses and the U.K.
subsidiarys overall profitability. For the fiscal year
ended February 29, 2004, the result of a hypothetical,
uniform 10% strengthening in the value of the U.S. dollar
relative to the British pound and the Euro would have been a
decrease in sales of approximately $3.4 million and an
increase in net income of approximately $2.5 million. In
addition to the direct effects of changes in exchange rates,
which are a changed dollar value of the resulting sales and/or
operating expenses, changes in exchange rates also could affect
the volume of sales or the foreign currency sales price as
competitors products become more or less attractive. The
Companys sensitivity analysis of the effects of changes in
foreign currency exchange rates does not factor in a potential
change in sales levels or local currency prices.

35



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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The Independent Auditors Report of
Ernst & Young LLP and the Consolidated Financial
Statements of the Company as of February 29, 2004 and
February 28, 2003 and for each of the three years in the
period ended February 29, 2004 follow:

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REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors

Intervoice, Inc.


We have audited the accompanying consolidated
balance sheets of Intervoice, Inc. and subsidiaries as of
February 29, 2004 and February 28, 2003 and the
related consolidated statements of operations, changes in
stockholders equity and cash flows for each of the three
years in the period ended February 29, 2004. Our audits
also included the financial statement schedule listed in the
index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Intervoice,
Inc. and subsidiaries at February 29, 2004 and
February 28, 2003, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended February 29, 2004, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note C to the consolidated
financial statements, effective March 1, 2002 the Company
changed its method of accounting for goodwill and other
intangible assets.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

Dallas, Texas

April 6, 2004


37



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INTERVOICE, INC.

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                                        |                             |         |              |   |   |         |         |  
|---------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------- | ------------ | - | - | ------- | ------- | -
|                                         |                                                                                                                                                                                        | February 29,                |         | February 28,
|                                         |                                                                                                                                                                                        | 2004                        |         | 2003        
|                                         |                                                                                                                                                                                        |                             |         |             
|                                         |                                                                                                                                                                                        |                            
|                                         |                                                                                                                                                                                        | (In thousands, except share
|                                         |                                                                                                                                                                                        | and per share data)        
|ASSETS                                  
|Current Assets                           |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                         | Cash and cash equivalents                                                                                                                                                              |                             | $       | 40,859       |   |   | $       | 26,211  |  
|                                         | Trade accounts receivable, net of allowance for
    doubtful accounts of $947 in 2004 and $2,527 in 2003                                                                               |                             |         | 25,898       |   |   |         | 25,853  |  
|                                         | Inventory                                                                                                                                                                              |                             |         | 8,415        |   |   |         | 8,895   |  
|                                         | Prepaid expenses and other current assets                                                                                                                                              |                             |         | 5,087        |   |   |         | 5,277   |  
|                                         |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                         |                                                                                                                                                                                        |                             | 80,259  |              |   |   | 66,236  |        
|Property and Equipment                   |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                         | Land and buildings                                                                                                                                                                     |                             |         | 16,857       |   |   |         | 16,708  |  
|                                         | Computer equipment and software                                                                                                                                                        |                             |         | 39,073       |   |   |         | 32,660  |  
|                                         | Furniture, fixtures and other                                                                                                                                                          |                             |         | 3,190        |   |   |         | 2,667   |  
|                                         | Service equipment                                                                                                                                                                      |                             |         | 9,421        |   |   |         | 8,744   |  
|                                         |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                         |                                                                                                                                                                                        |                             | 68,541  |              |   |   | 60,779  |        
|                                         | Less allowance for depreciation                                                                                                                                                        |                             |         | 48,325       |   |   |         | 40,406  |  
|                                         |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                         |                                                                                                                                                                                        |                             | 20,216  |              |   |   | 20,373  |        
|Other Assets                             |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                         | Intangible assets, net of accumulated
    amortization of $34,443 in 2004 and $32,218 in 2003                                                                                          |                             |         | 6,363        |   |   |         | 9,326   |  
|                                         | Goodwill                                                                                                                                                                               |                             |         | 3,401        |   |   |         | 3,401   |  
|                                         | Other assets                                                                                                                                                                           |                             |         | 3,491        |   |   |         | 1,655   |  
|                                         |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                         |                                                                                                                                                                                        | $                           | 113,730 |              |   | $ | 100,991 |        
|                                         |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current Liabilities                      |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                         | Accounts payable                                                                                                                                                                       |                             | $       | 10,746       |   |   | $       | 12,513  |  
|                                         | Accrued expenses                                                                                                                                                                       |                             |         | 11,919       |   |   |         | 12,705  |  
|                                         | Customer deposits                                                                                                                                                                      |                             |         | 6,625        |   |   |         | 9,061   |  
|                                         | Deferred income                                                                                                                                                                        |                             |         | 24,436       |   |   |         | 25,478  |  
|                                         | Current portion of long term borrowings                                                                                                                                                |                             |         |             |   |   |         | 3,333   |  
|                                         | Income taxes payable                                                                                                                                                                   |                             |         | 7,379        |   |   |         | 6,240   |  
|                                         |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                         |                                                                                                                                                                                        |                             | 61,105  |              |   |   | 69,330  |        
|Long Term Borrowings                     |                                                                                                                                                                                        |                             | 13,101  |              |   |   | 15,778  |        
|Other Long Term Liabilities              |                                                                                                                                                                                        |                             | 271     |              |   |   | 856     |        
|Deferred Income Taxes                    |                                                                                                                                                                                        |                             |        |              |   |   | 44      |        
|Stockholders Equity                     |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                         | Preferred stock, $100 par value 
    2,000,000 shares authorized: none issued                                                                                                         |                             |         |              |   |   |         |         |  
|                                         | Common stock, no par value, at nominal assigned
    value  62,000,000 shares authorized: 35,691,389
    issued and outstanding in 2004, 34,111,101 issued and
    outstanding in 2003 |                             |         | 18           |   |   |         | 17      |  
|                                         | Additional capital                                                                                                                                                                     |                             |         | 75,276       |   |   |         | 65,144  |  
|                                         | Accumulated deficit                                                                                                                                                                    |                             |         | (35,441      | ) |   |         | (46,768 | )
|                                         | Accumulated other comprehensive loss                                                                                                                                                   |                             |         | (600         | ) |   |         | (3,410  | )
|                                         |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                         |                                                                                                                                                                                        |                             | 39,253  |              |   |   | 14,983  |        
|                                         |                                                                                                                                                                                        |                             |         |              |   |   |         |        
|                                         |                                                                                                                                                                                        | $                           | 113,730 |              |   | $ | 100,991 |        
|                                         |                                                                                                                                                                                        |                             |         |              |   |   |         |        

See notes to consolidated financial statements.

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INTERVOICE, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |         | 
|--------------------------------------------------------------------------------------------------- | ------------------ | ------------------------------- | ------- | ------------ |  | ------------ | ------- | ------ |  | - | ------- | ------- | 
|                                                                                                    |                    |                                
|                                                                                                    |                    | Fiscal Year Ended              
|                                                                                                    |                    |                                
|                                                                                                    |                    | February 29,                    |         | February 28, |  | February 28,
|                                                                                                    |                    | 2004                            |         | 2003         |  | 2002        
|                                                                                                    |                    |                                 |         |              |  |             
|                                                                                                    |                    |                                
|                                                                                                    |                    | (In thousands, except share and
|                                                                                                    |                    | per share data)                
|Sales                                                                                               |                    |                                 |         |              |  |              |         |        |  |   |         |        
|                                                                                                    | Solutions          |                                 | $       | 83,612       |  |              | $       | 84,755 |  |   | $       | 126,379 | 
|                                                                                                    | Recurring services |                                 |         | 81,666       |  |              |         | 71,457 |  |   |         | 85,257  | 
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|                                                                                                    |                    |                                 | 165,278 |              |  |              | 156,212 |        |  |   | 211,636 |        
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Cost of goods sold                                                                                  |                    |                                 |         |              |  |              |         |        |  |   |         |        
|                                                                                                    | Solutions          |                                 |         | 47,675       |  |              |         | 60,723 |  |   |         | 87,173  | 
|                                                                                                    | Recurring services |                                 |         | 27,603       |  |              |         | 27,292 |  |   |         | 38,389  | 
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|                                                                                                    |                    |                                 | 75,278  |              |  |              | 88,015  |        |  |   | 125,562 |        
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Gross margin                                                                                        |                    |                                 |         |              |  |              |         |        |  |   |         |        
|                                                                                                    | Solutions          |                                 |         | 35,937       |  |              |         | 24,032 |  |   |         | 39,206  | 
|                                                                                                    | Recurring services |                                 |         | 54,063       |  |              |         | 44,165 |  |   |         | 46,868  | 
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|                                                                                                    |                    |                                 | 90,000  |              |  |              | 68,197  |        |  |   | 86,074  |        
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Research and development expenses                                                                   |                    |                                 | 15,193  |              |  |              | 22,592  |        |  |   | 29,308  |        
|Selling, general and administrative expenses                                                        |                    |                                 | 53,188  |              |  |              | 65,941  |        |  |   | 83,316  |        
|Amortization of goodwill and acquisition related
    intangible assets                              |                    |                                 | 2,820   |              |  |              | 7,101   |        |  |   | 13,378  |        
|Impairment of goodwill and acquisition related
    intangible assets                                |                    |                                 |        |              |  |              | 16,710  |        |  |   | 11,684  |        
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Income (loss) from operations                                                                       |                    |                                 | 18,799  |              |  |              | (44,147 | )      |  |   | (51,612 | )      
|Other income (expense)                                                                              |                    |                                 | (1,650  | )            |  |              | (658    | )      |  |   | 1,433   |        
|Interest expense                                                                                    |                    |                                 | (1,966  | )            |  |              | (4,674  | )      |  |   | (4,939  | )      
|Loss on early extinguishment of debt                                                                |                    |                                 | (488    | )            |  |              | (1,868  | )      |  |   |        |        
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Income (loss) before income taxes and the
    cumulative effect of a change in accounting principle |                    |                                 | 14,695  |              |  |              | (51,347 | )      |  |   | (55,118 | )      
|Income tax (benefit)                                                                                |                    |                                 | 3,368   |              |  |              | (752    | )      |  |   | (10,428 | )      
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Income (loss) before the cumulative effect of a
    change in accounting principle                  |                    |                                 | 11,327  |              |  |              | (50,595 | )      |  |   | (44,690 | )      
|Cumulative effect of change in accounting
    principle                                             |                    |                                 |        |              |  |              | (15,791 | )      |  |   |        |        
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Net income (loss)                                                                                   |                    | $                               | 11,327  |              |  | $            | (66,386 | )      |  | $ | (44,690 | )      
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Per Basic Share:                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Income (loss) before the cumulative effect of a
    change in accounting principle                  |                    | $                               | 0.33    |              |  | $            | (1.49   | )      |  | $ | (1.34   | )      
|Cumulative effect of change in accounting
    principle                                             |                    |                                 |        |              |  |              | (0.46   | )      |  |   |        |        
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Net income (loss)                                                                                   |                    | $                               | 0.33    |              |  | $            | (1.95   | )      |  | $ | (1.34   | )      
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Per Diluted Share:                                                                                  |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Income (loss) before the cumulative effect of a
    change in accounting principle                  |                    | $                               | 0.32    |              |  | $            | (1.49   | )      |  | $ | (1.34   | )      
|Cumulative effect of a change in accounting
    principle                                           |                    |                                 |        |              |  |              | (0.46   | )      |  |   |        |        
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        
|Net income (loss)                                                                                   |                    | $                               | 0.32    |              |  | $            | (1.95   | )      |  | $ | (1.34   | )      
|                                                                                                    |                    |                                 |         |              |  |              |         |        |  |   |         |        

See notes to consolidated financial statements.

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INTERVOICE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

|                             |                                                                                                                                                 |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         |         |  
|---------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------- | ---------- |  | -------- | -- | ------------ |  | ------------- | ------ | ----- |  | ----- | ------ | ----- |  | - | ------- | ------- | - | - | ------ | ------ | - | - | ------- | ------- | -
|                             |                                                                                                                                                 |                                   |            |            |  |          |    | Retained     |  | Accumulated   |        |      
|                             |                                                                                                                                                 | Common Stock                      |            |            |  |          |    | Earnings     |  | Other         |        |      
|                             |                                                                                                                                                 |                                   |            | Additional |  | Unearned |    | (Accumulated |  | Comprehensive |        |      
|                             |                                                                                                                                                 | Shares                            |            | Amount     |  | Capital  |    | Compensation |  | Deficit)      |        | Loss  |  | Total
|                             |                                                                                                                                                 |                                   |            |            |  |          |    |              |  |               |        |       |  |      
|                             |                                                                                                                                                 |                                  
|                             |                                                                                                                                                 | (In thousands, except share data)
|Balance at February 28, 2001 |                                                                                                                                                 |                                   | 33,099,647 |            |  | $        | 17 |              |  | $             | 55,671 |       |  | $     | (1,311 | )     |  | $ | 64,308  |         |   | $ | (4,055 | )      |   | $ | 114,630 |        
|                             | Net loss                                                                                                                                        |                                   |            |           |  |          |    |             |  |               |        |      |  |       |        |      |  |   |         | (44,690 | ) |   |        |       |   |   |         | (44,690 | )
|                             | Foreign currency translation adjustment                                                                                                         |                                   |            |           |  |          |    |             |  |               |        |      |  |       |        |      |  |   |         |        |   |   |        | (1,679 | ) |   |         | (1,679  | )
|                             | Cumulative effect on prior years of adopting
    Statement of Financial Accounting Standards No. 133, as
    amended, net of tax effect of $261 |                                   |            |           |  |          |    |             |  |               |        |      |  |       |        |      |  |   |         |        |   |   |        | (425   | ) |   |         | (425    | )
|                             | Valuation adjustment of interest rate swap hedge,
    net of tax effect of ($143)                                                               |                                   |            |           |  |          |    |             |  |               |        |      |  |       |        |      |  |   |         |        |   |   |        | 233    |   |   |         | 233     |  
|                             |                                                                                                                                                 |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         |        
|                             | Comprehensive loss                                                                                                                              |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         | (46,561 | )
|                             |                                                                                                                                                 |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         |        
|                             | Exercise of stock options                                                                                                                       |                                   |            | 929,533    |  |          |    |             |  |               |        | 6,054 |  |       |        |      |  |   |         |        |   |   |        |       |   |   |         | 6,054   |  
|                             | Amortization of unearned compensation                                                                                                           |                                   |            |           |  |          |    |             |  |               |        |      |  |       |        | 1,311 |  |   |         |        |   |   |        |       |   |   |         | 1,311   |  
|                             |                                                                                                                                                 |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         |        
|Balance at February 28, 2002 |                                                                                                                                                 |                                   | 34,029,180 |            |  |          | 17 |              |  |               | 61,725 |       |  |       |       |       |  |   | 19,618  |         |   |   | (5,926 | )      |   |   | 75,434  |        
|                             | Net loss                                                                                                                                        |                                   |            |           |  |          |    |             |  |               |        |      |  |       |        |      |  |   |         | (66,386 | ) |   |        |       |   |   |         | (66,386 | )
|                             | Foreign currency translation adjustment                                                                                                         |                                   |            |           |  |          |    |             |  |               |        |      |  |       |        |      |  |   |         |        |   |   |        | 2,324  |   |   |         | 2,324   |  
|                             | Valuation adjustment of interest rate swap hedge,
    net of tax effect of ($118)                                                               |                                   |            |           |  |          |    |             |  |               |        |      |  |       |        |      |  |   |         |        |   |   |        | 192    |   |   |         | 192     |  
|                             |                                                                                                                                                 |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         |        
|                             | Comprehensive loss                                                                                                                              |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         | (63,870 | )
|                             |                                                                                                                                                 |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         |        
|                             | Exercise of stock options                                                                                                                       |                                   |            | 81,921     |  |          |    |             |  |               |        | 192   |  |       |        |      |  |   |         |        |   |   |        |       |   |   |         | 192     |  
|                             | Tax benefit from exercise of stock options                                                                                                      |                                   |            |           |  |          |    |             |  |               |        | 2,171 |  |       |        |      |  |   |         |        |   |   |        |       |   |   |         | 2,171   |  
|                             | Issuance of warrants                                                                                                                            |                                   |            |           |  |          |    |             |  |               |        | 1,056 |  |       |        |      |  |   |         |        |   |   |        |       |   |   |         | 1,056   |  
|                             |                                                                                                                                                 |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         |        
|Balance at February 28, 2003 |                                                                                                                                                 |                                   | 34,111,101 |            |  |          | 17 |              |  |               | 65,144 |       |  |       |       |       |  |   | (46,768 | )       |   |   | (3,410 | )      |   |   | 14,983  |        
|                             | Net income                                                                                                                                      |                                   |            |           |  |          |    |             |  |               |        |      |  |       |        |      |  |   |         | 11,327  |   |   |        |       |   |   |         | 11,327  |  
|                             | Foreign currency translation adjustments,
    including tax benefits of $419                                                                    |                                   |            |           |  |          |    |             |  |               |        |      |  |       |        |      |  |   |         |        |   |   |        | 2,810  |   |   |         | 2,810   |  
|                             |                                                                                                                                                 |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         |        
|                             | Comprehensive income                                                                                                                            |                                   |            |           |  |          |    |             |  |               |        |      |  |       |        |      |  |   |         |        |   |   |        |       |   |   |         | 14,137  |  
|                             |                                                                                                                                                 |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         |        
|                             | Tax benefit from exercise of stock options                                                                                                      |                                   |            |            |  |          |    |              |  |               |        | 594   |  |       |        |      |  |   |         |        |   |   |        |       |   |   |         | 594     |  
|                             | Extension of stock options                                                                                                                      |                                   |            |           |  |          |    |             |  |               |        | 279   |  |       |        |      |  |   |         |        |   |   |        |       |   |   |         | 279     |  
|                             | Exercise of stock options                                                                                                                       |                                   |            | 1,580,288  |  |          |    | 1            |  |               |        | 9,259 |  |       |        |      |  |   |         |        |   |   |        |       |   |   |         | 9,260   |  
|                             |                                                                                                                                                 |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         |        
|Balance at February 29, 2004 |                                                                                                                                                 |                                   | 35,691,389 |            |  | $        | 18 |              |  | $             | 75,276 |       |  |       |       |       |  | $ | (35,441 | )       |   | $ | (600   | )      |   | $ | 39,253  |        
|                             |                                                                                                                                                 |                                   |            |            |  |          |    |              |  |               |        |       |  |       |        |       |  |   |         |         |   |   |        |        |   |   |         |        

See notes to consolidated financial statements.

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##### Table of Contents



INTERVOICE, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                        |                                                                                             |                                                            |        |              |        |              |         |         |         |   |         |         |         |  
|------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------ | ------------ | ------ | ------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                        |                                                                                             |                                                           
|                                                        |                                                                                             | Fiscal Year Ended                                         
|                                                        |                                                                                             |                                                           
|                                                        |                                                                                             | February 29,                                               |        | February 28, |        | February 28,
|                                                        |                                                                                             | 2004                                                       |        | 2003         |        | 2002        
|                                                        |                                                                                             |                                                            |        |              |        |             
|                                                        |                                                                                             |                                                           
|                                                        |                                                                                             | (In thousands)                                            
|Operating activities                                    |                                                                                             |                                                            |        |              |        |              |         |         |         |   |         |        
|                                                        | Net income (loss)                                                                           |                                                            | $      | 11,327       |        |              | $       | (66,386 | )       |   | $       | (44,690 | )      
|                                                        | Adjustments to reconcile net income (loss) to net
    cash provided by operating activities |                                                            |        |              |        |              |         |         |         |   |         |         |        
|                                                        |                                                                                             | Depreciation and amortization                              |        |              | 9,750  |              |         |         | 16,065  |   |         |         | 26,518  |  
|                                                        |                                                                                             | Deferred income taxes (benefit)                            |        |              |       |              |         |         | 2,200   |   |         |         | (16,860 | )
|                                                        |                                                                                             | Provision for doubtful accounts                            |        |              | 342    |              |         |         | (774    | ) |         |         | 408     |  
|                                                        |                                                                                             | Write down of inventories                                  |        |              | 34     |              |         |         | 5,667   |   |         |         | 14,488  |  
|                                                        |                                                                                             | Disposal of equipment                                      |        |              | 7      |              |         |         | 736     |   |         |         | 2,568   |  
|                                                        |                                                                                             | Foreign exchange loss                                      |        |              | 1,981  |              |         |         | 246     |   |         |         |        |  
|                                                        |                                                                                             | Write off of goodwill and intangible assets                |        |              |       |              |         |         | 32,501  |   |         |         | 11,866  |  
|                                                        |                                                                                             | Loss on early extinguishment of debt acquisition
    costs |        |              | 488    |              |         |         | 1,868   |   |         |         |        |  
|                                                        |                                                                                             | Tax benefit for exercise of stock options                  |        |              | 594    |              |         |         |        |   |         |         |        |  
|                                                        | Changes in operating assets and liabilities:                                                |                                                            |        |              |        |              |         |         |         |   |         |         |        
|                                                        |                                                                                             | Accounts receivable                                        |        |              | 1,111  |              |         |         | 17,788  |   |         |         | 31,835  |  
|                                                        |                                                                                             | Inventories                                                |        |              | 127    |              |         |         | 12,353  |   |         |         | (3,287  | )
|                                                        |                                                                                             | Prepaid expenses and other assets                          |        |              | 711    |              |         |         | 2,494   |   |         |         | 4,365   |  
|                                                        |                                                                                             | Accounts payable and accrued expenses                      |        |              | (4,191 | )            |         |         | (10,389 | ) |         |         | (6,314  | )
|                                                        |                                                                                             | Income taxes payable                                       |        |              | 501    |              |         |         | 1,804   |   |         |         | 818     |  
|                                                        |                                                                                             | Customer deposits                                          |        |              | (2,641 | )            |         |         | 2,943   |   |         |         | (1,746  | )
|                                                        |                                                                                             | Deferred income                                            |        |              | (1,984 | )            |         |         | 988     |   |         |         | 4,756   |  
|                                                        |                                                                                             | Other                                                      |        |              | 952    |              |         |         | 3,761   |   |         |         | (4,309  | )
|                                                        |                                                                                             |                                                            |        |              |        |              |         |         |         |   |         |        
|Net cash provided by operating activities               |                                                                                             |                                                            | 19,109 |              |        |              | 23,865  |         |         |   | 20,416  |        
|Investing activities                                    |                                                                                             |                                                            |        |              |        |              |         |         |         |   |         |        
|                                                        | Purchase of property and equipment                                                          |                                                            |        | (5,495       | )      |              |         | (4,169  | )       |   |         | (4,869  | )      
|                                                        | Proceeds from sale of fixed assets                                                          |                                                            |        | 22           |        |              |         | 1,890   |         |   |         |        |        
|                                                        | Purchased software                                                                          |                                                            |        | (50          | )      |              |         | (323    | )       |   |         | (184    | )      
|                                                        |                                                                                             |                                                            |        |              |        |              |         |         |         |   |         |        
|Net cash used in investing activities                   |                                                                                             |                                                            | (5,523 | )            |        |              | (2,602  | )       |         |   | (5,053  | )      
|                                                        |                                                                                             |                                                            |        |              |        |              |         |         |         |   |         |        
|Financing activities                                    |                                                                                             |                                                            |        |              |        |              |         |         |         |   |         |        
|                                                        | Paydown of debt                                                                             |                                                            |        | (10,611      | )      |              |         | (44,869 | )       |   |         | (19,657 | )      
|                                                        | Premium on early extinguishment of debt                                                     |                                                            |        | (20          | )      |              |         | (470    | )       |   |         |        |        
|                                                        | Borrowings                                                                                  |                                                            |        | 4,601        |        |              |         | 34,000  |         |   |         |        |        
|                                                        | Debt issuance costs                                                                         |                                                            |        |             |        |              |         | (2,515  | )       |   |         |        |        
|                                                        | Restricted cash                                                                             |                                                            |        | (2,750       | )      |              |         |        |         |   |         |        |        
|                                                        | Exercise of stock options                                                                   |                                                            |        | 9,260        |        |              |         | 192     |         |   |         | 6,054   |        
|                                                        |                                                                                             |                                                            |        |              |        |              |         |         |         |   |         |        
|Net cash provided by (used in) financing
    activities |                                                                                             |                                                            | 480    |              |        |              | (13,662 | )       |         |   | (13,603 | )      
|Effect of exchange rate on cash                         |                                                                                             |                                                            | 582    |              |        |              | 964     |         |         |   | (15     | )      
|                                                        |                                                                                             |                                                            |        |              |        |              |         |         |         |   |         |        
|Increase in cash and cash equivalents                   |                                                                                             |                                                            | 14,648 |              |        |              | 8,565   |         |         |   | 1,745   |        
|Cash and cash equivalents, beginning of period          |                                                                                             |                                                            | 26,211 |              |        |              | 17,646  |         |         |   | 15,901  |        
|                                                        |                                                                                             |                                                            |        |              |        |              |         |         |         |   |         |        
|Cash and cash equivalents, end of period                |                                                                                             | $                                                          | 40,859 |              |        | $            | 26,211  |         |         | $ | 17,646  |        
|                                                        |                                                                                             |                                                            |        |              |        |              |         |         |         |   |         |        

See notes to consolidated financial statements.

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INTERVOICE, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note A  Description of
Business

Intervoice, Inc. (together with its subsidiaries,
collectively referred to as the Company) is a leader
in providing converged voice and data solutions for the network
and enterprise markets. Through its open, standards based
product suites, the Company offers speech-enabled IVR
applications, multi-media and network-grade portals, voicemail
and prepaid calling solutions that allow network operators and
service providers to increase revenue through value-added
services and/or reduce costs through automation and that allow
enterprise customers to reduce costs and improve customer
service levels. In addition, the Company provides a suite of
professional services including implementation, business and
technical consulting services and recurring maintenance services
that supports its installed systems. To further leverage the
strong return on investment offered by its systems offerings,
the Company also offers enhanced communications solutions to its
customers on an outsourced basis as a Managed Service Provider,
or MSP.

Note B  Significant Accounting
Policies

Principles of
Consolidation:The consolidated
financial statements include the accounts of Intervoice, Inc.
and its subsidiaries, all of which are directly or indirectly
100% owned by Intervoice, Inc. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Certain prior year balances have been reclassified to conform to
the current year presentation. Financial statements of the
Companys foreign subsidiaries have been translated into
U.S. dollars at current and average exchange rates.
Resulting translation adjustments are recorded in
stockholders equity as a part of accumulated other
comprehensive loss. Any foreign currency transaction gains or
losses are included in the accompanying consolidated statements
of operations.

Use of Estimates:The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make certain estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.

Cash and Cash
Equivalents:Cash equivalents include
investments in highly liquid securities with a maturity of three
months or less at the time of acquisition. The carrying amount
of these securities approximates fair market value. Interest
income was $0.6 million, $0.3 million and
$1.1 million in fiscal 2004, 2003 and 2002, respectively.

Inventories:Inventories are valued at the lower of cost or market.
Inventories are recorded at standard cost which approximates
actual cost determined on a first-in, first-out basis. The
Company periodically reviews its inventories for unsaleable or
obsolete items and for items held in excess quantities based on
current and projected usage. Adjustments are made where
necessary to reduce the carrying value of individual items to
reflect the lower of cost or market, and any such adjustments
create a new carrying value for the affected items.

Property and
Equipment:Property and equipment is
stated at cost. Depreciation is provided using the straight-line
method over each assets estimated useful life. The range
of useful lives by major category are: buildings: 5 to
40 years; computer equipment and software: 3 to
5 years; furniture, fixtures and other: 5 years; and
service equipment: 3 years. Depreciation expense totaled
$6.7 million, $8.7 million and $12.7 million in
fiscal 2004, 2003 and 2002, respectively.

Intangible Assets and Impairment of Long-Lived
Assets:Intangible assets are
comprised of separately identifiable intangible assets arising
out of the Companys fiscal 2000 acquisition of Brite
Voice Systems, Inc., and certain capitalized purchased software.
Intangible assets are being amortized using the straight-line
method over each assets estimated useful life. Such lives
range from five to twelve years. Amortization expense for
these items totaled $3.0 million, $7.4 million and
$11.3 million in fiscal 2004, 2003 and 2002,
respectively. The Company reviews its intangible and other
long-lived assets for possible impairment when

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

events and circumstances indicate that the assets
might be impaired and the undiscounted projected cash flows
associated with such assets are less than the carrying amounts
of the assets. In those situations, the Company recognizes an
impairment loss on the intangible asset equal to the excess of
the carrying amount of the asset over the assets fair
value, generally determined based upon discounted estimates of
future cash flows. The Company recognized impairment losses
related to intangible assets totaling $16.7 million in
fiscal 2003 and $11.7 million in fiscal 2002. See
Note C  Change in Accounting Principle for
Goodwill and Other Intangible Assets. No additional
impairment was indicated for fiscal 2004.

The cost of internally developed software
products and substantial enhancements to existing software
products for sale are expensed until technological feasibility
is established, at which time any additional costs would be
capitalized in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86. Technological feasibility of
a computer software product is established when the Company has
completed all planning, designing, coding, and testing
activities that are necessary to establish that the product can
be produced to meet its design specifications including
functions, features, and technical performance requirements. No
costs have been capitalized to date for internally developed
software products and enhancements as the Companys current
process for developing software is essentially completed
concurrently with the establishment of technological
feasibility. The Company capitalizes purchased software upon
acquisition when such software is technologically feasible or if
it has an alternative future use, such as use of the software in
different products or resale of the purchased software.

Goodwill:The
Companys goodwill also results from its fiscal 2000
purchase of Brite Voice Systems, Inc. Under the provisions of
SFAS No. 141, Business Combinations,and
SFAS No. 142, Goodwill and Other Intangible Assets,which the Company adopted on March 1, 2002, goodwill is
presumed to have an indefinite life and is not subject to annual
amortization. Goodwill is subjected, however, to tests for
impairment on at least an annual basis and more frequently if
triggering events are identified on an interim basis. The
impairment review follows the two-step approach defined in
SFAS No. 142. The first step compares the fair value
of the Company with its carrying amount, including goodwill. If
the fair value exceeds the carrying amount, goodwill is
considered not impaired. If the carrying amount exceeds fair
value, the Company must compare the implied fair value of
goodwill with the carrying amount of that goodwill. If the
carrying amount of goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized in an amount
equal to the lesser of that excess or the carrying amount of
goodwill. See Note C for an expanded discussion of the
Companys fiscal 2003 adoption of
SFAS No. 141 and SFAS No. 142 and for a
summary of impairment charges recorded during fiscal 2003.
No additional impairment was indicated for fiscal 2004.

Other Assets:Other
Assets at February 29, 2004 is comprised of
$2.8 million of restricted cash used to collateralize a
portion of the Companys new line of credit,
$0.6 million of restricted certificates of deposit,
refundable deposits and long-term debt issuance costs. The CDs
are pledged in support of a letter of credit issued on behalf of
the Company to guarantee its performance under a long-term,
international managed services contract. The letter of credit
expires September 2004. In fiscal 2003, Other Assets was
comprised of refundable deposits, deferred costs associated with
one of the Companys managed service contracts,
$0.6 million of restricted certificates of deposit and
$0.7 million of long-term debt issuance costs. The deferred
costs associated with a managed service contract were amortized
to expense during fiscal 2004. The majority of the
long-term debt issuance costs were expensed during
fiscal 2004 in connection with the refinancing of the
Companys debt.

Deferred Income:Deferred income is comprised primarily of amounts collected but
not yet earned under annual maintenance and software support
contracts. The Company recognizes revenue from such contracts
ratably over the term of the contracts.

Derivatives:From
July 1999 through October 2001, the Company used interest rate
swap arrangements to hedge the variability of interest payments
on its variable rate credit facilities. While in effect, the
swap arrangements essentially converted the Companys then
outstanding floating rate debt to a fixed rate basis.

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company terminated its swap arrangements in
October 2001 in response to the continued downward movement in
interest rates during fiscal 2002 and had no derivative
contracts in place as of February 29/28, 2004, or 2003.

Prior to March 1, 2001, the Company did not
assign a value to the interest rate swaps, and gains and losses
from the swaps were included on the accrual basis in interest
expense. Effective March 1, 2001, the Company adopted
Statement of Financial Accounting Standards
No. 133  Accounting for Derivative
Instruments and Hedging Activities, as amended
(Statement No. 133), which required that the
Company record an asset or liability for the fair value of its
derivatives and that it mark such asset or liability to market
on an ongoing basis. Because the Companys interest rate
swaps were defined as cash flow hedges, changes to the
derivatives market value were initially reported at the
adoption of the Statement as a component of accumulated other
comprehensive loss to the extent that the hedge was determined
to be effective. Such changes were subsequently reclassified
into earnings when the related transaction (the quarterly
payment of variable rate interest) affected earnings. Changes in
market value attributable to the ineffective portion of a hedge
were reported in earnings immediately as incurred.

The Company had no other derivative instruments
during fiscal 2004, 2003 and 2002.

Product Warranties:The Company provides limited warranties on the sale of certain
of its solutions in the U.S. Such warranties cover routine
bug-fixes and hardware problems and do not provide a right to
system upgrades and enhancements. The warranties are typically
valid for one year. At February 29/28, 2004 and 2003,
the Companys accrued warranty costs totaled
$1.0 million and $0.8 million, respectively.

Revenue Recognition:The Company recognizes revenue from the sale of hardware and
software solutions, from the delivery of maintenance and other
customer services associated with installed solutions and from
the provision of its enhanced telecommunications services and
IVR applications on a managed service basis. The Companys
policies for revenue recognition follow the guidance in
Statement of Position No. 97-2 Software Revenue
Recognition, as amended (SOP 97-2), SEC Staff
Accounting Bulletin No. 104 (SAB 104) and
EITF 00-21 Revenue Arrangements with Multiple
Deliverables (EITF 00-21). If contracts include
multiple elements, each element of the arrangement is separately
identified and accounted for based on the relative fair value of
such element as evidenced by vendor specific objective evidence.
Revenue is not recognized on any element of the arrangement if
undelivered elements are essential to the functionality of the
delivered elements. The adoption of EITF 00-21 during
fiscal 2004 had no material effect on the Companys
results of operations.

Sale of Hardware and Software
Solutions:Many of the Companys
sales are of customized software or customized hardware/
software solutions. Such solutions incorporate newly designed
software and/or standard building blocks of hardware and
software which have been significantly modified, configured and
assembled to match unique customer requirements defined at the
beginning of each project. Sales of these customized solutions
are accounted for using contract accounting principles under
either the percentage of completion (POC) or completed contract
methodology as further described below. In other instances,
particularly in situations where the Company sells to
distributors or where the Company is supplying only additional
product capacity (i.e., similar hardware and software
solutions to what is already in place) for an existing customer,
the Company may sell systems that do not require significant
customization. In those situations, revenue is recognized when
there is persuasive evidence that an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. Typically, this is at shipment when
there is no installation obligation or at the completion of
minor post-shipment installation obligations.

Generally, the Company uses POC accounting for
its more complex custom solutions. In determining whether a
particular sale qualifies for POC treatment, the Company
considers multiple factors including the value of the contract
and the degree of customization inherent in the project.
Projects normally must have an aggregate value of more than
$500,000 to qualify for POC treatment. For a project accounted
for under the

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

POC method, the Company recognizes revenue as
work progresses over the life of the project based on a
comparison of actual labor inputs (labor hours worked) to
current estimates of total labor inputs required to complete the
project. Project estimates are reviewed and updated on a
quarterly basis. Unbilled receivables accrued under this POC
methodology totaled $8.8 million (34.0% of total net
receivables) and $4.9 million (19.0% of total net
receivables) at February 29/28, 2004 and 2003,
respectively. The Company expects to bill and collect unbilled
receivables as of February 29, 2004 within the next
twelve months.

The terms of most POC projects require customers
to make interim progress payments during the course of the
project. Such payments and a written customer acknowledgement at
the completion of the project, usually following a final
customer test phase, document the customers acceptance of
the project. In some circumstances, the passage of a
contractually defined time period or the customers use of
the system in a live operating environment may also constitute
final acceptance of a project.

The Company uses completed contract accounting
for smaller custom projects not meeting the POC thresholds
described above. The Company also uses completed contract
accounting in situations where the technical requirements of a
project are so complex or are so dependent on the development of
new technologies or the unique application of existing
technologies that the Companys ability to make reasonable
estimates is in doubt or where a sale is subject to unusual
inherent hazards that make the Companys
estimates doubtful. Such hazards are unrelated to, or only
incidentally related to, the Companys typical activities
and include situations where the enforceability of a contract is
suspect, completion of the contract is subject to pending
litigation, or where the solutions produced are subject to
condemnation or expropriation risks. These latter situations are
extremely rare. For all completed contract sales, the Company
recognizes revenue upon customer acceptance as evidenced by a
written customer acknowledgement, the passage of a contractually
defined time period or the customers use of the system in
a live operating environment.

The Company generates a significant percentage of
its sales, particularly sales of enhanced telecommunications
services systems, outside the United States. Customers in
certain countries are subject to significant economic and
political challenges that affect their cash flow, and many
customers outside the United States are generally accustomed to
vendor financing in the form of extended payment terms. To
remain competitive in markets outside the United States, the
Company may offer selected customers such payment terms. In all
cases, however, the Company only recognizes revenue at such time
as its solution or service fee is fixed or determinable,
collectibility is probable and all other criteria for revenue
recognition have been met. In some limited cases, this policy
may result in the Company recognizing revenue on a cash
basis, limiting revenue recognition on certain sales of
solutions and/or services to the actual cash received to date
from the customer, provided that all other revenue recognition
criteria have been satisfied.

Sale of Maintenance and Other Customer
Services:The Company recognizes
revenue from maintenance and other customer services when the
services are performed or ratably over the related contract
period. All significant costs and expenses associated with
maintenance contracts are expensed as incurred. This
approximates a ratable recognition of expenses over the contract
period.

Sale of Managed
Services:The Company can provide
enhanced communications solutions to customers on an outsourced
basis through its managed service business. While specific
arrangements can vary, the Company generally builds a customized
solution to address a specific customers business need and
then owns, monitors, and maintains that system, ensuring that it
processes the customers business transactions in
accordance with defined specifications. For its services, the
Company generally receives a one-time setup fee paid at the
beginning of the contract and a service fee paid monthly over
the life of the contract. Most contracts range from 12 to
36 months in length.

The Company combines the setup fee and the total
service fee to be received from the customer and recognizes
revenue ratably over the term of the managed service contract.
The Company capitalizes the cost of the computer system(s) and
related applications used to provide the service and depreciates
such costs over

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the contract life (for assets unique to the
individual contract) or the life of the equipment (for assets
common to the general managed service operations or for assets
whose useful lives are shorter than the related contract term).
All labor and other period costs required to provide the service
are expensed as incurred.

Loss Contracts:The
Company updates its estimates of the costs necessary to complete
all customer contracts in process on a quarterly basis. Whenever
current estimates indicate that the Company will incur a loss on
the completion of a contract, the Company immediately records a
provision for such loss as part of the current period cost of
goods sold.

Research and
Development:Research and development
costs are expensed as incurred.

Advertising Costs:Advertising costs are expensed as incurred. Advertising expense
was $0.9 million in fiscal 2004, $1.2 million in
fiscal 2003 and $1.4 million in fiscal 2002.

Income Taxes:Deferred income taxes are recognized using the liability method
and reflect the tax impact of temporary differences between the
amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and
regulations. The Company provides a valuation allowance for
deferred tax assets in circumstances where it does not consider
realization of such assets to be more likely than not. This is a
highly subjective assessment and requires the Company to
evaluate the predictability of future taxable income while
considering the significant losses the Company incurred in
fiscal 2003 and 2002. In general, the Company does not
anticipate reversing valuation allowances associated with
deferred tax assets of its U.S. and U.K. operations until the
earlier of the time that the underlying deferred tax assets are
realized or the time at which the respective taxable
entities actual results have demonstrated a sustained
profitability and their projected results support the
Companys ability to realize the deferred tax assets
currently being reserved.

Stock Compensation:The Company accounts for its stock-based employee compensation
using the intrinsic value method as defined in Accounting
Principles Board Statement No. 25 (APB 25). Under this
approach, the Company recognizes expense at the grant date of an
option only to the extent that the fair value of the related
common stock at the grant date exceeds the exercise price of the
option. In practice, the Company typically grants options at an
exercise price equal to the fair value of the stock on the grant
date, and, accordingly, the Company typically does not recognize
any expense upon the granting of an option. Because the Company
has elected this treatment, Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123) and
Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure (SFAS No. 148) require
disclosure of pro forma information which provides the effects
on net income (loss) and net income (loss) per share as if the
Company had accounted for its employee stock awards under the
fair value method prescribed by SFAS 123.

The fair value of the Companys employee
stock awards was estimated using a Black-Scholes option pricing
model with the following weighted-average assumptions for fiscal
2004, 2003 and 2002, respectively: risk-free interest rates of
2.34%, 2.95% and 3.71%; stock price volatility factors of 1.22,
1.11 and 0.96; and expected option lives of 3.03 years. The
Company does not have a history of paying dividends, and none
have been assumed in estimating the fair value of the options.
The weighted-average fair value per share of options granted in
fiscal 2004, 2003 and 2002 was $5.90, $1.95 and $7.44,
respectively. A reconciliation of the Companys actual net
income (loss) and net income (loss) per diluted common share to
its pro forma net

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

income (loss) and net income (loss) per diluted
common share using the fair value method of accounting for stock
options for fiscal 2004, 2003 and 2002 is as follows (in
millions, except per share data):

|                                                                                                                              |                       |      |      |      |  |      |       |       |   |   |       |       |  
|----------------------------------------------------------------------------------------------------------------------------- | --------------------- | ---- | ---- | ---- |  | ---- | ----- | ----- | - | - | ----- | ----- | -
|                                                                                                                              |                       | 2004 |      | 2003 |  | 2002
|                                                                                                                              |                       |      |      |      |  |     
|Net income (loss) as reported                                                                                                 |                       | $    | 11.3 |      |  | $    | (66.4 | )     |   | $ | (44.7 | )    
|Add: stock-based employee compensation expense
    included in reported net income net of related tax effect                  |                       |      | .3   |      |  |      |      |       |   |   |      |      
|Deduct: total stock-based employee compensation
    expense determined under fair value method, net of related tax
    effect |                       |      | (4.1 | )    |  |      | (2.5  | )     |   |   | (5.9  | )    
|                                                                                                                              |                       |      |      |      |  |      |       |       |   |   |       |      
|Pro forma net income (loss)                                                                                                   |                       | $    | 7.5  |      |  | $    | (68.9 | )     |   | $ | (50.6 | )    
|                                                                                                                              |                       |      |      |      |  |      |       |       |   |   |       |      
|Net income (loss) per share:                                                                                                  |                       |      |      |      |  |      |       |       |   |   |       |      
|                                                                                                                              | Diluted  as reported |      | $    | 0.32 |  |      | $     | (1.95 | ) |   | $     | (1.34 | )
|                                                                                                                              | Diluted  pro forma   |      | $    | 0.21 |  |      | $     | (2.02 | ) |   | $     | (1.51 | )

As noted above, the pro forma stock-based
compensation expense and related per share data shown above are
estimated using a Black-Scholes option pricing model. The
Black-Scholes model was developed for use in estimating the fair
value of publicly traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Companys employee stock options have
characteristics significantly different from those of publicly
traded options, and because changes in the subjective input
assumptions can materially affect the estimate of the fair value
of stock-based compensation, in managements opinion, the
existing models do not necessarily provide a reliable single
measure of the fair value of such compensation.

Note C  Change in Accounting
Principle for Goodwill and Other Intangible Assets

Effective March 1, 2002, the Company adopted
Statements of Financial Accounting Standards No. 141,
Business Combinations, and No. 142, Goodwill and Other
Intangible Assets (the Statements). Statement
No. 141 refines the definition of what assets may be
considered as separately identified intangible assets apart from
goodwill. Statement No. 142 provides that goodwill and
intangible assets deemed to have indefinite lives will no longer
be amortized, but will be subject to impairment tests on at
least an annual basis.

In adopting the Statements, the Company first
reclassified $2.7 million of intangible assets associated
with its assembled workforce (net of related deferred taxes of
$1.4 million) to goodwill because such assets did not meet
the new criteria for separate identification. The Company then
allocated its adjusted goodwill balance of $19.2 million to
its then existing Enterprise and Networks divisions and
completed the transitional impairment tests required by
Statement No. 142. The fair values of the reporting units
were estimated using a combination of the expected present
values of future cash flows and an assessment of comparable
market values. As a result of these tests, the Company
determined that the goodwill associated with its Networks
division was fully impaired, and, accordingly, it recognized a
non-cash, goodwill impairment charge of $15.8 million as
the cumulative effect on prior years of this change in
accounting principle. This impairment resulted primarily from
the significant decline in Networks sales and profitability
during the fourth quarter of fiscal 2002 and related reduced
forecasts for the divisions sales and profitability.
Effective August 1, 2002, the Company combined its
divisions into a single integrated organizational structure in
order to address changing market demands and global customer
requirements. The Company conducted its required annual test of
goodwill impairment during the fourth quarters of fiscal 2004
and fiscal 2003. No additional impairment of goodwill was
indicated.

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The changes in the carrying amount of goodwill
for the years ended February 29, 2004 and February 28,
2003 are as follows (in millions):

|                                                                                                         |  |      |     |      |  |   |       |  
|-------------------------------------------------------------------------------------------------------- |  | ---- | --- | ---- |  | - | ----- | -
|                                                                                                         |  | 2004 |     | 2003
|                                                                                                         |  |      |     |     
|Balance at beginning of year, net                                                                        |  | $    | 3.4 |      |  | $ | 16.5  |  
|Reclassification of assembled workforce, net of
    deferred income taxes, upon adoption of SFAS No. 141 |  |      |    |      |  |   | 2.7   |  
|Transitional impairment loss upon adoption of
    SFAS No. 142                                           |  |      |    |      |  |   | (15.8 | )
|                                                                                                         |  |      |     |      |  |   |       |  
|Balance at end of year                                                                                   |  | $    | 3.4 |      |  | $ | 3.4   |  
|                                                                                                         |  |      |     |      |  |   |       |  

As required by SFAS No. 142, the
following table of proforma net income (in millions) and
earnings per share presents summary results for fiscal 2004,
fiscal 2003 and fiscal 2002 adjusted to exclude amortization
expense related to goodwill and intangible assets that are no
longer being amortized as a result of the Companys
adoption of SFAS No. 141 and 142.

|                                          |  |                    |      |      |  |      |       |   |  |   |       |  
|----------------------------------------- |  | ------------------ | ---- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                          |  |                   
|                                          |  | For the Year Ended
|                                          |  | February 29/28    
|                                          |  |                   
|                                          |  | 2004               |      | 2003 |  | 2002
|                                          |  |                    |      |      |  |     
|Reported net income (loss)                |  | $                  | 11.3 |      |  | $    | (66.4 | ) |  | $ | (44.7 | )
|Add back goodwill amortization            |  |                    |     |      |  |      |      |   |  |   | 2.6   |  
|Add back assembled workforce amortization |  |                    |     |      |  |      |      |   |  |   | 1.8   |  
|                                          |  |                    |      |      |  |      |       |   |  |   |       |  
|Adjusted net income (loss)                |  | $                  | 11.3 |      |  | $    | (66.4 | ) |  | $ | (40.3 | )
|                                          |  |                    |      |      |  |      |       |   |  |   |       |  
|Basic earnings per share:                 |  |                    |      |      |  |      |       |   |  |   |       |  
|Reported net income (loss)                |  | $                  | 0.33 |      |  | $    | (1.95 | ) |  | $ | (1.34 | )
|Add back goodwill amortization            |  |                    |     |      |  |      |      |   |  |   | 0.08  |  
|Add back assembled workforce amortization |  |                    |     |      |  |      |      |   |  |   | 0.06  |  
|                                          |  |                    |      |      |  |      |       |   |  |   |       |  
|Adjusted net income (loss)                |  | $                  | 0.33 |      |  | $    | (1.95 | ) |  | $ | (1.21 | )
|                                          |  |                    |      |      |  |      |       |   |  |   |       |  
|Diluted earnings per share:               |  |                    |      |      |  |      |       |   |  |   |       |  
|Reported net income (loss)                |  | $                  | 0.32 |      |  | $    | (1.95 | ) |  | $ | (1.34 | )
|Add back goodwill amortization            |  |                    |     |      |  |      |      |   |  |   | 0.08  |  
|Add back assembled workforce amortization |  |                    |     |      |  |      |      |   |  |   | 0.06  |  
|                                          |  |                    |      |      |  |      |       |   |  |   |       |  
|Adjusted net income (loss)                |  | $                  | 0.32 |      |  | $    | (1.95 | ) |  | $ | (1.21 | )
|                                          |  |                    |      |      |  |      |       |   |  |   |       |  

Intangible assets other than goodwill at
February 29, 2004 and February 28, 2003 are comprised
of the following (in millions):

|                            |       |              |            |                   |  |              |      |             |  |   |      |      |  |   |     |     | 
|--------------------------- | ----- | ------------ | ---------- | ----------------- |  | ------------ | ---- | ----------- |  | - | ---- | ---- |  | - | --- | --- | 
|                            |       |              |            |                  
|                            |       |              |            | February 29, 2004
|                            |       |              |            |                  
|                            |       |              |            | Gross             |  |             
|                            |       | Amortization |            | Carrying          |  | Accumulated  |      | Unamortized
|Amortized Intangible Assets |       | Period       |            | Amount            |  | Amortization |      | Balance    
|                            |       |              |            |                   |  |              |      |            
|Customer relations          |       |              | 10 years   |                   |  | $            | 18.6 |             |  | $ | 13.3 |      |  | $ | 5.3 |    
|Developed technology        |       |              | 5 years    |                   |  |              | 20.2 |             |  |   | 19.7 |      |  |   | 0.5 |    
|Other intangibles           |       |              | 5-12 years |                   |  |              | 2.0  |             |  |   | 1.4  |      |  |   | 0.6 |    
|                            |       |              |            |                   |  |              |      |             |  |   |      |      |  |   |     |    
|                            | Total |              |            |                   |  |              | $    | 40.8        |  |   | $    | 34.4 |  |   | $   | 6.4 | 
|                            |       |              |            |                   |  |              |      |             |  |   |      |      |  |   |     |    

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                            |       |              |            |                   |  |              |      |             |  |   |      |      |  |   |     |     | 
|--------------------------- | ----- | ------------ | ---------- | ----------------- |  | ------------ | ---- | ----------- |  | - | ---- | ---- |  | - | --- | --- | 
|                            |       |              |            |                  
|                            |       |              |            | February 28, 2003
|                            |       |              |            |                  
|                            |       |              |            | Gross             |  |             
|                            |       | Amortization |            | Carrying          |  | Accumulated  |      | Unamortized
|Amortized Intangible Assets |       | Period       |            | Amount            |  | Amortization |      | Balance    
|                            |       |              |            |                   |  |              |      |            
|Customer relations          |       |              | 10 years   |                   |  | $            | 18.6 |             |  | $ | 12.3 |      |  | $ | 6.3 |    
|Developed technology        |       |              | 5 years    |                   |  |              | 20.2 |             |  |   | 17.9 |      |  |   | 2.3 |    
|Other intangibles           |       |              | 5-12 years |                   |  |              | 2.7  |             |  |   | 2.0  |      |  |   | 0.7 |    
|                            |       |              |            |                   |  |              |      |             |  |   |      |      |  |   |     |    
|                            | Total |              |            |                   |  |              | $    | 41.5        |  |   | $    | 32.2 |  |   | $   | 9.3 | 
|                            |       |              |            |                   |  |              |      |             |  |   |      |      |  |   |     |    

The estimated amortization expense attributable
to these intangible assets for each of the next five years and
thereafter is as follows (in millions):

|            |  |   |     | 
|----------- |  | - | --- | 
|Fiscal 2005 |  | $ | 1.7 | 
|Fiscal 2006 |  | $ | 1.2 | 
|Fiscal 2007 |  | $ | 1.1 | 
|Fiscal 2008 |  | $ | 1.1 | 
|Fiscal 2009 |  | $ | 1.0 | 
|Thereafter  |  | $ | 0.3 | 

During fiscal 2003, the Company was adversely
affected by continuing softness in the general US economy, by
extreme softness in the worldwide network/telecommunications
market and by political tensions in parts of South America and
the Middle East. The Company experienced a second year of
declining network revenue and significantly reduced its
estimates of near term growth in revenue and net income for its
networks based products. As a result, the Company determined
that a triggering event, as defined in SFAS No. 144,
had occurred during the fourth quarter of fiscal 2003 and,
accordingly, the Company evaluated its intangible assets for
evidence of impairment. Based on the results of its review, the
Company recognized impairment charges of $14.2 million and
$2.5 million, respectively, to reduce the carrying value of
its customer relations and developed technology intangible
assets to their respective fair values, which were based on
estimated discounted future cash flows.

During the fourth quarter of fiscal 2002, the
Company performed a comprehensive review of the positioning of
all product lines, including lines brought forward from its
fiscal 2000 merger with Brite. As a result of decisions made
during that review, the Company performed impairment tests in
accordance with its stated policies on the Brite tradename and
on certain of the developed technology associated with the Brite
acquisition. Based on these tests, the Company recorded
impairment charges of $4.8 million and $3.2 million,
respectively, to reduce the carrying value of these intangible
assets and an additional charge of $3.7 million to reduce
the carrying value of goodwill associated with the impaired
assets.

Note D  Inventory

Inventory at February 29/28 consists of the
following (in millions):

|                 |  |      |     |      |  |   |     | 
|---------------- |  | ---- | --- | ---- |  | - | --- | 
|                 |  | 2004 |     | 2003
|                 |  |      |     |     
|Purchased parts  |  | $    | 4.1 |      |  | $ | 5.0 | 
|Work in progress |  |      | 4.3 |      |  |   | 3.9 | 
|                 |  |      |     |      |  |   |     | 
|                 |  | $    | 8.4 |      |  | $ | 8.9 | 
|                 |  |      |     |      |  |   |     | 

The Company recorded approximately
$4.1 million in special charges during fiscal 2003 to
reduce the carrying value of inventories. See Note J.

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##### Table of Contents



INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note E  Accrued
Expenses

Accrued expenses consisted of the following at
February 29/28 (in millions):

|                                                                                      |  |      |      |      |  |   |      | 
|------------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | 
|                                                                                      |  | 2004 |      | 2003
|                                                                                      |  |      |      |     
|Accrued compensation and other employee related
    costs, including accrued vacation |  | $    | 5.7  |      |  | $ | 5.8  | 
|Other                                                                                 |  |      | 6.2  |      |  |   | 6.9  | 
|                                                                                      |  |      |      |      |  |   |      | 
|                                                                                      |  | $    | 11.9 |      |  | $ | 12.7 | 
|                                                                                      |  |      |      |      |  |   |      | 

Note F  Long-Term
Borrowings

At February 29/28, 2004 and 2003, the
Companys long-term debt was comprised of the following (in
millions):

|                                                                                                                                                                                                                            |  |                |      |      |  |   |      |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---- | ---- |  | - | ---- | -
|                                                                                                                                                                                                                            |  |               
|                                                                                                                                                                                                                            |  | February 29/28
|                                                                                                                                                                                                                            |  |               
|                                                                                                                                                                                                                            |  | 2004           |      | 2003
|                                                                                                                                                                                                                            |  |                |      |     
|Mortgage loan, bearing interest payable monthly
    at the greater of 10.5% or the prime rate plus 2.0%; principal
    due May 28, 2005                                                                                     |  | $              | 8.5  |      |  | $ | 10.5 |  
|Revolving line of credit, interest payable
    monthly, accruing at a rate equal to the prime rate plus 0.25%
    or the London Inter-Bank Offering Rate plus 1.75%; (2.875% at
    February 29, 2004)                      |  |                | 4.6  |      |  |   |     |  
|Amortizing term loan, principal due in equal
    monthly installments of approximately $0.3 million;
    interest payable monthly, accruing at a rate equal to the prime
    rate plus 2.75%; refinanced during fiscal 2004 |  |                |     |      |  |   | 8.6  |  
|                                                                                                                                                                                                                            |  |                |      |      |  |   |      |  
|Total debt outstanding                                                                                                                                                                                                      |  |                | 13.1 |      |  |   | 19.1 |  
|Less: current portion                                                                                                                                                                                                       |  |                | 0.0  |      |  |   | (3.3 | )
|                                                                                                                                                                                                                            |  |                |      |      |  |   |      |  
|Long-term debt, net of current portion                                                                                                                                                                                      |  | $              | 13.1 |      |  | $ | 15.8 |  
|                                                                                                                                                                                                                            |  |                |      |      |  |   |      |  



| |                   
| | ------------------
| | New Line of Credit

In January 2004, the Company entered into a new
credit agreement with a lender which provides for a revolving
line of credit equal to the lesser of $5.5 million or a
defined borrowing base comprised of eligible U.S. accounts
receivable and $2.8 million held in a cash collateral
account ($11.0 million at February 29, 2004). Initial
borrowings under the revolving line of credit of
$4.6 million were used to retire indebtedness then
outstanding under an amortizing term loan. The Company may
borrow, partially or wholly repay its outstanding borrowings
without penalty, and reborrow under the agreement so long as the
total outstanding borrowings do not exceed the available
borrowing base. The revolving line of credit agreement expires
on January 31, 2007.

The new credit agreement contains terms,
conditions and representations that are generally customary for
asset-based credit facilities including requirements that the
Company comply with certain significant financial and operating
covenants. In particular, the Company will have to maintain
income after taxes of not less than $1.00 for any fiscal year
and for any two consecutive fiscal quarters. The Company will
also have to maintain a Fixed Charge Ratio (EBITDA divided by
Fixed Charges, as such terms are defined in the agreement) for
each prior four quarter period of at least 1.5 to 1.0, and a
total Funded Debt (as such term is defined in the agreement) to
EBITDA ratio of not greater than 1.5 to 1.0 as of each fiscal
year end. In addition, the Company is prohibited from making
capital expenditures in excess of $8.0 million in any
fiscal year, from incurring more than $3.0 million in new
purchase money and bank indebtedness and from incurring operating

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

lease expense (other than for building rents) in
excess of $3.0 million for any fiscal year, all without
prior lender approval.

Borrowings under the new credit agreement are
secured by first liens on the Companys accounts
receivable, general intangibles, equipment and inventory. The
new agreement also requires the Company to maintain a minimum
balance of $2.8 million in a cash collateral account to
further secure the loan. This cash account is included in Other
Assets in the accompanying consolidated balance sheets. The
agreement also contains cross-default provisions with respect to
the mortgage loan on the Companys headquarters, such that
an event of default under the mortgage loan creates a default
under the new credit agreement. As of February 29, 2004,
the Company was in compliance with all financial and operating
covenants.



| |              
| | -------------
| | Mortgage Loan

In May 2002, the Company entered into a
$14.0 million mortgage loan secured by a first lien on the
Companys Dallas headquarters. Proceeds from the loan were
used to partially repay amounts outstanding under other debt
that existed at the time. During fiscal 2004 and fiscal 2003,
the Company made discretionary principal payments of
$2.0 million and $3.5 million, respectively. In March
2004, the Company made an additional discretionary payment of
$0.5 million. Under the terms of the mortgage loan, the
Company must maintain at least $5.0 million in net equity
as of the end of each of its fiscal quarters beginning with the
quarter ending August 31, 2004. The Company expects to
refinance the mortgage loan prior to its maturity in May 2005.



| |                                                              
| | -------------------------------------------------------------
| | Convertible Notes, Warrants and Registration
    Requirements

On May 29, 2002, the Company entered into a
securities purchase agreement, by and among the Company and the
buyers named therein, pursuant to which the buyers agreed to
purchase convertible notes in an aggregate principal amount of
$10.0 million, convertible into shares of the
Companys common stock, and warrants which give the holders
the right to purchase from the Company, for a period of three
years from the date the warrants were issued, an aggregate of
621,304 shares of the Companys common stock for
$4.0238 per share. Under certain circumstances, this
purchase may be accomplished through a cashless
exercise. Both the number of warrants and the exercise price of
the warrants are subject to antidilution adjustments as set
forth in the warrants. The fair value ($1.1 million) of the
warrants issued by the Company was recorded as a discount on the
convertible notes. The convertible notes were subsequently
repaid in full during fiscal 2003 using the proceeds of a
$10.0 million term loan, which loan was itself refinanced
during fiscal 2004 using the proceeds of the new line of credit
agreement as discussed above. The Companys obligations
under the warrants remain in force and are unaffected by the
redemption in fiscal 2003 of the convertible notes.

The Company and the buyers also entered into a
registration rights agreement, dated as of May 29, 2002,
pursuant to which the Company has filed a registration statement
on Form S-3 covering the resale of the warrant shares. The
registration statement became effective on June 27, 2002.
The Company is required to maintain the effectiveness of the
registration statement until the earlier of the date the
underlying common stock may be resold pursuant to
Rule 144(k) under the Securities Act of 1933 or the date on
which the sale of all the underlying common stock is completed.
The Company is subject to various penalties, including cash
penalties, for failure to meet its registration obligations and
the related stock exchange listing for the underlying common
stock.



| |                                   
| | ----------------------------------
| | Costs Associated with Refinancings

During fiscal 2004, the Company expensed
$0.5 million of unamortized debt issuance costs associated
with the term loan that was retired when the Company entered
into its new line of credit agreement. During fiscal 2003, the
Company recognized a loss of approximately $1.9 million on
the early extinguishment of the

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

convertible notes. The loss included a
$0.5 million early conversion premium and the write off of
unamortized debt issuance costs and unamortized discount
associated with the convertible notes.



| |                                           
| | ------------------------------------------
| | Use of Interest Rate Swap
    Arrangements

From July 1999 through October 2001, the Company
used interest rate swap arrangements to hedge the variability of
interest payments on its variable rate credit facilities. While
in effect, the swap arrangements essentially converted the
Companys then outstanding floating rate debt to a fixed
rate basis. The Company terminated its swap arrangements in
October 2001 in response to the continued downward movement in
interest rates during fiscal 2002 and had no derivative
contracts in place as of February 29/28, 2004 and 2003.



| |                   
| | ------------------
| | Cash Interest Paid

The Company made interest payments totaling
$2.0 million, $2.5 million, and $5.2 million in
fiscal 2004, 2003 and 2002, respectively. The fiscal 2002 amount
included $1.8 million paid in connection with the interest
rate swap arrangements as discussed above.

Note G  Income Taxes

Income (loss) before income taxes and the
cumulative effect of a change in accounting principle
attributable to domestic and foreign operations was
approximately $7.2 million and $7.5 million,
respectively, in fiscal 2004, $(51.7) million and
$0.4 million, respectively, in fiscal 2003 and
$(56.9) million and $1.8 million, respectively, in
fiscal 2002.

Details of the income tax provision (benefit)
attributable to income (loss) before income taxes and the
cumulative effect of a change in accounting principle are as
follows (in millions):

|                                |           |         |                |      |     |      |      |   |      |      |       |   |       |       |  
|------------------------------- | --------- | ------- | -------------- | ---- | --- | ---- | ---- | - | ---- | ---- | ----- | - | ----- | ----- | -
|                                |           | 2004    |                | 2003 |     | 2002
|                                |           |         |                |      |     |     
|Income tax provision (benefit): |           |         |                |      |     |      |      |   |      |      |       |  
|                                | Current:  |         |                |      |     |      |      |   |      |      |       |   |      
|                                |           | Federal |                | $    | 2.0 |      |      | $ | (3.1 | )    |       | $ | 4.4   |      
|                                |           | State   |                |      | 0.3 |      |      |   |     |      |       |   | 0.3   |      
|                                |           | Foreign |                |      | 1.1 |      |      |   | 0.1  |      |       |   | 1.8   |      
|                                |           |         |                |      |     |      |      |   |      |      |       |  
|                                |           |         | Total current  |      |     | 3.4  |      |   |      | (3.0 | )     |   |       | 6.5   |  
|                                |           |         |                |      |     |      |      |   |      |      |       |  
|                                | Deferred: |         |                |      |     |      |      |   |      |      |       |   |      
|                                |           | Federal |                |      |    |      |      |   | 1.4  |      |       |   | (12.8 | )    
|                                |           | State   |                |      |    |      |      |   |     |      |       |   | (3.4  | )    
|                                |           | Foreign |                |      |    |      |      |   | 0.8  |      |       |   | (0.7  | )    
|                                |           |         |                |      |     |      |      |   |      |      |       |  
|                                |           |         | Total deferred |      |     |     |      |   |      | 2.2  |       |   |       | (16.9 | )
|                                |           |         |                |      |     |      |      |   |      |      |       |  
|                                |           | $       | 3.4            |      |     | $    | (0.8 | ) |      | $    | (10.4 | )
|                                |           |         |                |      |     |      |      |   |      |      |       |  

52



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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation of the Companys income
taxes (benefit) with the United States federal statutory rate is
as follows (in millions):

|                                                                                                                                                |  |      |       |      |  |      |       |   |  |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                                                                                                                |  | 2004 |       | 2003 |  | 2002
|                                                                                                                                                |  |      |       |      |  |     
|Federal income taxes (benefit) at statutory rates                                                                                               |  | $    | 5.1   |      |  | $    | (18.0 | ) |  | $ | (19.3 | )
|Deemed dividends and other taxable income from
    wholly owned foreign subsidiaries                                                            |  |      | 13.6  |      |  |      |      |   |  |   |      |  
|Operating losses and credit carryforwards not
    benefited                                                                                     |  |      |      |      |  |      | 18.1  |   |  |   | 7.7   |  
|Change in US federal tax law, net of related IRS
    audit issues                                                                               |  |      |      |      |  |      | (3.0  | ) |  |   |      |  
|Change in valuation allowance, primarily in
    fiscal 2004 as a result of the use of net operating losses
    carried forward from prior years |  |      | (13.8 | )    |  |      | 2.2   |   |  |   |      |  
|Goodwill amortization and impairment                                                                                                            |  |      |      |      |  |      |      |   |  |   | 2.2   |  
|Effect of non-US rates                                                                                                                          |  |      |      |      |  |      |      |   |  |   | 0.5   |  
|State taxes, net of federal effect                                                                                                              |  |      | 0.3   |      |  |      |      |   |  |   |      |  
|Other                                                                                                                                           |  |      | (1.8  | )    |  |      | (0.1  | ) |  |   | (1.5  | )
|                                                                                                                                                |  |      |       |      |  |      |       |   |  |   |       |  
|                                                                                                                                                |  | $    | 3.4   |      |  | $    | (0.8  | ) |  | $ | (10.4 | )
|                                                                                                                                                |  |      |       |      |  |      |       |   |  |   |       |  

Income taxes (refunds), net, of
$0.8 million, $(7.9) million, and $4.1 million
were paid (received) in fiscal 2004, 2003 and 2002,
respectively.

The Companys U.S. taxable income for
fiscal 2004 included distributions deemed to have been made to
the Company as an U.S. entity from several of its foreign
subsidiaries, including, particularly, its U.K. subsidiary. Such
deemed distributions stemmed from the existence of intercompany
debt owed by the U.S. entity to certain of its foreign
subsidiaries and from the pledging of certain U.K. assets as
collateral for the Companys term loan which was
outstanding for a portion of the year.

During fiscal 2004, the Company used net
operating losses carried forward from previous years to reduce
its current taxes payable in the U.S. The use of these
losses and the related reversal of previously established
valuation allowances associated with the loss carryforwards
reduced the Companys U.S. and consolidated tax provisions
for fiscal 2004 and also gave rise to $1.0 million in
credits to equity for portions of the loss carryforwards related
to stock options and other equity issues.

During fiscal 2004, the Company reached final
settlement with the Internal Revenue Service regarding
previously disclosed audits of the Companys federal income
tax returns for its fiscal years 2000 and 2001. In the
settlement, the Company lost the ability to carry back
approximately $5.4 million in net operating losses
generated in fiscal 2001 and repaid approximately
$2.1 million of refunds previously received from the IRS
plus approximately $0.5 million in accrued interest. The
final settlements had been anticipated in the Companys
fiscal 2003 net tax provision and had no material effect on
the tax provision or net income for fiscal 2004.

During fiscal 2004, the Companys wholly
owned subsidiary, Brite Voice Systems, Inc. (Brite),
reached final settlement with the IRS regarding a disputed
Notice of Deficiency relating to Brites August 1999
federal income tax return. As a result of the settlement, the
Company reversed approximately $1.2 million of taxes
payable it had accrued in prior years in response to the IRS
challenge. The effect of this settlement is included within
other in the fiscal 2004 rate reconciliation table
shown above.

During fiscal 2003, United States tax law was
amended to allow companies which incurred net operating losses
in 2001 and 2002 to carry such losses back a maximum of five
years instead of the maximum of two years previously allowed. As
a result of this change, during the first quarter of fiscal
2003, the Company used $21.5 million of its previously
reported net operating loss carryforwards and $0.4 million
of its previously

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

reported tax credit carryforwards and recognized
a one-time tax benefit of $7.9 million, of which
$2.2 million was recognized as additional capital
associated with previous stock option exercises. Also during
fiscal 2003, the Company became aware of the audit issues
described above associated with its fiscal 2000 and 2001
U.S. tax returns and recorded a charge of approximately
$2.7 million as part of its tax provision for the year.

Deferred taxes result from the effect of
transactions which are recognized in different periods for
financial and tax reporting purposes. Significant components of
the Companys deferred tax assets and liabilities are as
follows at February 29/28 (in millions):

|                          |                                            |                                |   |       |      |   |   |       |      |  
|------------------------- | ------------------------------------------ | ------------------------------ | - | ----- | ---- | - | - | ----- | ---- | -
|                          |                                            | 2004                           |   | 2003 
|                          |                                            |                                |   |      
|Deferred Tax Assets:      |                                            |                                |   |       |      |   |   |      
|                          | Net operating loss carryforwards           |                                | $ | 0.1   |      |   | $ | 15.8  |     
|                          | Tax credit carryforwards                   |                                |   | 7.4   |      |   |   | 5.6   |     
|                          | Inventory                                  |                                |   | 2.3   |      |   |   | 2.4   |     
|                          | Accrued expenses                           |                                |   | 2.1   |      |   |   | 2.8   |     
|                          | Deferred revenue                           |                                |   | 0.8   |      |   |   | 1.0   |     
|                          | Allowance for doubtful accounts            |                                |   | 0.3   |      |   |   | 0.7   |     
|                          | Depreciation and amortization              |                                |   | 1.7   |      |   |   | 2.3   |     
|                          | Intercompany interest                      |                                |   | 1.2   |      |   |   |      |     
|                          | Other items                                |                                |   | 1.8   |      |   |   | 2.3   |     
|                          |                                            |                                |   |       |      |   |   |      
|                          |                                            | Total deferred tax assets      |   |       | 17.7 |   |   |       | 32.9 |  
|                          | Valuation allowance                        |                                |   | (15.5 | )    |   |   | (29.3 | )   
|                          |                                            |                                |   |       |      |   |   |      
|                          |                                            | Net deferred tax assets        |   |       | 2.2  |   |   |       | 3.6  |  
|                          |                                            |                                |   |       |      |   |   |      
|Deferred tax liabilities: |                                            |                                |   |       |      |   |   |      
|                          | Acquisition-related identified intangibles |                                |   | (2.0  | )    |   |   | (3.0  | )   
|                          | Other items                                |                                |   | (0.2  | )    |   |   | (0.6  | )   
|                          |                                            |                                |   |       |      |   |   |      
|                          |                                            | Total deferred tax liabilities |   |       | (2.2 | ) |   |       | (3.6 | )
|                          |                                            |                                |   |       |      |   |   |      
|                          |                                            | Net deferred tax assets        |   | $     |     |   |   | $     |     |  
|                          |                                            |                                |   |       |      |   |   |      

At February 29, 2004, the Company had
U.S. net operating loss carryforwards totaling
$0.3 million. This amount, if not used, will expire in
2023. At February 29, 2004 the Company also had
$3.8 million, $1.6 million and $0.6 million in US
research and development, foreign tax credit and alternative
minimum tax credit carryforwards, respectively, and
$1.3 million in UK foreign tax credits. If unused, the
R&D tax credit carryforwards will begin to expire in 2019,
and the foreign tax credit carryforwards will begin to expire in
2005.

During fiscal 2003 and fiscal 2002, the Company
established a valuation allowance against its net deferred tax
assets. Although the Company earned a profit in fiscal 2004 and
was able to use some previously reserved net operating loss
carryforwards, the Company believes the existence of losses in
its U.S. operations in recent years and the dependency of
its international subsidiaries on continuing
U.S. operations prevent it from concluding that it is more
likely than not that its deferred tax assets will be realized.

In fiscal 2002, the Company did not provide a
valuation allowance for deferred assets associated with its
foreign subsidiaries. In providing such a reserve during fiscal
2003, the Company recognized tax expense totaling
$0.8 million to increase the valuation allowance for net
foreign deferred tax assets that existed at February 28,
2002. Also during fiscal 2003, and as further discussed in
Note C, the Company reduced its deferred tax liabilities by
$1.4 million in connection with the reclassification of its
assembled workforce

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

intangible asset to goodwill. As a result of this
transaction, the Company increased the valuation allowance
associated with its U.S. net deferred tax asset by
$1.4 million.

Note H  Stockholders
Equity

The Company has six plans under which options may
be issued to employees and/or non-employee members of the
Companys Board of Directors. As of February 29, 2004,
7,404,598 shares of common stock were reserved for future
issuance under all option plans as follows:

|                                 |       |                      |           |               |  |  |         |           | 
|-------------------------------- | ----- | -------------------- | --------- | ------------- |  |  | ------- | --------- | 
|                                 |       |                     
|                                 |       | Shares Available For
|                                 |       |                     
|                                 |       | Outstanding          |           | Future Stock 
|Plan Name                        |       | Stock Options        |           | Option Grants
|                                 |       |                      |           |              
|1990 Employee Stock Option Plan  |       |                      | 790,768   |               |  |  |        |          
|1990 Non-Employee Option Plan    |       |                      | 69,000    |               |  |  |        |          
|1998 Employee Non-Qualified Plan |       |                      | 338,669   |               |  |  | 18,500  |          
|1999 Non-Qualified Plan          |       |                      | 3,290,229 |               |  |  | 215,224 |          
|2003 Stock Option Plan           |       |                      | 1,619,800 |               |  |  | 380,200 |          
|Employee Stock Purchase Plan     |       |                      | 103,808   |               |  |  | 578,400 |          
|                                 |       |                      |           |               |  |  |         |          
|                                 | Total |                      |           | 6,212,274     |  |  |         | 1,192,324 | 
|                                 |       |                      |           |               |  |  |         |          

Options outstanding at February 29, 2004 are
summarized as follows:

|                |  |        |           |                  |  |                  |       |  |  |  |      | 
|--------------- |  | ------ | --------- | ---------------- |  | ---------------- | ----- |  |  |  | ---- | 
|                |  |        |           |                  |  | Weighted Average
|                |  |        |           |                  |  | Remaining       
|                |  |        |           | Weighted Average |  | Contractual Life
|Exercise Prices |  | Shares |           | Exercise Price   |  | in Years        
|                |  |        |           |                  |  |                 
|$1.02  $ 5.53  |  |        | 2,025,095 |                  |  | $                | 3.10  |  |  |  | 6.78 | 
|$6.06  $ 7.12  |  |        | 2,629,619 |                  |  | $                | 6.81  |  |  |  | 8.28 | 
|$7.52  $28.88  |  |        | 1,557,560 |                  |  | $                | 12.25 |  |  |  | 6.32 | 
|                |  |        |           |                  |  |                  |       |  |  |  |      | 
|                |  |        | 6,212,274 |                  |  |                  |       |  |  |  |      | 
|                |  |        |           |                  |  |                  |       |  |  |  |      | 

Options exercisable at February 29, 2004 are
summarized as follows:

|                |  |        |           |                  |  |                  |       |  |  |  |      | 
|--------------- |  | ------ | --------- | ---------------- |  | ---------------- | ----- |  |  |  | ---- | 
|                |  |        |           |                  |  | Weighted Average
|                |  |        |           |                  |  | Remaining       
|                |  |        |           | Weighted Average |  | Contractual Life
|Exercise Prices |  | Shares |           | Exercise Price   |  | in Years        
|                |  |        |           |                  |  |                 
|$1.02  $ 5.53  |  |        | 1,101,759 |                  |  | $                | 4.35  |  |  |  | 5.06 | 
|$6.06  $ 9.56  |  |        | 1,113,671 |                  |  | $                | 6.56  |  |  |  | 6.46 | 
|$9.69  $28.88  |  |        | 1,212,985 |                  |  | $                | 13.12 |  |  |  | 5.90 | 
|                |  |        |           |                  |  |                  |       |  |  |  |      | 
|                |  |        | 3,428,415 |                  |  |                  |       |  |  |  |      | 
|                |  |        |           |                  |  |                  |       |  |  |  |      | 



| |                                
| | -------------------------------
| | 1990 Employee Stock Option Plan

A stock option plan is in effect under which
shares of common stock were authorized for issuance by the
Compensation Committee of the Board of Directors as stock
options to key employees. Option prices per share are the fair
market value per share of stock, based on the closing per share
price on the date of grant. The Company has granted options at
various dates with terms under which the options generally
become exercisable at the rate of 20%, 25% or 33% per year.
Options becoming exercisable at 33% per year expire six

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

or ten years after the date of grant.
Options becoming exercisable at 20% or 25% per year expire
ten years after the date of grant.

|                             |           |        |           |                  |   |   |      |      | 
|---------------------------- | --------- | ------ | --------- | ---------------- | - | - | ---- | ---- | 
|                             |           |        |           | Weighted Average
|                             |           |        |           | Exercise Price  
|                             |           | Shares |           | Per Share       
|                             |           |        |           |                 
|Balance at February 28, 2001 |           |        | 1,923,302 |                  |   | $ | 6.82 |     
|                             | Granted   |        |           |                 |   |   |      |     | 
|                             | Exercised |        |           | (229,184         | ) |   |      | 5.05 | 
|                             | Forfeited |        |           | (22,234          | ) |   |      | 6.65 | 
|                             |           |        |           |                  |   |   |      |     
|Balance at February 28, 2002 |           |        | 1,671,884 |                  |   | $ | 7.06 |     
|                             | Granted   |        |           |                 |   |   |      |     | 
|                             | Exercised |        |           | (14,286          | ) |   |      | 4.92 | 
|                             | Forfeited |        |           | (43,638          | ) |   |      | 4.92 | 
|                             |           |        |           |                  |   |   |      |     
|Balance at February 28, 2003 |           |        | 1,613,960 |                  |   | $ | 7.14 |     
|                             | Granted   |        |           |                 |   |   |      |     | 
|                             | Exercised |        |           | (666,560         | ) |   |      | 9.20 | 
|                             | Forfeited |        |           | (156,632         | ) |   |      | 8.02 | 
|                             |           |        |           |                  |   |   |      |     
|Balance at February 29, 2004 |           |        | 790,768   |                  |   | $ | 5.23 |     
|                             |           |        |           |                  |   |   |      |     

Options for a total of 790,768 shares were
exercisable at an average price of $5.23 at February 29,
2004.



| |                              
| | -----------------------------
| | 1990 Non-Employee Option Plan

Under the 1990 non-employee stock option
plan, nonqualified stock options were issued to non-employee
members of the Companys Board of Directors in accordance
with a formula prescribed by the plan. Option prices per share
are the fair market value per share based on the closing per
share price on the date of grant. Each option became exercisable
within the period specified in the optionees agreement and
is exercisable for 10 years from the date of grant.

|                             |           |        |        |                  |   |   |      |      | 
|---------------------------- | --------- | ------ | ------ | ---------------- | - | - | ---- | ---- | 
|                             |           |        |        | Weighted Average
|                             |           |        |        | Exercise Price  
|                             |           | Shares |        | Per Share       
|                             |           |        |        |                 
|Balance at February 28, 2001 |           |        | 84,000 |                  |   | $ | 7.35 |     
|                             | Granted   |        |        |                 |   |   |      |     | 
|                             | Exercised |        |        | (8,000           | ) |   |      | 6.97 | 
|                             |           |        |        |                  |   |   |      |     
|Balance at February 28, 2002 |           |        | 76,000 |                  |   | $ | 7.39 |     
|                             | Granted   |        |        |                 |   |   |      |     | 
|                             | Exercised |        |        |                 |   |   |      |     | 
|                             |           |        |        |                  |   |   |      |     
|Balance at February 28, 2003 |           |        | 76,000 |                  |   | $ | 7.39 |     
|                             | Granted   |        |        |                 |   |   |      |     | 
|                             | Exercised |        |        | (7,000           | ) |   |      | 4.88 | 
|                             |           |        |        |                  |   |   |      |     
|Balance at February 29, 2004 |           |        | 69,000 |                  |   | $ | 7.64 |     
|                             |           |        |        |                  |   |   |      |     

Options for a total of 69,000 shares were
exercisable at an average price of $7.64 at February 29,
2004.

56



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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                     
| | ------------------------------------
| | 1998 Employee Non-Qualified
    Plan

During fiscal 1999, the Company adopted a
stock option plan under which shares of common stock may be
authorized for issuance by the Compensation Committee of the
Board of Directors as non-qualified stock options to key
employees. Option prices per share are the fair market value per
share of stock based on the average of the high and low price
per share on the date of grant. The Company has granted options
at various dates with terms under which the options become
exercisable at a rate of 25% or 33% per year and are
exercisable for a period of ten years after the date of
grant.

|                             |           |        |         |                  |   |   |      |      | 
|---------------------------- | --------- | ------ | ------- | ---------------- | - | - | ---- | ---- | 
|                             |           |        |         | Weighted Average
|                             |           |        |         | Exercise Price  
|                             |           | Shares |         | Per Share       
|                             |           |        |         |                 
|Balance at February 28, 2001 |           |        | 717,005 |                  |   | $ | 6.47 |     
|                             | Granted   |        |         |                 |   |   |      |     | 
|                             | Exercised |        |         | (328,671         | ) |   |      | 7.03 | 
|                             | Forfeited |        |         | (12,916          | ) |   |      | 9.27 | 
|                             |           |        |         |                  |   |   |      |     
|Balance at February 28, 2002 |           |        | 375,418 |                  |   | $ | 5.83 |     
|                             | Granted   |        |         | 87,000           |   |   |      | 2.43 | 
|                             | Exercised |        |         | (3,750           | ) |   |      | 4.88 | 
|                             | Forfeited |        |         | (51,168          | ) |   |      | 8.87 | 
|                             |           |        |         |                  |   |   |      |     
|Balance at February 28, 2003 |           |        | 407,500 |                  |   | $ | 4.73 |     
|                             | Granted   |        |         | 90,919           |   |   |      | 2.06 | 
|                             | Exercised |        |         | (136,250         | ) |   |      | 4.77 | 
|                             | Forfeited |        |         | (23,500          | ) |   |      | 3.96 | 
|                             |           |        |         |                  |   |   |      |     
|Balance at February 29, 2004 |           |        | 338,669 |                  |   | $ | 4.05 |     
|                             |           |        |         |                  |   |   |      |     

Options for a total of 199,123 shares were
exercisable at an average price of $5.34 at February 29,
2004.



| |                        
| | -----------------------
| | 1999 Non-Qualified Plan

During fiscal 2000, the Company adopted a
stock option plan under which shares of common stock may be
authorized for issuance by the Compensation Committee of the
Board of Directors as non-qualified stock options to key
employees and non-employee members of the Companys Board
of Directors. Option prices per share are the fair market value
per share of stock based on the average of the high and low
price per share on the date of grant. The Company has granted
options to employees at various dates with terms under which the
options become exercisable at a rate of 25% or 33% per year
and are exercisable for a period of ten years after the
date of grant. In addition, the Company has granted options to
non-employee directors at various dates

57



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##### Table of Contents



INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

with terms under which the options become
exercisable within the period specified in the optionees
agreement, generally one year. Such options are exercisable
for a period of ten years from the date of grant.

|                             |           |        |           |                  |   |   |       |       | 
|---------------------------- | --------- | ------ | --------- | ---------------- | - | - | ----- | ----- | 
|                             |           |        |           | Weighted Average
|                             |           |        |           | Exercise Price  
|                             |           | Shares |           | Per Share       
|                             |           |        |           |                 
|Balance at February 28, 2001 |           |        | 3,409,937 |                  |   | $ | 10.50 |      
|                             | Granted   |        |           | 259,000          |   |   |       | 11.47 | 
|                             | Exercised |        |           | (168,223         | ) |   |       | 8.27  | 
|                             | Forfeited |        |           | (317,398         | ) |   |       | 11.37 | 
|                             |           |        |           |                  |   |   |       |      
|Balance at February 28, 2002 |           |        | 3,183,316 |                  |   | $ | 10.62 |      
|                             | Granted   |        |           | 907,750          |   |   |       | 1.86  | 
|                             | Exercised |        |           |                 |   |   |       |      | 
|                             | Forfeited |        |           | (677,520         | ) |   |       | 10.33 | 
|                             |           |        |           |                  |   |   |       |      
|Balance at February 28, 2003 |           |        | 3,413,546 |                  |   | $ | 8.35  |      
|                             | Granted   |        |           | 548,856          |   |   |       | 2.77  | 
|                             | Exercised |        |           | (316,324         | ) |   |       | 5.14  | 
|                             | Forfeited |        |           | (355,849         | ) |   |       | 10.65 | 
|                             |           |        |           |                  |   |   |       |      
|Balance at February 29, 2004 |           |        | 3,290,229 |                  |   | $ | 7.48  |      
|                             |           |        |           |                  |   |   |       |      

Options held by employees and non-employees for
2,198,524 and 96,000 shares, respectively, were exercisable
at average prices of $9.56 and $7.63, respectively, at
February 29, 2004.



| |                       
| | ----------------------
| | 2003 Stock Option Plan

During fiscal 2004, the Company adopted a
stock option plan under which shares of common stock may be
authorized for issuance by the Compensation Committee of the
Board of Directors as non-qualified stock options to employee
and non-employee members of the Companys Board of
Directors. Option prices per share are the fair market value per
share of stock based on the average of the high and low price
per share on the date of grant. The Company has granted options
to employee and non-employee directors at various dates with
terms under which the options become exercisable within the
period specified in the optionees agreement, generally one
to three years. Such options are exercisable for a period
of ten years from the date of grant.

|                             |           |        |           |                  |   |   |      |      | 
|---------------------------- | --------- | ------ | --------- | ---------------- | - | - | ---- | ---- | 
|                             |           |        |           | Weighted Average
|                             |           |        |           | Exercise Price  
|                             |           | Shares |           | Per Share       
|                             |           |        |           |                 
|Balance at February 28, 2003 |           | $      |          |                  |   |   |     |     
|                             | Granted   |        |           | 1,632,100        |   |   |      | 7.16 | 
|                             | Exercised |        |           |                 |   |   |      |     | 
|                             | Forfeited |        |           | (12,300          | ) |   |      | 7.12 | 
|                             |           |        |           |                  |   |   |      |     
|Balance at February 29, 2004 |           |        | 1,619,800 |                  |   | $ | 7.16 |     
|                             |           |        |           |                  |   |   |      |     

Options for a total of 75,000 shares were
exercisable at an average price of $7.12 at February 29,
2004.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan
under which options are granted to eligible employees in
accordance with a formula prescribed by the plan and are
exercised automatically at the end of a

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

one-year payroll deduction period. The plan was
amended during fiscal 2004 to increase the aggregate shares
available for issuance under the plan to 2,000,000. The option
period consists of the 12-month period beginning January 1
and ending the following December 31. Option prices are 85%
of the lower of the closing price per share of the
Companys common stock on the option grant date or the
option exercise date.

|                             |           |        |         |                  |   |   |       |       | 
|---------------------------- | --------- | ------ | ------- | ---------------- | - | - | ----- | ----- | 
|                             |           |        |         | Weighted Average
|                             |           |        |         | Exercise Price  
|                             |           | Shares |         | Per Share       
|                             |           |        |         |                 
|Balance at February 28, 2001 |           |        | 236,505 |                  |   | $ | 5.80  |      
|                             | Granted   |        |         | 130,518          |   |   |       | 10.29 | 
|                             | Exercised |        |         | (194,455         | ) |   |       | 5.84  | 
|                             | Forfeited |        |         | (42,050          | ) |   |       | 5.62  | 
|                             |           |        |         |                  |   |   |       |      
|Balance at February 28, 2002 |           |        | 130,518 |                  |   | $ | 10.29 |      
|                             | Granted   |        |         | 498,369          |   |   |       | 1.84  | 
|                             | Exercised |        |         | (63,885          | ) |   |       | 1.62  | 
|                             | Forfeited |        |         | (66,633          | ) |   |       | 1.69  | 
|                             |           |        |         |                  |   |   |       |      
|Balance at February 28, 2003 |           |        | 498,369 |                  |   | $ | 1.84  |      
|                             | Granted   |        |         | 103,808          |   |   |       | 10.09 | 
|                             | Exercised |        |         | (444,517         | ) |   |       | 1.84  | 
|                             | Forfeited |        |         | (53,852          | ) |   |       | 1.84  | 
|                             |           |        |         |                  |   |   |       |      
|Balance at February 29, 2004 |           |        | 103,808 |                  |   | $ | 10.09 |      
|                             |           |        |         |                  |   |   |       |      

As of February 29, 2004, no options were
exercisable under this plan.



| |                      
| | ---------------------
| | Restricted Stock Plan

During fiscal 1996, the Company adopted a
Restricted Stock Plan. Shares issued to senior executives were
earned based on the achievement of certain targeted share prices
and the continued service of each executive for a two-year
period after each target was met. Shares were available for
annual grants to other key executives as a component of their
annual bonuses on the achievement of targeted annual earnings
per share objectives and the completion of an additional
two years of service after the grant.

Activity related to restricted stock was as
follows:

|                             |        |           |        |         |  
|---------------------------- | ------ | --------- | ------ | ------- | -
|                             |        | Senior   
|                             |        | Executive
|                             |        | Plan     
|                             |        |          
|Balance at February 28, 2001 |        |           | 87,164 |        
|                             | Vested |           |        | (87,164 | )
|                             |        |           |        |        
|Balance at February 28, 2002 |        |           |       |        
|                             |        |           |        |        

There was no activity during fiscal 2004 or
fiscal 2003 in the Restricted Stock Plan. On June 24, 2003
the Company terminated the Restricted Stock Plan.



| |                                
| | -------------------------------
| | Preferred Share Purchase Rights

One Preferred Share Purchase Right is attached to
each outstanding share of the Companys common stock. The
rights will become exercisable upon the earlier to occur of
ten days after the first public announcement that a person
or group has acquired beneficial ownership of 20 percent or
more, or ten days after a person or group announces a
tender offer that would result in beneficial ownership of
20 percent or

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

more, of the Companys outstanding common
stock. At such time as the rights become exercisable, each right
will entitle its holder to purchase one eight-hundredth of
a share of Series A Preferred Stock for $37.50, subject to
adjustment. If the Company is acquired in a business combination
transaction while the rights are outstanding, each right will
entitle its holder to purchase for $37.50 common shares of the
acquiring company having a market value of $75. In addition, if
a person or group acquires beneficial ownership of
20 percent or more of the Companys outstanding common
stock, each right will entitle its holder (other than such
person or members of such group) to purchase, for $37.50, a
number of shares of the Companys common stock having a
market value of $75. Furthermore, at any time after a person or
group acquires beneficial ownership of 20 percent or more
(but less than 50 percent) of the Companys
outstanding common stock, the Board of Directors may, at its
option, exchange part or all of the rights (other than rights
held by the acquiring person or group) for shares of the
Companys common stock on a one-for-one basis. At any time
prior to the acquisition of such a 20 percent position, the
Company can redeem each right for $0.00125. The Board of
Directors is also authorized to reduce the 20 percent
thresholds referred to above to not less than 10 percent
if, in its judgment, it is to the Companys benefit to do
so. The rights expire in May 2011.



| |                                     
| | ------------------------------------
| | Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss
are as follows (in millions):

|                             |                                                                                      |             |      |             |   |       |      |      |   |   |      |      |  
|---------------------------- | ------------------------------------------------------------------------------------ | ----------- | ---- | ----------- | - | ----- | ---- | ---- | - | - | ---- | ---- | -
|                             |                                                                                      | Foreign     |      | FAS 133     |   |      
|                             |                                                                                      | Currency    |      | Derivative  |   |      
|                             |                                                                                      | Translation |      | Liability   |   |      
|                             |                                                                                      | Adjustments |      | Adjustments |   | Total
|                             |                                                                                      |             |      |             |   |      
|Balance at February 28, 2001 |                                                                                      | $           | (4.0 | )           |   | $     |     |      |   | $ | (4.0 | )   
|                             | Foreign currency translation adjustments                                             |             |      | (1.7        | ) |       |      |     |   |   |      | (1.7 | )
|                             | Cumulative effect of adopting FAS 133, net
    of tax effect of $0.3                 |             |      |            |   |       |      | (0.4 | ) |   |      | (0.4 | )
|                             | Reclassification of derivative losses into
    earnings, net of tax effect of $(0.1) |             |      |            |   |       |      | 0.2  |   |   |      | 0.2  |  
|                             |                                                                                      |             |      |             |   |       |      |      |   |   |      |     
|Balance at February 28, 2002 |                                                                                      | $           | (5.7 | )           |   | $     | (0.2 | )    |   | $ | (5.9 | )   
|                             | Foreign currency translation adjustments                                             |             |      | 2.3         |   |       |      |     |   |   |      | 2.3  |  
|                             | Reclassification of derivative losses into
    earnings, net of tax effect of $(0.1) |             |      |            |   |       |      | 0.2  |   |   |      | 0.2  |  
|                             |                                                                                      |             |      |             |   |       |      |      |   |   |      |     
|Balance at February 28, 2003 |                                                                                      | $           | (3.4 | )           |   | $     |     |      |   | $ | (3.4 | )   
|                             | Foreign currency translation adjustments                                             |             |      | 2.8         |   |       |      |     |   |   |      | 2.8  |  
|                             |                                                                                      |             |      |             |   |       |      |      |   |   |      |     
|Balance at February 29, 2004 |                                                                                      | $           | (0.6 | )           |   | $     |     |      |   | $ | (0.6 | )   
|                             |                                                                                      |             |      |             |   |       |      |      |   |   |      |     

Note I  Leases

Rental expense, before the effect of special
charges discussed in Note J, was $1.9 million,
$2.5 million and $3.9 million in fiscal 2004,
2003 and 2002, respectively. Rental costs in all years generally
related to office and manufacturing facility leases. The lease
agreements include renewal provisions and require the Company

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

to pay taxes, insurance and maintenance costs. At
February 29, 2004, the Companys commitments for
minimum rentals under noncancelable operating leases were as
follows (in millions):

|            |  |        |     | 
|----------- |  | ------ | --- | 
|Fiscal Year |  | Amount
|            |  |       
|2005        |  | $      | 3.1 | 
|2006        |  | $      | 2.2 | 
|2007        |  | $      | 1.4 | 
|2008        |  | $      | 1.1 | 
|2009        |  | $      | 0.8 | 
|Thereafter  |  | $      | 0.9 | 

Of the total commitments under noncancelable
operating leases, $1.0 million has already been charged to
expense as of February 29, 2004 in connection with the
fiscal 2003 and 2002 special charges described in Note J.

Note J  Special
Charges



| |            
| | -----------
| | Fiscal 2004

During fiscal 2004, the Company incurred
severance charges of approximately $1.4 million in
connection with a reduction in workforce affecting 56 positions.
In addition, the Company incurred cash and non-cash charges
totaling approximately $0.5 million and $0.3 million,
respectively, under the terms of a separation agreement with the
Companys former Chief Financial Officer who resigned to
pursue other opportunities.

The following table summarizes the effect on
reported operating results by financial statement category of
all special charges activities for fiscal 2004 (in millions).

|                                        |  |            |     |             |  |                |     |       |  |   |     |  |  |   |     | 
|--------------------------------------- |  | ---------- | --- | ----------- |  | -------------- | --- | ----- |  | - | --- |  |  | - | --- | 
|                                        |  |            |     |             |  | Selling,       |     |      
|                                        |  | Cost of    |     | Research &  |  | General &      |     |      
|                                        |  | Goods Sold |     | Development |  | Administrative |     | Total
|                                        |  |            |     |             |  |                |     |      
|Severance payments and related benefits |  | $          | 0.6 |             |  | $              | 0.2 |       |  | $ | 0.6 |  |  | $ | 1.4 | 
|Separation settlement                   |  |            |    |             |  |                |    |       |  |   | 0.8 |  |  |   | 0.8 | 
|                                        |  |            |     |             |  |                |     |       |  |   |     |  |  |   |     | 
|Total                                   |  | $          | 0.6 |             |  | $              | 0.2 |       |  | $ | 1.4 |  |  | $ | 2.2 | 
|                                        |  |            |     |             |  |                |     |       |  |   |     |  |  |   |     | 

As of February 29, 2004, all cash charges
had been paid.



| |            
| | -----------
| | Fiscal 2003

During fiscal 2003, the Company continued to
implement actions designed to lower cost and improve operational
efficiency. It also reviewed its intangible assets for evidence
of impairment in light of changes in its business and continued
softness in the world-wide telecommunications networks markets.
(See Note C.)

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the effect of the
special charges on fiscal 2003 operations by financial statement
category (in millions).

|                                        |       |            |     |             |  |      |     |          |  |               |     |       |  |   |     |     |  |   |      |      |  |   |      |      | 
|--------------------------------------- | ----- | ---------- | --- | ----------- |  | ---- | --- | -------- |  | ------------- | --- | ----- |  | - | --- | --- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                                        |       | Cost of    |     | Research &  |  |      |     | Other    |  | Impairment of |     |      
|                                        |       | Goods Sold |     | Development |  | SG&A |     | Expenses |  | Intangibles   |     | Total
|                                        |       |            |     |             |  |      |     |          |  |               |     |      
|Write down of intangible assets         |       | $          |    |             |  | $    |    |          |  | $             |    |       |  | $ |    |     |  | $ | 16.7 |      |  | $ | 16.7 |     
|Severance payments and related benefits |       |            | 2.3 |             |  |      | 0.8 |          |  |               | 3.1 |       |  |   |    |     |  |   |     |      |  |   | 6.2  |     
|Facilities closures                     |       |            | 0.2 |             |  |      | 0.1 |          |  |               | 0.4 |       |  |   |    |     |  |   |     |      |  |   | 0.7  |     
|Write down of excess inventories        |       |            | 4.1 |             |  |      |    |          |  |               |    |       |  |   |    |     |  |   |     |      |  |   | 4.1  |     
|Costs associated with loss contracts    |       |            | 4.7 |             |  |      |    |          |  |               |    |       |  |   |    |     |  |   |     |      |  |   | 4.7  |     
|Loss on early extinguishment of debt    |       |            |    |             |  |      |    |          |  |               |    |       |  |   | 1.9 |     |  |   |     |      |  |   | 1.9  |     
|                                        |       |            |     |             |  |      |     |          |  |               |     |       |  |   |     |     |  |   |      |      |  |   |      |     
|                                        | Total |            | $   | 11.3        |  |      | $   | 0.9      |  |               | $   | 3.5   |  |   | $   | 1.9 |  |   | $    | 16.7 |  |   | $    | 34.3 | 
|                                        |       |            |     |             |  |      |     |          |  |               |     |       |  |   |     |     |  |   |      |      |  |   |      |     

The severance and related costs recognized during
fiscal 2003 related to three separate workforce reductions that
affected a total of 273 employees. One of the reductions was
associated with the Companys consolidation of its separate
Enterprise and Networks divisions into a single, integrated
organizational structure. The charge also included costs
associated with the resignation of the Networks division
president during the first quarter of fiscal 2003. Costs related
to facilities closures included $0.4 million for the
closure of the Companys leased facility in Chicago,
Illinois and $0.3 million associated with the closure of a
portion of the Companys leased facilities in Manchester,
United Kingdom. The downsizing of the leased space in Manchester
followed from the Companys decision to consolidate
virtually all of its manufacturing operations into its Dallas,
Texas facilities. The inventory adjustments reflected the
Companys continued assessment of its inventory levels in
light of sales projections, the decision to eliminate the U.K.
manufacturing operation and the consolidation of the business
units. The charges for loss contracts reflected the costs
incurred on two contracts which are expected to result in net
losses to the Company upon completion. The loss on early
extinguishment of debt included $1.4 million in non-cash
charges to write-off unamortized debt discount and unamortized
debt issue costs and $0.5 million in prepayment premiums.
As of February 29, 2004, all cash charges had been paid.



| |            
| | -----------
| | Fiscal 2002

During the fourth quarter of fiscal 2002, the
Company performed a comprehensive review of the positioning of
its product lines, including lines brought forward from its
merger with Brite, reevaluated its physical plant needs, and
reviewed its aggregate staffing levels. Based on these reviews,
the Company took a number of strategic actions designed to lower
costs and streamline product offerings. As a result of these
actions, the Company incurred special charges of approximately
$33.4 million, including $16.4 million for the write
down of intangible assets and inventories associated with
discontinued product lines, $6.5 million for the write down
of excess inventories, $5.2 million for severance payments
and related benefits, $4.2 million for facilities closures,
and $1.1 million relating to the write down of
non-productive fixed assets.

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##### Table of Contents



INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the effect of
these special charges on fiscal 2002 operations by financial
statement category (in millions).

|                                                                                               |       |            |     |             |  |      |     |                |  |       |     |     |  |   |      |      |  |   |      |      | 
|---------------------------------------------------------------------------------------------- | ----- | ---------- | --- | ----------- |  | ---- | --- | -------------- |  | ----- | --- | --- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                                                                                               |       | Cost of    |     | Research &  |  |      |     | Impairment     |  |      
|                                                                                               |       | Goods Sold |     | Development |  | SG&A |     | of Intangibles |  | Total
|                                                                                               |       |            |     |             |  |      |     |                |  |      
|Write down of intangible assets and inventories
    associated with discontinued product lines |       | $          | 4.4 |             |  | $    |    |                |  | $     | 0.3 |     |  | $ | 11.7 |      |  | $ | 16.4 |     
|Write down of excess inventories                                                               |       |            | 6.5 |             |  |      |    |                |  |       |    |     |  |   |     |      |  |   | 6.5  |     
|Severance payments and related benefits                                                        |       |            | 2.2 |             |  |      | 0.8 |                |  |       | 2.2 |     |  |   |     |      |  |   | 5.2  |     
|Facilities closures                                                                            |       |            |    |             |  |      |    |                |  |       | 4.2 |     |  |   |     |      |  |   | 4.2  |     
|Write down of non-productive fixed assets                                                      |       |            | 0.3 |             |  |      | 0.7 |                |  |       | 0.1 |     |  |   |     |      |  |   | 1.1  |     
|                                                                                               |       |            |     |             |  |      |     |                |  |       |     |     |  |   |      |      |  |   |      |     
|                                                                                               | Total |            | $   | 13.4        |  |      | $   | 1.5            |  |       | $   | 6.8 |  |   | $    | 11.7 |  |   | $    | 33.4 | 
|                                                                                               |       |            |     |             |  |      |     |                |  |       |     |     |  |   |      |      |  |   |      |     

The $11.7 million write down of intangible
assets reflected the impairment of the Brite tradename, the
impairment of certain IVR technology acquired as part of the
Brite acquisition and the impairment of related goodwill (See
Note C). The $4.4 million write down of inventories
and $0.3 million charge to SG&A related to the
Companys decision to discontinue sales of certain earlier
versions of its payment and messaging systems that ran on a
different hardware platform than that used by the current
versions of those systems. The additional writedown of
inventories totaling approximately $6.5 million related to
items which the Company could continue to use in certain sales
situations but which, given the slowdown in market demand, it
held in excess quantities at the end of fiscal 2002.

As part of its fiscal 2002 initiatives, the
Company announced plans to forego expansion into existing leased
space in Allen, Texas and to close its Jacksonville, Florida and
Wichita, Kansas locations. As a result of these actions, the
Company recorded charges of approximately $4.2 million,
including approximately $3.8 million accrued for future
lease commitments and approximately $0.4 million for
accelerated depreciation expense arising from a reassessment of
the useful lives of certain related property and equipment. As
part of its overall facilities assessment, the Company also
identified and wrote off approximately $1.1 million of
fixed assets no longer being used by the Company. The Company
completed the sale of its Wichita, Kansas office building on
May 31, 2002. The $2.0 million in gross proceeds was
used to pay down amounts outstanding under the Companys
then outstanding revolving credit facility. As of
February 29, 2004, approximately $1.0 million of the
accrued lease costs remained unpaid.

The severance and related costs recognized in the
fourth quarter of fiscal 2002 were associated with two workforce
reductions that affected 198 employees. As of February 29,
2004 all amounts had been paid.

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note K  Earnings Per
Share

The following table sets forth the computation of
basic and diluted earnings per share:

|                                                                                   |  |                           |      |      |  |      |       |   |  |   |       |  
|---------------------------------------------------------------------------------- |  | ------------------------- | ---- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                                                   |  |                          
|                                                                                   |  | Year Ended February 29/28
|                                                                                   |  |                          
|                                                                                   |  | 2004                      |      | 2003 |  | 2002
|                                                                                   |  |                           |      |      |  |     
|                                                                                   |  |                          
|                                                                                   |  | (In millions, except     
|                                                                                   |  | per share data)          
|Numerator:                                                                         |  |                           |      |      |  |      |       |   |  |   |       |  
|Income (loss) before the cumulative effect of a
    change in accounting principle |  | $                         | 11.3 |      |  | $    | (50.6 | ) |  | $ | (44.7 | )
|Cumulative effect on prior years of a change in
    accounting principle           |  |                           |     |      |  |      | (15.8 | ) |  |   |      |  
|                                                                                   |  |                           |      |      |  |      |       |   |  |   |       |  
|Net income (loss)                                                                  |  | $                         | 11.3 |      |  | $    | (66.4 | ) |  | $ | (44.7 | )
|                                                                                   |  |                           |      |      |  |      |       |   |  |   |       |  
|Denominator:                                                                       |  |                           |      |      |  |      |       |   |  |   |       |  
|Denominator for basic earnings per share                                           |  |                           | 34.4 |      |  |      | 34.0  |   |  |   | 33.4  |  
|Effect of dilutive
    securities  employee stock options                         |  |                           | 1.0  |      |  |      |      |   |  |   |      |  
| outstanding
    warrants                                                         |  |                           | 0.3  |      |  |      |      |   |  |   |      |  
|                                                                                   |  |                           |      |      |  |      |       |   |  |   |       |  
|Denominator for diluted earnings per share                                         |  |                           | 35.7 |      |  |      | 34.0  |   |  |   | 33.4  |  
|                                                                                   |  |                           |      |      |  |      |       |   |  |   |       |  
|Basic:                                                                             |  |                           |      |      |  |      |       |   |  |   |       |  
|Income (loss) before the cumulative effect of a
    change in accounting principle |  | $                         | 0.33 |      |  | $    | (1.49 | ) |  | $ | (1.34 | )
|Cumulative effect on prior years of a change in
    accounting principle           |  |                           |     |      |  |      | (0.46 | ) |  |   |      |  
|                                                                                   |  |                           |      |      |  |      |       |   |  |   |       |  
|Net income (loss)                                                                  |  | $                         | 0.33 |      |  | $    | (1.95 | ) |  | $ | (1.34 | )
|                                                                                   |  |                           |      |      |  |      |       |   |  |   |       |  
|Diluted:                                                                           |  |                           |      |      |  |      |       |   |  |   |       |  
|Income (loss) before the cumulative effect of a
    change in accounting principle |  | $                         | 0.32 |      |  | $    | (1.49 | ) |  | $ | (1.34 | )
|Cumulative effect on prior years of a change in
    accounting principle           |  |                           |     |      |  |      | (0.46 | ) |  |   |      |  
|                                                                                   |  |                           |      |      |  |      |       |   |  |   |       |  
|Net income (loss)                                                                  |  | $                         | 0.32 |      |  | $    | (1.95 | ) |  | $ | (1.34 | )
|                                                                                   |  |                           |      |      |  |      |       |   |  |   |       |  

Options to purchase 1,554,060, 6,009,375 and
5,437,136 shares of common stock at average exercise prices
of $12.25, $7.23 and $9.14, respectively, were outstanding at
February 29, 2004, February 28, 2003 and
February 28, 2002, respectively, but were not included in
the computations of diluted earnings (loss) per share because
the effect would have been anti-dilutive to the calculations.
For fiscal 2004, the options would be anti-dilutive because the
options exercise prices were greater than the average
price of the Companys shares for the year. For fiscal 2003
and 2002, the anti-dilution is due to the loss for the year.

Note L  Operating Segment
Information and Major Customers

The Company operates as a single, integrated
business unit. The Companys chief operating decision maker
assesses performance and allocates resources on an enterprise
wide basis. The Companys product line includes IVR/portal
solutions, messaging solutions, payment solutions, maintenance
and related services, and managed services provided for
customers on an outsourced or managed service provider basis. In
prior years, the Company identified its sales of systems and
related services as being sales to the Enterprise and Network
markets. Generally sales of IVR/portal systems and related
services were made to Enterprise customers, while sales of
messaging and payment systems were made to Network customers.
Going forward, the Company believes that product line
distinction provides the most meaningful breakdown of quarterly
and annual sales activity. The Company is not able to provide
the historical breakdown of Network system sales into its

64



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##### Table of Contents



INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

messaging and payment systems components. The
Companys net sales by product line for fiscal 2004, 2003
and 2002 were as follows (in millions):

|                                                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|------------------------------------------------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                     |  | 2004 |       | 2003 |  | 2002
|                                                                                     |  |      |       |      |  |     
|IVR/portal solution sales (Enterprise systems
    sales prior to fiscal 2004)        |  | $    | 54.2  |      |  | $    | 52.4  |  |  | $ | 77.6  | 
|Messaging solution sales (included in Network
    system sales prior to fiscal 2004) |  |      | 10.8  |      |  |      |      |  |  |   |      | 
|Payment solution sales (included in Network
    system sales prior to fiscal 2004)   |  |      | 18.6  |      |  |      |      |  |  |   |      | 
|Network system sales                                                                 |  |      |      |      |  |      | 32.3  |  |  |   | 48.8  | 
|                                                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|Total solution sales                                                                 |  |      | 83.6  |      |  |      | 84.7  |  |  |   | 126.4 | 
|                                                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|Maintenance and related services sales                                               |  |      | 57.0  |      |  |      | 49.7  |  |  |   | 47.3  | 
|Managed services sales                                                               |  |      | 24.7  |      |  |      | 21.8  |  |  |   | 37.9  | 
|                                                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|Total recurring services sales                                                       |  |      | 81.7  |      |  |      | 71.5  |  |  |   | 85.2  | 
|                                                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|Total Company sales                                                                  |  | $    | 165.3 |      |  | $    | 156.2 |  |  | $ | 211.6 | 
|                                                                                     |  |      |       |      |  |      |       |  |  |   |       | 



| |                      
| | ---------------------
| | Geographic Operations

Revenues are attributed to geographic locations
based on locations of customers. The Companys net sales by
geographic area for fiscal years 2004, 2003 and 2002 were as
follows (in millions):

|                               |       |      |      |       |  |      |      |       |  |   |       |       | 
|------------------------------ | ----- | ---- | ---- | ----- |  | ---- | ---- | ----- |  | - | ----- | ----- | 
|Revenues:                      |       | 2004 |      | 2003  |  | 2002
|                               |       |      |      |       |  |     
|North America                  |       | $    | 97.7 |       |  | $    | 91.5 |       |  | $ | 118.8 |      
|Central and South America      |       |      | 7.5  |       |  |      | 6.1  |       |  |   | 7.4   |      
|Pacific Rim                    |       |      | 2.5  |       |  |      | 2.9  |       |  |   | 5.5   |      
|Europe, Middle East and Africa |       |      | 57.6 |       |  |      | 55.7 |       |  |   | 79.9  |      
|                               |       |      |      |       |  |      |      |       |  |   |       |      
|                               | Total |      | $    | 165.3 |  |      | $    | 156.2 |  |   | $     | 211.6 | 
|                               |       |      |      |       |  |      |      |       |  |   |       |      

The Companys fixed assets by geographic
location are as follows (in millions):

|                        |  |      |      |      |  |   |      | 
|----------------------- |  | ---- | ---- | ---- |  | - | ---- | 
|Property and Equipment: |  | 2004 |      | 2003
|                        |  |      |      |     
|United States           |  | $    | 18.8 |      |  | $ | 17.8 | 
|United Kingdom          |  |      | 1.4  |      |  |   | 2.6  | 
|                        |  |      |      |      |  |   |      | 
|                        |  | $    | 20.2 |      |  | $ | 20.4 | 
|                        |  |      |      |      |  |   |      | 



| |                         
| | ------------------------
| | Concentration of Revenue

One customer, O2, formerly BT Cellnet, has
purchased both solutions and managed services from the Company.
Such combined purchases accounted for 10%, 11% and 15% of the
Companys total sales during fiscal 2004, 2003 and 2002,
respectively. There were no other customers accounting for 10%
or more of the Companys sales during the three years ended
February 29, 2004.

Note M  Concentrations of
Credit Risk

The Company sells systems directly to end-users
and distributors primarily in the banking and financial,
telecommunications, human resource, and healthcare markets.
Customers are dispersed across different

65



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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

geographic areas, primarily North America,
Europe, the Middle East and Africa. Credit is extended based on
an evaluation of a customers financial condition, and a
deposit is generally required. The Company has made a provision
for credit losses in these financial statements.

Note N  Employee Benefit
Plan

The Company sponsors an employee savings plan in
the United States which qualifies under section 401(k) of
the Internal Revenue Code. All full time employees who have
completed three months of service are eligible to participate in
the plan. The Company matches 50% of employee contributions up
to 6% of the employees eligible compensation. Company
contributions totaled $1.0 million, $1.1 million and
$1.3 million in fiscal 2004, 2003 and 2002, respectively.

Note O  Contingencies



| |                              
| | -----------------------------
| | Intellectual Property Matters

The Company provides its customers a qualified
indemnity against the infringement of third party intellectual
property rights. From time to time various owners of patents and
copyrighted works send the Company or its customers letters
alleging that the Companys products do or might infringe
upon the owners intellectual property rights, and/or
suggesting that the Company or its customers should negotiate a
license or cross-license agreement with the owner. The
Companys policy is to never knowingly infringe upon any
third partys intellectual property rights. Accordingly,
the Company forwards any such allegation or licensing request to
its outside legal counsel for their review and opinion. The
Company generally attempts to resolve any such matter by
informing the owner of its position concerning non-infringement
or invalidity, and/or, if appropriate, negotiating a license or
cross-license agreement. Even though the Company attempts to
resolve these matters without litigation, it is always possible
that the owner of the patent or copyrighted works will institute
litigation. Owners of patent(s) and/or copyrighted work(s) have
previously instituted litigation against the Company alleging
infringement of their intellectual property rights, although no
such litigation is currently pending against the Company. The
Company currently has a portfolio of 68 patents, and it has
applied for and will continue to apply for and receive a number
of additional patents to reflect its technological innovations.
The Company believes that its patent portfolio could allow it to
assert counterclaims for infringement against certain owners of
intellectual property rights if those owners were to sue the
Company for infringement.

From time to time Ronald A. Katz Technology
Licensing L.P. (RAKTL) has sent letters to certain
customers of the Company suggesting that the customer should
negotiate a license agreement to cover the practice of certain
patents owned by RAKTL. In the letters, RAKTL has alleged that
certain of its patents pertain to certain enhanced services
offered by network providers, including prepaid card and
wireless services and postpaid card services. RAKTL has further
alleged that certain of its patents pertain to certain call
processing applications, including applications for call centers
that route calls using a called partys DNIS identification
number. As a result of the correspondence, an increasing number
of the Companys customers have had discussions, or are in
discussions, with RAKTL. Certain products offered by the Company
can be programmed and configured to provide enhanced services to
network providers and call processing applications for call
centers. The Companys contracts with customers usually
include a qualified obligation to indemnify and defend customers
against claims that products as delivered by the Company
infringe a third partys patent.

None of the Companys customers have
notified the Company that RAKTL has claimed that any product
provided by the Company infringes any claims of any RAKTL
patent. Accordingly, the Company has not been required to defend
any customers against a claim of infringement under a RAKTL
patent. The Company has, however, received letters from
customers notifying the Company of the efforts by RAKTL to
license its patent portfolio and reminding the Company of its
potential obligations under the indemnification provisions of
the applicable agreements in the event that a claim is asserted.
In response to correspondence

66



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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

from RAKTL, a few customers have attempted to
tender to the Company the defense of its products under
contractual indemnity provisions. The Company has informed these
customers that while it fully intends to honor any contractual
indemnity provisions, it does not believe it currently has any
obligation to provide such a defense because RAKTL does not
appear to have made a claim that a Company product infringes a
patent. Some of these customers have disagreed with the Company
and believe that the correspondence from RAKTL can be construed
as claim(s) against the Companys products. One such
customer who had attempted to tender the defense of its products
to the Company recently informed the Company that the customer
had entered into an agreement to license certain rights under
the RAKTL patents and demanded the Company indemnify the
customer for unspecified amounts, including attorneys
fees, paid in connection with the license agreement. The Company
has notified the customer that the Company believes it does not
have any indemnity obligation in connection with the license
agreement.

Even though RAKTL has not alleged that a product
provided by the Company infringes a RAKTL patent, it is always
possible that RAKTL may do so. In the event that a Company
product becomes the subject of litigation, a customer could
attempt to invoke the Companys indemnity obligations under
the applicable agreement. As with most sales contracts with
suppliers of computerized equipment, the Companys
contractual indemnity obligations are generally limited to the
products and services provided by the Company, and generally
require the customer to allow the Company to have control over
any litigation and settlement negotiations with the patent
holder. The customers who have received letters from RAKTL
generally have multiple suppliers of the types of products that
might potentially be subject to claims by RAKTL.

Even though no claims have been made that a
specific product offered by the Company infringes any claim
under the RAKTL patent portfolio, the Company has received
opinions from its outside patent counsel that certain products
and applications offered by the Company do not infringe certain
claims of the RAKTL patents. The Company has also received
opinions from its outside counsel that certain claims under the
RAKTL patent portfolio are invalid or unenforceable.
Furthermore, based on the reviews by outside counsel, the
Company is not aware of any valid and enforceable claims under
the RAKTL portfolio that are infringed by the Companys
products. If the Company does become involved in litigation in
connection with the RAKTL patent portfolio, under a contractual
indemnity or any other legal theory, the Company intends to
vigorously contest the claims and to assert appropriate
defenses. An increasing number of companies, including some
large, well known companies and some customers of the Company,
have already licensed certain rights under the RAKTL patent
portfolio. RAKTL has previously announced license agreements
with, among others, AT&T Corp., Microsoft Corporation and
International Business Machines Corporation.



| |                   
| | ------------------
| | Pending Litigation

David Barrie, et al., on Behalf of
Themselves and All Others Similarly Situated v.
InterVoice-Brite, Inc., et al.;
No. 3-01CV1071-D, pending in the United States District
Court, Northern District of Texas, Dallas Division:

Several related class action lawsuits were filed
in the United States District Court for the Northern District of
Texas on behalf of purchasers of common stock of the Company
during the period from October 12, 1999 through
June 6, 2000 (the Class Period). Plaintiffs
have filed claims, which were consolidated into one proceeding,
under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and the Securities and Exchange Commission
Rule 10b-5 against the Company as well as certain named
current and former officers and directors of the Company on
behalf of the alleged class members. In the complaint,
Plaintiffs claim that the Company and the named current and
former officers and directors issued false and misleading
statements during the Class Period concerning the financial
condition of the Company, the results of the Companys
merger with Brite and the alleged future business projections of
the Company. Plaintiffs have asserted that these alleged
statements resulted in artificially inflated stock prices.

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company believes that it and its officers
complied with their obligations under the securities laws, and
has vigorously defended the lawsuit. The Company responded to
this complaint by filing a motion to dismiss the complaint in
the consolidated proceeding. The Company asserted that the
complaint lacked the degree of specificity and factual support
to meet the pleading standards applicable to federal securities
litigation. On this basis, the Company requested that the United
States District Court for the Northern District of Texas dismiss
the complaint in its entirety. Plaintiffs responded to the
Companys request for dismissal. On August 8, 2002,
the Court entered an order granting the Companys motion to
dismiss the class action lawsuit. In the order dismissing the
lawsuit, the Court granted plaintiffs an opportunity to
reinstate the lawsuit by filing an amended complaint.

Plaintiffs filed an amended complaint on
September 23, 2002. The Company has filed a motion to
dismiss the amended complaint, and plaintiffs filed a response
in opposition to the Companys motion to dismiss. On
September 15, 2003, the Court granted the Companys
motion to dismiss the amended class action complaint. Unlike the
Courts prior order dismissing the original class action
complaint, the order dismissing the amended complaint did not
grant plaintiffs an opportunity to reinstate the lawsuit by
filing a new amended complaint. On October 9, 2003, the
plaintiffs filed a notice of appeal to the Fifth Circuit Court
of Appeals from the trial courts order of dismissal
entered on September 15, 2003. The plaintiffs filed their
appellant brief on February 20, 2004 and the Company filed
its brief in opposition to the plaintiffs appeal on
May 10, 2004.



| |              
| | -------------
| | Other Matters

The Company is a defendant from time to time in
lawsuits incidental to its business. Based on currently
available information, the Company believes that resolution of
all known lawsuits, including the matter described above, is
uncertain, and there can be no assurance that future costs
related to such matters would not be material to the
Companys financial position or results of operations.

The Company is a party to many routine contracts
in which it provides general indemnities and warranties in the
normal course of business to third parties for various risks.
These indemnities and warranties are discussed in the following
paragraphs. Except in specific circumstances where the Company
has determined that the likelihood of loss is probable and the
amount of the loss quantifiable, the Company has not recorded a
liability for any of these indemnities. In general, the Company
is not able to estimate the potential amount of any liability
relating to these indemnities and warranties.

Many of the Companys contracts,
particularly for managed services, foreign contracts and
contracts with telecommunication companies, include provisions
for the assessment of liquidated damages for delayed project
completion and/or for the Companys failure to achieve
certain minimum service levels. The Company has had to pay
liquidated damages in the past and may have to pay additional
liquidated damages in the future. Any such future liquidated
damages could be significant.

The Companys contracts with its customers
generally contain qualified indemnifications against third party
claims relating to the infringement of intellectual property as
described in Intellectual Property Matters above.

The Companys contracts with its customers
also generally contain warranties and, in some cases, general
indemnifications against other unspecified third party and
general liability claims. The Company has liability insurance
protecting it against certain obligations, primarily certain
claims related to property damage, that result from these
indemnities.

The Company is obligated under a
$0.6 million letter of credit issued by a bank to guarantee
the Companys performance under a long-term international
managed services contract. The letter of credit is fully
collateralized by a restricted certificate of deposit and
expires in September, 2004.

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INTERVOICE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has employment agreements with three
executive officers. Two of these agreements require the Company
to make termination payments to the officer of two times the
officers annual base compensation in the event the
officers services are terminated without cause or payments
of up to 2.99 times the officers annual compensation
including bonuses in connection with a termination of the
officers services following a change in ownership of the
Company, as defined in the agreement, prior to the expiration of
the agreement. If both officers with such agreements were
terminated for one of the preceding reasons during fiscal 2005,
the cost to the Company would range from $1.2 million to
$1.8 million. The third employment agreement requires that
in the event the officers services are terminated without
cause, the Company either must make termination payments to the
officer of one times the officers annual base compensation
and accelerate vesting on 33,333 shares of Company common
stock covered by a stock option or make termination payments to
the officer of two times the officers annual base
compensation. If the officer covered by this agreement were
terminated during fiscal 2005, the Company would be required to
make payments ranging from $0.2 million to
$0.5 million.

The Company, under the terms of its Articles of
Incorporation and Bylaws, indemnifies its directors, officers,
employees or agents or any other person serving at the
Companys request as a director, officer, employee or agent
of another corporation in connection with a derivative suit if
(1) he or she is successful on the merits or otherwise or
(2) acted in good faith, and in a manner he or she
reasonably believed to be in or not opposed to the best
interests of the corporation, but the Company will not provide
indemnification for any claim as to which the person was
adjudged liable for negligence or misconduct unless the court
determines that under the circumstances the person is fairly and
reasonably entitled to indemnification. The Company provides the
same category of persons with indemnification in a
non-derivative suit only if such person (1) is successful
on the merits or otherwise or (2) acted in good faith, and
in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation, and with
respect to any criminal action or proceeding, had no reason to
believe his or her conduct was unlawful.

In connection with certain lawsuits filed against
the Company and certain of its present and former officers and
directors (see Pending Litigation above), the
Company has agreed to pay in advance any expenses, including
attorneys fees, incurred by such present and former
officers and directors in defending such litigation, in
accordance with Article 2.02-1 of the Texas Business
Corporation Act and the Companys Articles of Incorporation
and Bylaws. Each of these parties has provided the Company with
a written undertaking to repay the Company the expenses advanced
if the person is ultimately not entitled to indemnification.

The merger agreement between Intervoice, Inc. and
Brite Voice Systems, Inc. provides that until the fifth
anniversary of the merger in 2004, the Company shall, as the
surviving corporation, indemnify, defend and hold harmless, to
the fullest extent permitted under Kansas law or the terms of
Brites Articles of Incorporation or Bylaws as in effect at
the effective time of the merger, the present and former
officers and directors of Brite and its subsidiaries against all
losses, claims, damages, liabilities, costs, fees and expenses,
including reasonable attorneys fees and judgments, fines,
losses, claims, liabilities and amounts paid in settlement,
arising out of actions or omissions occurring at or prior to the
effective time of the merger. The merger agreement also provides
that the Company will maintain Brites existing
directors and officers liability insurance or a
substantially equivalent policy, for at least five years after
the effective time of the merger. The Company is not, however,
required to pay total premiums for insurance in excess of
$250,000. If the Company is unable to obtain substantially
equivalent coverage for an aggregate premium not to exceed
$250,000, then it will obtain as much insurance as can be
obtained for $250,000.

Texas corporations are authorized to obtain
insurance to protect officers and directors from certain
liabilities, including liabilities against which the corporation
cannot indemnify its officers and directors. The Company has
obtained liability insurance for its officers and directors as
permitted by Article 2.02-1 of the Texas Business
Corporation Act.

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SCHEDULE II

INTERVOICE, INC.

VALUATION AND QUALIFYING ACCOUNTS

|                              |                                 |               |   |              |  |            |   |            |      |  |   |      |      |  |   |     | 
|----------------------------- | ------------------------------- | ------------- | - | ------------ |  | ---------- | - | ---------- | ---- |  | - | ---- | ---- |  | - | --- | 
|Column A                      |                                 | Column B      |   | Column C     |  | Column D   |   | Column E  
|                              |                                 |               |   |              |  |            |   |           
|                              |                                 |               |   | Additions    |  |            |   |           
|                              |                                 |               |   | (Recoveries) |  |            |   |           
|                              |                                 | Balance at    |   | Charged to   |  |            |   | Balance at
|                              |                                 | Beginning     |   | Cost and     |  |            |   | End of    
|Description                   |                                 | of Period     |   | Expenses     |  | Deductions |   | Period    
|                              |                                 |               |   |              |  |            |   |           
|                              |                                 |              
|                              |                                 | (In millions)
|Year Ended February 29, 2004: |                                 |               |   |              |  |            |   |            |      |  |   |      |      |  |   |    
|                              | Allowance for doubtful accounts |               | $ | 2.5          |  |            | $ | 0.3        |      |  | $ | (1.9 | )(A) |  | $ | 0.9 | 
|Year Ended February 28, 2003: |                                 |               |   |              |  |            |   |            |      |  |   |      |      |  |   |    
|                              | Allowance for doubtful accounts |               | $ | 3.5          |  |            | $ | (0.7       | )(B) |  | $ | (0.3 | )(A) |  | $ | 2.5 | 
|Year Ended February 28, 2002: |                                 |               |   |              |  |            |   |            |      |  |   |      |      |  |   |    
|                              | Allowance for doubtful accounts |               | $ | 3.6          |  |            | $ | 0.4        |      |  | $ | (0.5 | )(A) |  | $ | 3.5 | 



---



|    |  |                                                                                                 
|--- |  | ------------------------------------------------------------------------------------------------
|(A) |  | Accounts written off.                                                                           
|   
|(B) |  | Recovery of accounts written off in a preceding
    year, net of current period account charges.

70



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

Not applicable.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

(a) Evaluation of disclosure controls and
procedures. The Companys chief executive officer and
chief financial officer have reviewed and evaluated the
effectiveness of the Companys disclosure controls and
procedures (as defined in Rule 13a-15(e) promulgated under
the Securities Exchange Act of 1934) as of February 29,
2004. Based on that review and evaluation, which included
inquiries made to certain other employees of the Company, the
chief executive officer and chief financial officer have
concluded that the Companys current disclosure controls
and procedures, as designed and implemented, are effective to
ensure that information required to be disclosed by the Company
in reports it files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange
Commission rules and forms.

(b) Changes in Internal Control Over
Financial Reporting. There were no significant changes in
the Companys internal control over financial reporting
during the fourth quarter of fiscal 2004 that materially
affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The Companys has adopted a code of ethics
applicable to its principal executive officer, principal
financial officer and principal accounting officer. Such code of
ethics is included as Exhibit 14 to this Annual Report on
Form 10-K. The additional information required by this item
will be contained in the sections entitled Election of
Directors and Executive Officers in the
Companys Definitive Proxy Statement, involving the
election of directors, to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year
covered by this Form 10-K (the Definitive Proxy
Statement) and is incorporated herein by reference.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item will be
contained in the section entitled Executive
Compensation in the Definitive Proxy Statement. Such
information is incorporated herein by reference.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this item will be
contained in the section entitled Election of
Directors in the Definitive Proxy Statement. Such
information is incorporated herein by reference.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this item will be
contained in the section entitled Certain
Transactions in the Definitive Proxy Statement. Such
information is incorporated herein by reference.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by this item will be
contained in the section entitled Auditors in the
Definitive Proxy Statement. Such information is incorporated
herein by reference.

71



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PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) The following consolidated financial
statements and financial statement schedule of Intervoice, Inc.
and subsidiaries are included in Items 8 and 15(a),
respectively.

|    |  |                                                                                                                                      |  |      |    | 
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|    |  |                                                                                                                                      |  | Page
|    |  |                                                                                                                                      |  |     
|(1) |  | Financial Statements                                                                                                                 |  |      |    | 
|    |  | Report of Independent Auditors                                                                                                       |  |      | 37 | 
|    |  | Consolidated Balance Sheets at February 29,
    2004 and February 28, 2003                                                           |  |      | 38 | 
|    |  | Consolidated Statements of Operations for each of
    the three years in the period ended February 29, 2004                          |  |      | 39 | 
|    |  | Consolidated Statements of Changes in
    Stockholders Equity for each of the three years in the
    period ended February 29, 2004 |  |      | 40 | 
|    |  | Consolidated Statements of Cash Flows for each of
    the three years in the period ended February 29, 2004                          |  |      | 41 | 
|    |  | Notes to Consolidated Financial Statements                                                                                           |  |      | 42 | 
|(2) |  | Financial Statement Schedule II Valuation
    and Qualifying Accounts                                                                |  |      | 70 | 

All other schedules are omitted because they are
not applicable or the required information is shown in the
financial statements or notes thereto.

(3) Exhibits:

The exhibits required to be filed by this
Item 15 are set forth in the Index to Exhibits accompanying
this report.

(b) Reports on Form 8-K filed during
the quarter ended February 29, 2004:



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | 1. A report on Form 8-K was filed on
    December 19, 2003 to announce the Companys third
    quarter earnings release.                
|
| | 2. A report on Form 8-K was filed on
    January 26, 2004 to announce the Companys new credit
    agreement with Wells Fargo Bank, N.A.

72



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Sections 13
or 15(d) of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                 
| | ----------------
| | INTERVOICE, INC.



| |     |                         
| | --- | ------------------------
| | By: | /s/ DAVID W. BRANDENBURG

| |                                   
| | ----------------------------------
| |                                   
| | David W. Brandenburg              
| | Chairman of the Board of Directors
| | and Chief Executive Officer       

Dated: May 14, 2004

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                               |  |                                                                    |  |              |  | 
|---------------------------------------------- |  | ------------------------------------------------------------------ |  | ------------ |  | 
|                                               |  |                                                                    |  |             
|Signature                                      |  | Title                                                              |  | Date        
|                                               |  |                                                                    |  |             
|                                              
|/s/ DAVID W. BRANDENBURGDavid W. Brandenburg   |  | Chairman of the Board of Directors and Chief
    Executive Officer |  | May 14, 2004
|                                              
|/s/ ROBERT E. RITCHEYRobert E. Ritchey         |  | President                                                          |  | May 14, 2004
|                                              
|/s/ CRAIG E. HOLMESCraig E. Holmes             |  | Executive Vice President and Chief Financial
    Officer           |  | May 14, 2004
|                                              
|/s/ MARK C. FALKENBERGMark C. Falkenberg       |  | Chief Accounting Officer                                           |  | May 14, 2004
|                                              
|/s/ GERALD F. MONTRYGerald F. Montry           |  | Director                                                           |  | May 14, 2004
|                                              
|/s/ JOSEPH J. PIETROPAOLOJoseph J. Pietropaolo |  | Director                                                           |  | May 14, 2004
|                                              
|/s/ GEORGE C. PLATTGeorge C. Platt             |  | Director                                                           |  | May 14, 2004
|                                              
|/s/ DONALD B. REEDDonald B. Reed               |  | Director                                                           |  | May 14, 2004
|                                              
|/s/ JACK P. REILYJack P. Reily                 |  | Director                                                           |  | May 14, 2004

73



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##### Table of Contents



INDEX TO EXHIBITS

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Articles of Incorporation, as amended, of
    Registrant.(2)                                                                                                                                                                                                                                                                                                                                                 
|        | 3  | .2          |  | Amendment to Articles of Incorporation of
    Registrant.(8)                                                                                                                                                                                                                                                                                                                                                 
|        | 3  | .3          |  | Amendment to Articles of Incorporation of
    Registrant.(19)                                                                                                                                                                                                                                                                                                                                                
|        | 3  | .4          |  | Second Restated Bylaws of Registrant, as
    amended.(1)                                                                                                                                                                                                                                                                                                                                                     
|        | 4  | .1          |  | Third Amended and Restated Rights Agreement dated
    as of May 1, 2001 between the Registrant and Computershare
    Investor Services, LLC, as Rights Agent.(4)                                                                                                                                                                                                                                             
|        | 4  | .2          |  | Securities Purchase Agreement, dated as of
    May 29, 2002, between the Registrant and the Buyers named
    therein (the Securities Purchase Agreement).(17)                                                                                                                                                                                                                                              
|        | 4  | .3          |  | Form of Convertible Note, dated as of
    May 29, 2002, between the Registrant and each of the Buyers
    under the Securities Purchase Agreement.(17)                                                                                                                                                                                                                                                       
|        | 4  | .4          |  | Form of Warrant, dated as of May 29, 2002,
    between the Registrant and each of the Buyers under the
    Securities Purchase Agreement.(17)                                                                                                                                                                                                                                                                
|        | 4  | .5          |  | Registration Rights Agreement, dated as of
    May 29, 2002, between the Registrant and each of the Buyers
    under the Securities Purchase Agreement.(17)                                                                                                                                                                                                                                                  
|        | 4  | .6          |  | First Amendment to Third Amended and Restated
    Rights Agreement dated as of May 29, 2002, between the
    Registrant and Computershare Investor Services, LLC.(17)                                                                                                                                                                                                                                        
|        | 10 | .1          |  | The InterVoice, Inc. 1990 Incentive Stock Option
    Plan, as Amended.(6)                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .2          |  | The InterVoice, Inc. 1990 Nonqualified Stock
    Option Plan for Non-Employees, as amended.(3)                                                                                                                                                                                                                                                                                                               
|        | 10 | .3          |  | InterVoice, Inc. Restricted Stock Plan.(5)                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .4          |  | Employment Agreement dated as of
    September 16, 1998 between the Company and Rob-Roy J.
    Graham.(7)                                                                                                                                                                                                                                                                                                    
|        | 10 | .5          |  | InterVoice, Inc. 1998 Stock Option Plan.(7)                                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .6          |  | Acquisition Agreement and Plan of Merger dated as
    of April 27, 1999, by and among the Company, InterVoice
    Acquisition Subsidiary III, Inc. (Acquisition
    Subsidiary) and Brite Voice Systems, Inc.(10)                                                                                                                                                                                          
|        | 10 | .7          |  | Patent License Agreement between Lucent
    Technologies GRL Corp. and InterVoice Limited Partnership,
    effective as of October 1, 1999. Portions of this exhibit
    have been excluded Pursuant to a request for confidential
    treatment.(8)                                                                                                                                                         
|        | 10 | .8          |  | Intervoice, Inc. 1999 Stock Option Plan.(12)                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .9          |  | Credit Agreement dated June 1, 1999 among
    InterVoice, Inc., InterVoice Acquisition Subsidiary III,
    Inc. and Bank of America National Trust and Savings Association,
    as Agent, Banc of America Securities LLC and certain
    other financial Institutions indicated as being parties to the
    Credit Agreement (collectively, Lender).(11)                                                 
|        | 10 | .10         |  | Forebearance Agreement dated as of March 7,
    2002, by and among the Company, Brite Voice Systems, Inc., Bank
    of America, National Association, as agent, and the Lenders
    party thereto.(15)                                                                                                                                                                                                       
|        | 10 | .11         |  | Consent and Amendment to Forebearance Agreement,
    dated as of March 31, 2002, by and among the Company, Brite
    Voice Systems, Inc., Bank of America, National Association, as
    agent, and the Lenders party thereto.(16)                                                                                                                                                                            
|        | 10 | .12         |  | Consent, Waiver and Third Amendment to Credit
    Agreement, effective as of May 29, 2002 among the
    Registrant, Brite Voice Systems, Inc. (successor by merger to
    InterVoice Acquisition Subsidiary III, Inc.), Bank of
    America, National Association (successor by merger to Bank of
    America National Trust and Savings Association), as Agent, and
    the other Lenders named therein.(17)
|        | 10 | .13         |  | Subordination and Intercreditor Agreement
    effective as of May 29, 2002 by and among the Registrant,
    the Buyers under the Securities Purchase Agreement, and Bank of
    America, National Association, as Agent for the Senior Creditors
    (defined therein).(17)                                                                                                                                  
|        | 10 | .14         |  | Promissory Note, dated May 29, 2002,
    executed by the Registrant in favor of Beal Bank, S.S.B.(17)                                                                                                                                                                                                                                                                                                        



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                        
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .15         |  | Deed of Trust, Security Agreement, and Assignment
    of Leases and Rents dated May 29, 2002, executed by the
    Registrant for its benefit of Beal Bank, S.S.B.(17)                                                                                                                  
|        | 10 | .16         |  | First Amendment to Employment Agreement effective
    as of July 1, 2000, between the Company and Rob-Roy J.
    Graham.(9)                                                                                                                                                            
|        | 10 | .17         |  | First Amendment to Credit Agreement effective as
    of January 15, 2001, between the Company, Agent and the
    Lenders.(13)                                                                                                                                                          
|        | 10 | .18         |  | Consent and Second Amendment to Credit Agreement
    effective as of February 28, 2001, between the Company,
    Agent and the Lenders.(13)                                                                                                                                            
|        | 10 | .19         |  | Second Amendment to Employment Agreement dated as
    of October 31, 2001, between the Company and Rob-Roy J.
    Graham.(14)                                                                                                                                                          
|        | 10 | .20         |  | Second Amended Employment Agreement dated as of
    February 18, 2002, between the Company and David W.
    Brandenburg.(18)                                                                                                                                                           
|        | 10 | .21         |  | Loan and Security Agreement dated as of
    August 29, 2002 between the Company and Foothill Capital
    Corporation.(20)                                                                                                                                                              
|        | 10 | .22         |  | Modification Agreement dated as of
    September 30, 2002, by and between the Company and Beal
    Bank S.S.B., modifying a deed of trust.(19)                                                                                                                                         
|        | 10 | .23         |  | Second Modification Agreement dated as of
    February 27, 2003 by and between the Company and Beal Bank
    S.S.B., modifying a deed of trust.(21)                                                                                                                                    
|        | 10 | .24         |  | Employment Agreement dated as of October 23,
    2002, between the Company and Robert E. Ritchey.(21)                                                                                                                                                                                  
|        | 10 | .25         |  | Separation Agreement with Rob-Roy J. Graham dated
    June 25, 2003.(22)                                                                                                                                                                                                               
|        | 10 | .26         |  | Intervoice, Inc. Employee Stock Purchase Plan, as
    amended and restated effective June 24, 2003.(23)                                                                                                                                                                                
|        | 10 | .27         |  | Intervoice, Inc. 2003 Stock Option Plan.(23)                                                                                                                                                                                                                                           
|        | 10 | .28         |  | Employment Agreement with Craig E. Holmes
    effective August 27, 2003.(23)                                                                                                                                                                                                           
|        | 10 | .29         |  | Credit and Security Agreement dated as of
    January 26, 2004, between the Company and Wells Fargo Bank,
    N.A.(24)                                                                                                                                                                 
|        | 14 |             |  | Code of Ethics.(25)                                                                                                                                                                                                                                                                    
|        | 21 |             |  | Subsidiaries.(25)                                                                                                                                                                                                                                                                      
|        | 23 |             |  | Consent of Independent Auditors.(25)                                                                                                                                                                                                                                                   
|        | 31 | .1          |  | Certification of Chief Executive Officer of
    Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).(25)                                                                                                                                                                      
|        | 31 | .2          |  | Certification of Chief Financial Officer of
    Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).(25)                                                                                                                                                                      
|        | 32 | .1          |  | Certification by Chief Executive Officer of
    Periodic Report Pursuant to 18 U.S.C. Section 1350.(25)                                                                                                                                                                                
|        | 32 | .2          |  | Certification by Chief Financial Officer of
    Periodic Report Pursuant to 18 U.S.C. Section 1350.(25)                                                                                                                                                                                
|        | 99 | .1          |  | Pages 12, 13, 18, 38-40, 43 and 45 of the
    Registration Statement on Form S-4, as amended
    (incorporated by reference to page 12, 13, 18, 38-40, 43
    and 45 of the Registration Statement on Form S-4/A
    (Amendment No. One) filed by the Company on July 13,
    1999).(8)
|        | 99 | .2          |  | Letter Agreement dated April 2, 2002 between
    the Company and a prospective purchaser of the Companys
    facilities in Wichita, Kansas. Portions of this exhibit have
    been excluded pursuant to a request for confidentiality
    treatment.(16)                              



---



| |     |                                                                                                                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to exhibits to the
    Companys 1991 Annual Report on Form 10-K for the
    fiscal year ended February 28, 1991, filed with the
    Securities and Exchange Commission (SEC) on May 29,
    1991, as amended by Amendment No. 1 on Form 8 to
    Annual Report on Form 10-K, filed with the SEC on
    August 1, 1991.



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##### Table of Contents





| |     |                                                                                                                                                                                                                                                                  
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Incorporated by reference to exhibits to the
    Companys 1995 Annual Report on Form 10-K for the
    fiscal year ended February 28, 1995, filed with the SEC on
    May 30, 1995.                                                                              
|
| | (3) | Incorporated by reference to exhibits to the
    Companys Registration Statement on Form S-8 filed
    with the SEC on April 6, 1994, with respect to the
    Companys 1990 Nonqualified Stock Option Plan for
    Non-Employees, Registration Number 33-77590.
|
| | (4) | Incorporated by reference to exhibits to
    Form 8-A/ A (Amendment 3) filed with the SEC on
    May 9, 2001.                                                                                                                                                    
|
| | (5) | Incorporated by reference to exhibits to the
    Companys 1996 Annual Report on Form 10-K for the
    fiscal year ended February 29, 1996, filed with the SEC on
    May 29, 1996.                                                                              
|
| | (6) | Incorporated by reference to the Companys
    1997 Annual Report on Form 10-K for the fiscal year ended
    February 28, 1997, filed with the SEC on May 29, 1997.                                                                                              
|
| | (7) | Incorporated by reference to exhibits to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended August 31, 1998, filed with the SEC on
    October 14, 1998.                                                                                  
|
| | (8) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    August 31, 1999, filed with the SEC on October 15,
    1999.                                                                                       
|
| | (9) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    August 31, 2000, filed with the SEC on October 16,
    2000.                                                                                       



|     |                                                                                                                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to
    Exhibit 99(b)(1) of the Schedule 14-D1 filed by Brite
    Voice systems, Inc. and Intervoice Acquisition
    Subsidiary III, Inc. on May 3, 1999.                    
|    
|(11) | Incorporated by reference to
    Exhibit 99(b)(1) of the Schedule 14-D1 (Amendment
    No. 4) filed by Brite Voice Systems, Inc. and Intervoice
    Acquisition Subsidiary III, Inc. on June 14, 1999.
|    
|(12) | Incorporated by reference to Registration
    Statement on Form S-8 filed with the SEC on
    October 15, 1999, Registration Number 333-89127.                                                        
|    
|(13) | Incorporated by reference to exhibits to the
    Companys 2001 Annual Report on form 10-K for the fiscal
    year ended February 28, 2001, filed with the SEC on
    May 18, 2001.                   
|    
|(14) | Incorporated by reference to exhibits to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended November 30, 2001, filed with the SEC on
    January 11, 2002.                     
|    
|(15) | Incorporated by reference to exhibits to the
    Companys Current Report on Form 8-K, filed with the
    SEC on March 13, 2002.                                                                      
|    
|(16) | Incorporated by reference to exhibits to the
    Companys Current Report on Form 8-K, filed with the
    SEC on April 18, 2002.                                                                      
|    
|(17) | Incorporated by reference to exhibits to the
    Companys Current Report on Form 8-K, filed with the
    SEC on May 30, 2002.                                                                        
|    
|(18) | Incorporated by reference to exhibits to the
    Companys 2002 Annual Report on Form 10-K for the
    fiscal year ended February 28, 2002, filed with the SEC on
    May 30, 2002.                   
|    
|(19) | Incorporated by reference to exhibits to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended August 31, 2002, filed with the SEC on
    October 15, 2002.                       
|    
|(20) | Incorporated by reference to exhibits to the
    Companys Current Report on Form 8-K, filed with the
    SEC on August 29, 2002.                                                                     
|    
|(21) | Incorporated by reference to exhibits to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended February 28, 2003, filed with the SEC on
    May 29, 2003.                        
|    
|(22) | Incorporated by reference to exhibits to
    Companys Quarterly Report on Form 10-Q for the
    quarter ended May 31, 2003, filed with the SEC on
    July 15, 2003.                                 
|    
|(23) | Incorporated by reference to exhibits to
    Companys Quarterly Report on Form 10-Q for the
    quarter ended August 31, 2003, filed with the SEC on
    October 14, 2003.                           
|    
|(24) | Incorporated by reference to exhibits to the
    Companys Current Report on Form 8-K, filed with the
    SEC on January 26, 2004.                                                                    
|    
|(25) | Filed herewith.