##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

For the quarterly period ended September 30, 2002

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: 0  18323

SYNTELLECT INC.

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 86-0486871                          
|                                                               |  |                                     
|(State or other jurisdiction of incorporation
or organization) |  | (I.R.S. Employer
Identification No.)

|                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------
|16610 N. Black Canyon Highway, Suite 100, Phoenix, Arizona 85053
(Address of principal executive offices)
(Zip Code)

(602) 789-2800
(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES   x NO  o


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

11,369,152 shares of common stock, $.01 par value per share, were
outstanding on November 13, 2002.





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TABLE OF CONTENTS



|                                                                                                                   |                                                                   |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------- |  |  |  |  |  |  | 
|Condensed Consolidated Balance Sheets                                                                             
|Condensed Consolidated Statements of Operations and Comprehensive Loss                                            
|Condensed Consolidated Statements of Cash Flows                                                                   
|NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                          
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND                      RESULTS OF OPERATIONS
|                                                                                                                   | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|                                                                                                                   | ITEM 4. CONTROLS AND PROCEDURES                                  
|                                                                                                                   | PART II -OTHER INFORMATION                                      
|                                                                                                                   | ITEM 5. OTHER INFORMATION                                        
|                                                                                                                   | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                         
|                                                                                                                   | SIGNATURES                                                       
|EX-10.V                                                                                                           
|EX-10.VII.A                                                                                                       
|EX-10.VII.B                                                                                                       
|EX-10.VII.C                                                                                                       
|EX-10.VII.D                                                                                                       
|EX-10.VII.E                                                                                                       
|EX-10.VII.F                                                                                                       
|EX-10.VII.G                                                                                                       
|EX-10.VII.H                                                                                                       
|EX-10.VII.I                                                                                                       
|EX-10.X.B                                                                                                         
|EX-10.XII.A                                                                                                       
|EX-10.XII.B                                                                                                       
|EX-10.XII.C                                                                                                       
|EX-10.XII.D                                                                                                       
|EX-10.XII.E                                                                                                       
|EX-99.A                                                                                                           
|EX-99.B                                                                                                           
|EX-99.C                                                                                                           
|EX-99.D                                                                                                           



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES
INDEX

|                                                                                              |                                                                                                                                                       |  |      |   | 
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | - | 
|                                                                                              |                                                                                                                                                       |  | Page
|                                                                                              |                                                                                                                                                       |  |     
|PART I. FINANCIAL INFORMATION                                                                 |                                                                                                                                                       |  |      |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 1. Financial Statements                                                                  |                                                                                                                                                       |  |      |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Condensed Consolidated Balance Sheets  As of September 30,
2002 and December 31, 2001                                                                |  |      | 3 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Condensed Consolidated Statements of Operations
and Comprehensive Loss  Three Months and
Nine Months Ended September 30, 2002 and
September 30, 2001 |  |      | 4 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Condensed Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2002 and
September 30, 2001                                         |  |      | 5 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Notes to Condensed Consolidated Financial Statements                                                                                                  |  |      | 6 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations |                                                                                                                                                       |  | 10   |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 3. Quantitative and Qualitative Disclosure about Market Risk                             |                                                                                                                                                       |  | 17   |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 4. Controls and Procedures                                                               |                                                                                                                                                       |  | 18   |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|PART II. OTHER INFORMATION                                                                    |                                                                                                                                                       |  |      |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 5. Other Information                                                                     |                                                                                                                                                       |  | 18   |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                                                       |  | 19   |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|SIGNATURES                                                                                    |                                                                                                                                                       |  | 20   |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|PART I  FINANCIAL INFORMATION                                                                |                                                                                                                                                       |  |      |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|ITEM 1. FINANCIAL STATEMENTS                                                                  |                                                                                                                                                       |  |      |  

2



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES




Condensed Consolidated Balance Sheets

(in thousands, except share amounts)


|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |              |        |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------- | ------- | ------ | ------------- | ------ | ------------ | ------ |  |  | 
|                                                |                                                                                                                       |                                                      |                                                |         |        | September 30, |        | December 31,
|                                                |                                                                                                                       |                                                      |                                                |         |        | 2002          |        | 2001        
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|                                                |                                                                                                                       |                                                      |                                                |         |        | (unaudited)   |        |              |        | 
|                                                |                                                                                                                       |                                                      |                                                | Assets  |        |               |        |              |        |  |  | 
|                                               
|                                               
|                                               
|                                               
|Current assets:                                 |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                                                                                             |                                                      | $                                              | 2,443   |        |               | $      | 3,997        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Trade receivables, net of allowance for doubtful accounts of $199 and $416, respectively                              |                                                      |                                                | 5,290   |        |               |        | 7,617        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Note receivable                                                                                                       |                                                      |                                                | 67      |        |               |        | 84           |       
|                                               
|                                               
|                                               
|                                               
|                                                | Other receivables                                                                                                     |                                                      |                                                | 19      |        |               |        | 5            |       
|                                               
|                                               
|                                               
|                                               
|                                                | Inventories                                                                                                           |                                                      |                                                | 533     |        |               |        | 634          |       
|                                               
|                                               
|                                               
|                                               
|                                                | Prepaid expenses                                                                                                      |                                                      |                                                | 1,031   |        |               |        | 1,072        |       
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|                                                |                                                                                                                       | Total current assets                                 |                                                |         | 9,383  |               |        |              | 13,409 | 
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|Property and equipment, net                     |                                                                                                                       |                                                      | 3,017                                          |         |        |               | 3,772  |             
|                                               
|                                               
|                                               
|                                               
|Note receivable, non-current portion            |                                                                                                                       |                                                      | 146                                            |         |        |               | 202    |             
|                                               
|                                               
|                                               
|                                               
|Other assets                                    |                                                                                                                       |                                                      | 566                                            |         |        |               | 816    |             
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|                                                |                                                                                                                       | Total assets                                         |                                                | $       | 13,112 |               |        | $            | 18,199 | 
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|                                                |                                                                                                                       |                                                      | Liabilities and Shareholders Equity (Deficit) |         |        |               |        |              |        |  | 
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                            |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts payable                                                                                                      |                                                      | $                                              | 2,320   |        |               | $      | 2,145        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued liabilities                                                                                                   |                                                      |                                                | 1,004   |        |               |        | 1,923        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Customer deposits                                                                                                     |                                                      |                                                | 387     |        |               |        | 232          |       
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred revenue                                                                                                      |                                                      |                                                | 7,252   |        |               |        | 8,129        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Note payable                                                                                                          |                                                      |                                                | 1,715   |        |               |        | 1,449        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Capital lease obligations  current portion                                                                           |                                                      |                                                | 243     |        |               |        | 249          |       
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|                                                |                                                                                                                       | Total current liabilities                            |                                                |         | 12,921 |               |        |              | 14,127 | 
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|Deferred revenue  non-current portion          |                                                                                                                       |                                                      | 645                                            |         |        |               |       |             
|                                               
|                                               
|                                               
|                                               
|Capital lease obligations  non-current portion |                                                                                                                       |                                                      | 351                                            |         |        |               | 537    |             
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|                                                |                                                                                                                       | Total liabilities                                    |                                                |         | 13,917 |               |        |              | 14,664 | 
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|Shareholders equity (deficit):                 |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|                                               
|                                               
|                                               
|                                               
|                                                | Preferred stock, $.01 par value per share. Authorized 2,500,000 shares; no shares issued or outstanding               |                                                      |                                                |        |        |               |        |             |       
|                                               
|                                               
|                                               
|                                               
|                                                | Common stock, $.01 par value per share. Authorized 25,000,000 shares; issued, 14,691,584 and 14,660,485, respectively |                                                      |                                                | 147     |        |               |        | 147          |       
|                                               
|                                               
|                                               
|                                               
|                                                | Additional paid-in capital                                                                                            |                                                      |                                                | 62,676  |        |               |        | 62,628       |       
|                                               
|                                               
|                                               
|                                               
|                                                | Accumulated deficit                                                                                                   |                                                      |                                                | (51,839 | )      |               |        | (47,621      | )     
|                                               
|                                               
|                                               
|                                               
|                                                | Accumulated other comprehensive loss                                                                                  |                                                      |                                                | (375    | )      |               |        | (205         | )     
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|                                                |                                                                                                                       |                                                      | 10,609                                         |         |        |               | 14,949 |             
|                                               
|                                               
|                                               
|                                               
|                                                | Treasury stock, at cost, 3,322,432 shares                                                                             |                                                      |                                                | (11,414 | )      |               |        | (11,414      | )     
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|                                                |                                                                                                                       | Total shareholders equity (deficit)                 |                                                |         | (805   | )             |        |              | 3,535  | 
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             
|                                                |                                                                                                                       | Total liabilities and shareholders equity (deficit) |                                                | $       | 13,112 |               |        | $            | 18,199 | 
|                                                |                                                                                                                       |                                                      |                                                |         |        |               |        |             

See accompanying notes to the condensed consolidated financial statements.

3



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES




Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)
(unaudited)


|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |        |  
|--------------------------------------- | --------------------------------------- | - | ------------------ | ----- | ----------------- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                        |                                         |   | Three Months Ended |       | Nine Months Ended
|                                        |                                         |   | September 30,      |       | September 30,    
|                                        |                                         |   |                    |       |                  
|                                        |                                         |   | 2002               |       | 2001              |   | 2002   |        | 2001
|                                        |                                         |   |                    |       |                   |   |        |        |     
|Net revenue:                            |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | Licenses                                |   | $                  | 1,561 |                   |   | $      | 2,316  |      |   | $      | 6,833  |   |   | $      | 8,202  |  
|                                       
|                                       
|                                       
|                                       
|                                        | Services                                |   |                    | 5,017 |                   |   |        | 5,020  |      |   |        | 14,191 |   |   |        | 15,603 |  
|                                       
|                                       
|                                       
|                                       
|                                        | Hosted Services                         |   |                    | 768   |                   |   |        | 1,131  |      |   |        | 2,705  |   |   |        | 3,497  |  
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                        | Total net revenue                       |   |                    | 7,346 |                   |   |        | 8,467  |      |   |        | 23,729 |   |   |        | 27,302 |  
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|Cost of revenue:                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | Licenses                                |   |                    | 355   |                   |   |        | 748    |      |   |        | 1,717  |   |   |        | 2,265  |  
|                                       
|                                       
|                                       
|                                       
|                                        | Services                                |   |                    | 2,115 |                   |   |        | 2,578  |      |   |        | 7,046  |   |   |        | 8,634  |  
|                                       
|                                       
|                                       
|                                       
|                                        | Hosted Services                         |   |                    | 848   |                   |   |        | 1,131  |      |   |        | 2,679  |   |   |        | 3,282  |  
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                        | Total cost of revenue                   |   |                    | 3,318 |                   |   |        | 4,457  |      |   |        | 11,442 |   |   |        | 14,181 |  
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|Gross profit                            |                                         |   | 4,028              |       |                   |   | 4,010  |        |      |   | 12,287 |        |   |   | 13,121 |       
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|Operating expenses:                     |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | Selling, marketing and administrative   |   |                    | 3,716 |                   |   |        | 5,285  |      |   |        | 12,784 |   |   |        | 16,815 |  
|                                       
|                                       
|                                       
|                                       
|                                        | Research and development                |   |                    | 1,010 |                   |   |        | 952    |      |   |        | 3,529  |   |   |        | 3,251  |  
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                        | Total operating expenses                |   |                    | 4,726 |                   |   |        | 6,237  |      |   |        | 16,313 |   |   |        | 20,066 |  
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                        | Operating loss                          |   |                    | (698  | )                 |   |        | (2,227 | )    |   |        | (4,026 | ) |   |        | (6,945 | )
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|Other income (expense), net:            |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | Interest expense, net                   |   |                    | (96   | )                 |   |        | (68    | )    |   |        | (173   | ) |   |        | (40    | )
|                                       
|                                       
|                                       
|                                       
|                                        | Gain (loss) on disposal of assets       |   |                    | 1     |                   |   |        |       |      |   |        | (1     | ) |   |        |       |  
|                                       
|                                       
|                                       
|                                       
|                                        | Other expense                           |   |                    | (7    | )                 |   |        |       |      |   |        | (18    | ) |   |        |       |  
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                        | Total other expense                     |   |                    | (102  | )                 |   |        | (68    | )    |   |        | (192   | ) |   |        | (40    | )
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                        | Loss before income taxes                |   |                    | (800  | )                 |   |        | (2,295 | )    |   |        | (4,218 | ) |   |        | (6,985 | )
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                        | Income tax benefit                      |   |                    |      |                   |   |        | (16    | )    |   |        |       |   |   |        | (16    | )
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                        | Net loss                                |   | $                  | (800  | )                 |   | $      | (2,279 | )    |   | $      | (4,218 | ) |   | $      | (6,969 | )
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|Loss per common share  basic           |                                         | $ | (0.07              | )     |                   | $ | (0.20  | )      |      | $ | (0.37  | )      |   | $ | (0.62  | )     
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|Loss per common share  diluted         |                                         | $ | (0.07              | )     |                   | $ | (0.20  | )      |      | $ | (0.37  | )      |   | $ | (0.62  | )     
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|Weighted average common share  basic   |                                         |   | 11,369             |       |                   |   | 11,294 |        |      |   | 11,350 |        |   |   | 11,236 |       
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|Weighted average common share  diluted |                                         |   | 11,369             |       |                   |   | 11,294 |        |      |   | 11,350 |        |   |   | 11,236 |       
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                        | Net loss                                |   | $                  | (800  | )                 |   | $      | (2,279 | )    |   | $      | (4,218 | ) |   | $      | (6,969 | )
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|Other comprehensive loss, net of tax:   |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | Foreign currency translation adjustment |   |                    | (141  | )                 |   |        | (8     | )    |   |        | (170   | ) |   |        | (48    | )
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                        | Total other comprehensive loss          |   |                    | (141  | )                 |   |        | (8     | )    |   |        | (170   | ) |   |        | (48    | )
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       
|                                        | Comprehensive loss                      |   | $                  | (941  | )                 |   | $      | (2,287 | )    |   | $      | (4,388 | ) |   | $      | (7,017 | )
|                                        |                                         |   |                    |       |                   |   |        |        |      |   |        |        |   |   |        |       

See accompanying notes to the condensed consolidated financial statements.

4



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES




Condensed Consolidated Statements of Cash Flows

(in thousands  unaudited)


|                                                      |                                                                             |                                                    |        |                   |        |      |        |        |        |  
|----------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------- | ------ | ----------------- | ------ | ---- | ------ | ------ | ------ | -
|                                                      |                                                                             |                                                    |        | Nine Months Ended
|                                                      |                                                                             |                                                    |        | September 30,    
|                                                      |                                                                             |                                                    |        |                  
|                                                      |                                                                             |                                                    |        | 2002              |        | 2001
|                                                      |                                                                             |                                                    |        |                   |        |     
|Cash flows from operating activities:                 |                                                                             |                                                    |        |                   |        |      |        |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net loss                                                                    |                                                    | $      | (4,218            | )      |      | $      | (6,969 | )     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Adjustments to reconcile net loss to net cash used in operating activities: |                                                    |        |                   |        |      |        |        |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                             | Depreciation and amortization                      |        |                   | 1,157  |      |        |        | 1,302  |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                             | Loss on disposal of property, plant, and equipment |        |                   | 1      |      |        |        |       |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                             | Provision for doubtful accounts                    |        |                   | 325    |      |        |        | 232    |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                             | Stock option compensation expense                  |        |                   | 3      |      |        |        |       |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                             | Decrease in accounts receivable                    |        |                   | 2,002  |      |        |        | 4,644  |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                             | Decrease in inventories                            |        |                   | 101    |      |        |        | 706    |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                             | Increase (decrease) in accounts payable            |        |                   | 175    |      |        |        | (29    | )
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                             | Decrease in accrued liabilities                    |        |                   | (919   | )    |        |        | (1,188 | )
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                             | Decrease in deferred revenue                       |        |                   | (232   | )    |        |        | (141   | )
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                             | Increase (decrease) in customer deposits           |        |                   | 155    |      |        |        | (1,999 | )
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                             | Change in other assets and liabilities             |        |                   | 304    |      |        |        | (453   | )
|                                                      |                                                                             |                                                    |        |                   |        |      |        |       
|                                                      |                                                                             | Net cash used in operating activities              |        |                   | (1,146 | )    |        |        | (3,895 | )
|                                                      |                                                                             |                                                    |        |                   |        |      |        |       
|Cash flows from investing activities:                 |                                                                             |                                                    |        |                   |        |      |        |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from short-term investment                                         |                                                    |        |                  |        |      |        | 75     |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from note receivable                                               |                                                    |        | 73                |        |      |        |       |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from the sale of property and equipment                            |                                                    |        |                  |        |      |        | 26     |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Purchase of property and equipment                                          |                                                    |        | (403              | )      |      |        | (1,338 | )     
|                                                      |                                                                             |                                                    |        |                   |        |      |        |       
|                                                      |                                                                             | Net cash used in investing activities              |        |                   | (330   | )    |        |        | (1,237 | )
|                                                      |                                                                             |                                                    |        |                   |        |      |        |       
|Cash flows from financing activities:                 |                                                                             |                                                    |        |                   |        |      |        |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Borrowings on line of credit                                                |                                                    |        | 6,918             |        |      |        | 1,422  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Repayments on line of credit                                                |                                                    |        | (6,652            | )      |      |        |       |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from issuance of common stock                                      |                                                    |        | 18                |        |      |        | 246    |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Payments on capital lease obligations                                       |                                                    |        | (192              | )      |      |        | (133   | )     
|                                                      |                                                                             |                                                    |        |                   |        |      |        |       
|                                                      |                                                                             | Net cash provided by financing activities          |        |                   | 92     |      |        |        | 1,535  |  
|                                                      |                                                                             |                                                    |        |                   |        |      |        |       
|Effect of exchange rates on cash                      |                                                                             |                                                    | (170   | )                 |        |      | (48    | )     
|                                                      |                                                                             |                                                    |        |                   |        |      |        |       
|Net decrease in cash and cash equivalents             |                                                                             |                                                    | (1,554 | )                 |        |      | (3,645 | )     
|Cash and cash equivalents at beginning of year        |                                                                             |                                                    | 3,997  |                   |        |      | 7,334  |       
|                                                      |                                                                             |                                                    |        |                   |        |      |        |       
|Cash and cash equivalents at end of nine month period |                                                                             | $                                                  | 2,443  |                   |        | $    | 3,689  |       
|                                                      |                                                                             |                                                    |        |                   |        |      |        |       
|Supplemental disclosure of cash flow information:     |                                                                             |                                                    |        |                   |        |      |        |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash paid for interest                                                      |                                                    | $      | 197               |        |      | $      | 86     |       
|                                                      |                                                                             |                                                    |        |                   |        |      |        |       
|Significant non-cash transactions                    
|                                                      | Property and equipment purchased under capital lease                        |                                                    | $      |                  |        |      | $      | 446    |       
|                                                      |                                                                             |                                                    |        |                   |        |      |        |       
|                                                      | Warrants issued under credit facility                                       |                                                    | $      | 27                |        |      | $      |       |       
|                                                      |                                                                             |                                                    |        |                   |        |      |        |       

See accompanying notes to the condensed consolidated financial statements.

5



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES




NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


(1) Basis of Presentation

The accompanying unaudited, condensed, consolidated financial statements
include the accounts of Syntellect Inc. (together with its subsidiaries,
collectively, the Company, which may also be referred to as the registrant,
we, us, or our). All significant inter-company balances and transactions
have been eliminated in consolidation.

The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). In
our opinion, the financial statements include all adjustments of a normal
recurring nature, which are necessary for a fair presentation of the results
for the interim periods presented. Certain information and footnote
disclosures normally included in financial statements have been condensed or
omitted pursuant to such rules and regulations. Although we believe that the
disclosures are adequate to make the information presented not misleading, we
suggest that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in our
December 31, 2001 Annual Report on Form 10-K. The results of operations for
the three and nine months ended September 30, 2002 are not necessarily
indicative of the results to be expected for the full year.

(2) Revenue Recognition

Our revenue is derived from three business segments: Licenses, Services
and Hosted Services. Revenue derived from Licenses and from Services is
recognized pursuant to Statement of Position 97-2, Software Revenue
Recognition(SOP 97-2); Statement of Position 98-9, Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions (SOP
98-9); and Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements(SAB No. 101). Revenue derived from Hosted Services is
recognized pursuant to the provisions of SAB No. 101. We strictly adhere to
the revenue recognition criteria under the guidance mentioned above. See Item 8
 Financial Statements and Supplementary Data, Notes to Consolidated Financial
Statements in our December 31, 2001 Annual Report on Form 10-K for a detailed
description of our revenue recognition policy.

(3) Inventories

Inventories consist of the following:

|                                             |  |                |     |              |  |   |     | 
|-------------------------------------------- |  | -------------- | --- | ------------ |  | - | --- | 
|                                             |  | (in thousands)
|                                             |  | September 30,  |     | December 31,
|                                             |  | 2002           |     | 2001        
|                                             |  |                |     |             
|Finished Goods                               |  | $              | 196 |              |  | $ | 168 | 
|                                            
|                                            
|                                            
|                                            
|Purchased Components                         |  |                | 122 |              |  |   | 236 | 
|                                            
|                                            
|                                            
|                                            
|Repair, warranty, and maintenance components |  |                | 215 |              |  |   | 230 | 
|                                             |  |                |     |              |  |   |     | 
|                                             |  | $              | 533 |              |  | $ | 634 | 
|                                             |  |                |     |              |  |   |     | 

6



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(4) Earnings (Loss) Per Share Computation

|                                                                                     |  |                                          |        |                   |  |                |        |                |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | ---------------------------------------- | ------ | ----------------- |  | -------------- | ------ | -------------- |  | - | ------ | - |  | - | ------ | -
|                                                                                     |  | (in thousands, except per share amounts)
|                                                                                     |  | Three Months Ended                       |        | Nine Months Ended
|                                                                                     |  |                                          |        |                  
|                                                                                     |  | Sept. 30, 2002                           |        | Sept. 30, 2001    |  | Sept. 30, 2002 |        | Sept. 30, 2001
|                                                                                     |  |                                          |        |                   |  |                |        |               
|Net loss                                                                             |  | $                                        | (800   | )                 |  | $              | (2,279 | )              |  | $ | (4,218 | ) |  | $ | (6,969 | )
|                                                                                     |  |                                          |        |                   |  |                |        |                |  |   |        |   |  |   |        |  
|Weighted average share outstanding  basic                                           |  |                                          | 11,369 |                   |  |                | 11,294 |                |  |   | 11,350 |   |  |   | 11,236 |  
|                                                                                     |  |                                          |        |                   |  |                |        |                |  |   |        |   |  |   |        |  
|Loss per share  basic                                                               |  | $                                        | (0.07  | )                 |  | $              | (0.20  | )              |  | $ | (0.37  | ) |  | $ | (0.62  | )
|                                                                                     |  |                                          |        |                   |  |                |        |                |  |   |        |   |  |   |        |  
|Weighted average shares outstanding  diluted                                        |  |                                          | 11,369 |                   |  |                | 11,294 |                |  |   | 11,350 |   |  |   | 11,236 |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Effect of dilutive securities  stock options                                        |  |                                          | 0      |                   |  |                | 0      |                |  |   | 0      |   |  |   | 0      |  
|                                                                                     |  |                                          |        |                   |  |                |        |                |  |   |        |   |  |   |        |  
|Weighted average shares outstanding  diluted                                        |  |                                          | 11,369 |                   |  |                | 11,294 |                |  |   | 11,350 |   |  |   | 11,236 |  
|                                                                                     |  |                                          |        |                   |  |                |        |                |  |   |        |   |  |   |        |  
|Loss per share  diluted                                                             |  | $                                        | (0.07  | )                 |  | $              | (0.20  | )              |  | $ | (0.37  | ) |  | $ | (0.62  | )
|                                                                                     |  |                                          |        |                   |  |                |        |                |  |   |        |   |  |   |        |  
|Dilutive securities excluded from
diluted loss per share due to anti-dilutive effect |  |                                          | 1,957  |                   |  |                | 2,145  |                |  |   | 1,957  |   |  |   | 2,145  |  
|                                                                                     |  |                                          |        |                   |  |                |        |                |  |   |        |   |  |   |        |  

The computation of diluted loss per share for the three-month periods
ended September 30, 2002 and 2001 and for the nine-month periods ended
September 30, 2002 and 2001 excluded the effect of certain incremental common
shares attributable to the assumed exercise of common stock options because
their effect would be anti-dilutive.

(5) Credit Facilities

On April 30, 2002, we elected an early termination of our $2.5 million,
asset-based, operating line of credit with a commercial lending institution.
The credit instrument accrued interest at prime plus 8.5% per annum with a
$7,500 minimum monthly finance charge. We could borrow according to a formula
on 65% of eligible domestic accounts receivable less than 90 days old,
excluding maintenance receivables. In place of that line of credit, on May 14,
2002, we executed an Accounts Receivable Financing Agreement (the Agreement)
for a one-year, $3.0 million, asset-based, operating line of credit with a
commercial banking institution. Any outstanding balance on this line of credit
incurs interest at a rate of prime plus 3.25% per annum plus a collateral
handling fee of 0.25% with a minimum monthly finance charge of $5,000. The
maximum cash available under the terms of this Agreement is 80% of the $3.0
million loan value, or $2.4 million. At September 30, 2002, the prime rate was
4.75% making the then applicable interest rate under the Agreement 8% per
annum. We may borrow according to a formula based on 80% of eligible accounts
receivable less than 90 days old, including certain maintenance receivables,
selected foreign receivables, and excluding customer deposits. The commercial
banking institution has a perfected first priority security interest in all our
assets. In addition, all current depository accounts have been relocated to
the new commercial bank.

7



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(5) Credit Facilities, continued

Furthermore, we issued fully vested warrants to purchase 30,000 shares of
our common stock to this commercial banking institution. These warrants expire
on May 14, 2007. The exercise price is $1.17 per share, which approximated the
market price of the underlying common stock on the date of grant. The value of
the warrants issued in connection with this Agreement was determined using the
Black-Scholes calculation to be $27,000 and has been capitalized as a deferred
asset, which is amortized as interest expense over the one-year life of the
Agreement.

On July 22 2002, we entered into a Loan Modification and Forbearance
Agreement (the Modification) to the Agreement in which the bank agrees to
abstain from calling the Agreement into default due to violation of the
covenants through October 30, 2002. The Modification also increased the loan
amount to $3.75 million, extended the expiration date to July 14, 2003, and
increased the collateral handling fee to 0.75% during a time of non-compliance
with the covenants of the Agreement. The maximum cash available under the
terms of the Modification is 80% of the $3.75 million loan value, or $3.0
million. We were required to pay $10,000 in bank fees in order to execute the
Modification.

At September 30, 2002, we were in compliance with all of the covenants in
the Agreement and subsequent Modification. At September 30, 2002, our
outstanding balance on this credit facility was $1.7 million. Also at
September 30, 2002, there was an additional $1.3 million available to borrow.

On November 7, 2002, we entered into an Accounts Receivable Financing
Modification Agreement (the Modification #2) to the Agreement in which we
amended an affirmative, financial covenant. Also, Modification #2 extended the
increased collateral handling fee of 0.75% until the later of February 1, 2003
or one month following the quarter in which we are in compliance with
affirmative covenants listed in the Agreement and no other event of default has
occurred.

(6) Business Segments

An operating segment is defined as a component of an enterprise that
engages in business activities which may earn revenue and incur expenses, whose
results are regularly reviewed by a chief operating decision maker, and for
which discrete financial information is available. We have three operating
segments, which are organized around differences in products and services:
Licenses, Services, and Hosted Services.

Licenses is our operating business segment that includes our contact
center software platform, Vista IMR, speech-enabled licenses, and other third
party licenses that we offer along with our Vista IMR software. Vista IMR
consists of a broad suite of communications features. Some of the components of
Vista IMR include Interactive Voice Response, Interactive Web Response, and
Speed Enabled Directory. This business segment also includes all revenue and
costs related to hardware sales.

Services is our operating business segment that includes customer support
and integration in the areas of consulting, project management, application
development, installation, functional specifications, training and maintenance
services. We generally sell these services as part of the initial sale or, in
some cases, as post implementation services.

Hosted Services is our operating business segment that provides Service
Bureau IMR services offering campaign oriented initiatives such as Lead
Capture, Site Locator, credit card processing, disaster recovery, and disaster
mitigation or a combined on-site and hosted services with similar value-added
options attached.

8



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(6)  Business Segments, continued

|                                          |  |                |        |          |  |                 |       |       |  |   |       |   |  |   |        |  
|----------------------------------------- |  | -------------- | ------ | -------- |  | --------------- | ----- | ----- |  | - | ----- | - |  | - | ------ | -
|                                          |  | (in thousands)
|                                          |  | Licenses       |        | Services |  | Hosted Services |       | Total
|                                          |  |                |        |          |  |                 |       |      
|Three-months ended September 30, 2002     |  |                |        |          |  |                 |       |       |  |   |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Revenue from customers                    |  | $              | 1,561  |          |  | $               | 5,017 |       |  | $ | 768   |   |  | $ | 7,346  |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |                | 114    |          |  |                 | 56    |       |  |   | 180   |   |  |   | 350    |  
|                                         
|                                         
|                                         
|                                         
|Segment income (loss) before income taxes |  |                | (1,841 | )        |  |                 | 1,227 |       |  |   | (186  | ) |  |   | (800   | )
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |                | 39     |          |  |                 | 50    |       |  |   | 69    |   |  |   | 158    |  
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|Three-months ended September 30, 2001     |  |                |        |          |  |                 |       |       |  |   |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Revenue from customers                    |  | $              | 2,316  |          |  | $               | 5,020 |       |  | $ | 1,131 |   |  | $ | 8,467  |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |                | 182    |          |  |                 | 89    |       |  |   | 165   |   |  |   | 436    |  
|                                         
|                                         
|                                         
|                                         
|Segment loss before income taxes          |  |                | (1,890 | )        |  |                 | (184  | )     |  |   | (221  | ) |  |   | (2,295 | )
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |                | 39     |          |  |                 |      |       |  |   | 367   |   |  |   | 406    |  

|                                          |  |                |        |          |  |                 |        |       |  |   |       |   |  |   |        |  
|----------------------------------------- |  | -------------- | ------ | -------- |  | --------------- | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                                          |  | (in thousands)
|                                          |  | Licenses       |        | Services |  | Hosted Services |        | Total
|                                          |  |                |        |          |  |                 |        |      
|Nine-months ended September 30, 2002      |  |                |        |          |  |                 |        |       |  |   |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Revenue from customers                    |  | $              | 6,833  |          |  | $               | 14,191 |       |  | $ | 2,705 |   |  | $ | 23,729 |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |                | 413    |          |  |                 | 204    |       |  |   | 540   |   |  |   | 1,157  |  
|                                         
|                                         
|                                         
|                                         
|Segment income (loss) before income taxes |  |                | (5,191 | )        |  |                 | 1,436  |       |  |   | (463  | ) |  |   | (4,218 | )
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |                | 145    |          |  |                 | 124    |       |  |   | 134   |   |  |   | 403    |  
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|Nine-months ended September 30, 2001      |  |                |        |          |  |                 |        |       |  |   |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Revenue from customers                    |  | $              | 8,202  |          |  | $               | 15,603 |       |  | $ | 3,497 |   |  | $ | 27,302 |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |                | 542    |          |  |                 | 265    |       |  |   | 495   |   |  |   | 1,302  |  
|                                         
|                                         
|                                         
|                                         
|Segment loss before income taxes          |  |                | (5,060 | )        |  |                 | (1,354 | )     |  |   | (571  | ) |  |   | (6,985 | )
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |                | 560    |          |  |                 | 257    |       |  |   | 521   |   |  |   | 1,338  |  

9



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##### Table of Contents






|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

SUMMARY OF OPERATIONS

Many of our existing and potential customers delayed capital investments
due to the weakened U.S. economy, particularly in the telecommunication
technology sector. Additionally, recent corporate announcements of financial
misstatements and misrepresentations have affected how companies evaluate
potential new capital equipment and service providers, further elongating the
sales cycle. Due to the decline in revenue and order bookings during the
second and third quarters of 2002, we determined it necessary to further reduce
our operating expenses to a level commensurate with our revenue. As a result,
we took steps to decrease our estimated quarterly sales breakeven level to
approximately $7.5 million for the fourth quarter of 2002.

We have a proven technology platform, strong operational competency, and a
loyal and supportive customer base. However, our success as a software,
services, and integration company is based on its ability to generate new
customers as well as develop and grow our installed base of clients. Effective
October 1, 2002, we have implemented a new sales approach that has two distinct
revenue generating strategies, one for new customers and one for existing
customers, our installed base. Our business is most successful when we have a
healthy combination of revenue from new customers and strong, recurring revenue
from our installed base of clients. We believe this blended approach will
facilitate the growth of our revenue stream.

CRITICAL ACCOUNTING POLICIES

For a complete discussion of our critical accounting policies, see Item 2
 Managements Discussion and Analysis of Financial Condition and Results of
Operations in our December 31, 2001 Annual Report of Form 10-K.

RESULTS OF OPERATIONS

Net Revenue

The following table summarizes our net revenue performance (in thousands)
for the three and nine-month periods ended September 30, 2002 and 2001.

10



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##### Table of Contents



|                          |  |                    |       |                   |  |          |     |            |  |          |       |            |  |          |     |            |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |  
|------------------------- |  | ------------------ | ----- | ----------------- |  | -------- | --- | ---------- |  | -------- | ----- | ---------- |  | -------- | --- | ---------- |  | - | ------ |  |  |  | --- | - |  | - | ------ |  |  |  | --- | -
|                          |  | Three-months ended |       | Nine-months ended
|                          |  |                    |       |                  
|                          |  | Sept 30,           |       | % of total        |  | Sept 30, |     | % of total |  | Sept 30, |       | % of total |  | Sept 30, |     | % of total
|Current results           |  | 2002               |       | revenue           |  | 2001     |     | revenue    |  | 2002     |       | revenue    |  | 2001     |     | revenue   
|                          |  |                    |       |                   |  |          |     |            |  |          |       |            |  |          |     |           
|Licenses                  |  | $                  | 1,561 |                   |  |          | 21  | %          |  | $        | 2,316 |            |  |          | 27  | %          |  | $ | 6,833  |  |  |  | 29  | % |  | $ | 8,202  |  |  |  | 30  | %
|                         
|                         
|                         
|                         
|Services                  |  |                    |       |                   |  |          |     |            |  |          |       |            |  |          |     |            |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |  
|                         
|                         
|                         
|                         
|Application development   |  |                    | 1,380 |                   |  |          | 19  | %          |  |          | 1,649 |            |  |          | 19  | %          |  |   | 4,003  |  |  |  | 17  | % |  |   | 4,885  |  |  |  | 18  | %
|                         
|                         
|                         
|                         
|Project management        |  |                    | 245   |                   |  |          | 3   | %          |  |          | 295   |            |  |          | 3   | %          |  |   | 718    |  |  |  | 3   | % |  |   | 1,025  |  |  |  | 4   | %
|                         
|                         
|                         
|                         
|Maintenance               |  |                    | 2,498 |                   |  |          | 34  | %          |  |          | 2,336 |            |  |          | 28  | %          |  |   | 7,238  |  |  |  | 31  | % |  |   | 7,136  |  |  |  | 26  | %
|                         
|                         
|                         
|                         
|Installation              |  |                    | 249   |                   |  |          | 3   | %          |  |          | 269   |            |  |          | 3   | %          |  |   | 584    |  |  |  | 2   | % |  |   | 827    |  |  |  | 3   | %
|                         
|                         
|                         
|                         
|Other services            |  |                    | 645   |                   |  |          | 9   | %          |  |          | 471   |            |  |          | 6   | %          |  |   | 1,648  |  |  |  | 7   | % |  |   | 1,730  |  |  |  | 6   | %
|                          |  |                    |       |                   |  |          |     |            |  |          |       |            |  |          |     |            |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |  
|Total services            |  |                    | 5,017 |                   |  |          | 68  | %          |  |          | 5,020 |            |  |          | 59  | %          |  |   | 14,191 |  |  |  | 60  | % |  |   | 15,603 |  |  |  | 57  | %
|                         
|                         
|                         
|                         
|Hosted Services           |  |                    | 768   |                   |  |          | 11  | %          |  |          | 1,131 |            |  |          | 14  | %          |  |   | 2,705  |  |  |  | 11  | % |  |   | 3,497  |  |  |  | 13  | %
|                          |  |                    |       |                   |  |          |     |            |  |          |       |            |  |          |     |            |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |  
|Total net revenue         |  | $                  | 7,346 |                   |  |          | 100 | %          |  | $        | 8,467 |            |  |          | 100 | %          |  | $ | 23,729 |  |  |  | 100 | % |  | $ | 27,302 |  |  |  | 100 | %
|                          |  |                    |       |                   |  |          |     |            |  |          |       |            |  |          |     |            |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |  
|                         
|Domestic                  |  | $                  | 5,460 |                   |  |          | 74  | %          |  | $        | 6,372 |            |  |          | 75  | %          |  | $ | 18,929 |  |  |  | 80  | % |  | $ | 20,429 |  |  |  | 75  | %
|                         
|                         
|                         
|                         
|International             |  |                    | 1,886 |                   |  |          | 26  | %          |  |          | 2,095 |            |  |          | 25  | %          |  |   | 4,800  |  |  |  | 20  | % |  |   | 6,873  |  |  |  | 25  | %
|                          |  |                    |       |                   |  |          |     |            |  |          |       |            |  |          |     |            |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |  
|Total net revenue         |  | $                  | 7,346 |                   |  |          | 100 | %          |  | $        | 8,467 |            |  |          | 100 | %          |  | $ | 23,729 |  |  |  | 100 | % |  | $ | 27,302 |  |  |  | 100 | %
|                          |  |                    |       |                   |  |          |     |            |  |          |       |            |  |          |     |            |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |  
|                         
|Direct Licenses revenue   |  | $                  | 1,560 |                   |  |          | 100 | %          |  | $        | 1,868 |            |  |          | 81  | %          |  | $ | 6,329  |  |  |  | 93  | % |  | $ | 6,665  |  |  |  | 81  | %
|                         
|                         
|                         
|                         
|Indirect Licenses revenue |  |                    | 1     |                   |  |          | 0   | %          |  |          | 448   |            |  |          | 19  | %          |  |   | 504    |  |  |  | 7   | % |  |   | 1,537  |  |  |  | 19  | %
|                          |  |                    |       |                   |  |          |     |            |  |          |       |            |  |          |     |            |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |  
|Total Licenses revenue    |  | $                  | 1,561 |                   |  |          | 100 | %          |  | $        | 2,316 |            |  |          | 100 | %          |  | $ | 6,833  |  |  |  | 100 | % |  | $ | 8,202  |  |  |  | 100 | %
|                          |  |                    |       |                   |  |          |     |            |  |          |       |            |  |          |     |            |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |  
|                         
|Speech Licenses           |  | $                  | 208   |                   |  |          | 13  | %          |  | $        | 316   |            |  |          | 14  | %          |  | $ | 1,578  |  |  |  | 23  | % |  | $ | 716    |  |  |  | 9   | %
|                          |  |                    |       |                   |  |          |     |            |  |          |       |            |  |          |     |            |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |  

Net revenue for the quarter ended September 30, 2002 was $7.3 million, a
decrease of $1.2 million, or 13%, from the $8.5 million reported for the third
quarter of 2001. Net revenue for the nine-month periods ended September 30,
2002 and 2001 was $23.7 million and $27.3 million, respectively, a decrease of
$3.6 million, or 13%. Net revenue consists of Licenses, Services, and Hosted
Services, which represented 21%, 68%, and 11% of net revenue, respectively, for
the quarter ended September 30, 2002, and 27%, 59% and 14% of net revenue,
respectively, for the comparable prior year period. Domestic and international
revenue for the quarter ended September 30, 2002 was $5.4 million, or 74%, and
$1.9 million, or 26%, of total revenue, respectively, compared to $6.4 million,
or 75%, and $2.1 million, or 25%, of total revenue, respectively, for the same
period in 2001. Domestic and international revenue for the nine months ended
September 30, 2002 was $18.9 million, or 80%, and $4.8 million, or 20%, of
total revenue, respectively, compared to $20.4 million, or 75%, and $6.9
million, or 25%, of total revenue, respectively, for the same period in 2001.

Licenses revenue for the quarter ended September 30, 2002 was $1.6
million, a decrease of $0.7 million, or 33%, from the $2.3 million reported for
the quarter ended September 30, 2001. Licenses revenue for the nine months
ended September 30, 2002 was $6.8 million, a decrease of $1.4 million, or 17%,
when compared to the nine months ended September 30, 2001. These decreases
were due to our inability to book sufficient orders caused by our existing and
potential customers capital purchase delays intensified by economic
conditions. During this quarter, we reorganized our sales force to assist in
the success of our sales team to identify new opportunities, book orders, and
manage our existing customer base.

Speech-enabled licenses represented $0.2 million, or 13%, of the Licenses
revenue for the quarter ended September 30, 2002 compared to $0.3 million, or
14%, in the third quarter of the prior year. The amount of speech-enabled
licenses sold is an important operating measure to us because we believe
natural speech technology to be the biggest driver of growth in the IVR
industry.

Services revenue for the quarter ended September 30, 2002 remained steady
at $5.0 million when compared to the same period in 2001. Services revenue for
the nine months ended September 30, 2002 was $14.2 million, a decrease of $1.4
million, or 9%, when compared to the same prior year period. The change in
Services revenue for the first nine months of 2002 compared to the first nine
months of 2001 consisted of application services, $0.9 million decrease;

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project management, $0.3 million decrease; maintenance, $0.1 million
increase; installation, $0.2 million decrease; and other services, $0.1 million
decrease. Services revenue from application services, installations, and
project management is generally recognized within six months following the
quarter in which our customer placed the order. During that time, the Services
revenue is reported as backlog. We have experienced a decline in our trend of
orders booked for the first, second, and third quarters of 2002. Although the
revenue and orders booked in the Services segment have decreased, we have
managed to improve the gross profit of the Services business segment by 5% as
shown by the nine month periods ended September 30, 2002 and 2001.

Hosted Services revenue for the quarter ended September 30, 2002 was $0.8
million compared to $1.1 million for the same period in 2001, a decrease of
$0.3 million, or 32%. Hosted Services revenue was $2.7 million for the nine
months ended September 30, 2002, a decrease of $0.8 million, or 23%, when
compared to the same prior year period. Hosted Services consists of Home
Ticket, voice services, Vista IMR hosted services, and other hosted services.
Voice services provide media voice files for all of our application services,
hosted and on-site systems. Vista IMR hosted services may include Lead
Capture, Speech Enabled Directory, Site Locator, disaster mitigation, disaster
recovery, electronic payment processing, broadcast faxing, and call center
processing. The primary reason for the decrease in Hosted Services revenue is
the declining demand for analog, pay-per-view services that our Home Ticket
product offers.

Gross Margin

The following table summarizes our gross margin performance (in thousands)
for the three and nine-month periods ended September 30, 2002 and 2001.

|                   |                 |      |                    |          |                   |      |          |          |         |      |          |          |         |      |          |          |         |   |        |       |  |  |    |    |      |   |        |       |  |  |    |    |  
|------------------ | --------------- | ---- | ------------------ | -------- | ----------------- | ---- | -------- | -------- | ------- | ---- | -------- | -------- | ------- | ---- | -------- | -------- | ------- | - | ------ | ----- |  |  | -- | -- | ---- | - | ------ | ----- |  |  | -- | -- | -
|                   |                 |      | Three-months ended |          | Nine-months ended
|                   |                 |      |                    |          |                  
|                   |                 |      |                    |          |                   |      | % of     |          |         |      |          |          | % of    |      |          |          |         |   | % of   |       |  |  |    |    | % of
|                   |                 |      | Sept 30,           |          | revenue           |      | Sept 30, |          | revenue |      | Sept 30, |          | revenue |      | Sept 30, |          | revenue
|Current results    |                 | 2002 |                    | category |                   | 2001 |          | category |         | 2002 |          | category |         | 2001 |          | category
|                   |                 |      |                    |          |                   |      |          |          |         |      |          |          |         |      |          |          |        
|                   | Licenses        |      | $                  | 1,206    |                   |      |          | 77       | %       |      | $        | 1,568    |         |      |          | 68       | %       |   | $      | 5,116 |  |  |    | 75 | %    |   | $      | 5,937 |  |  |    | 72 | %
|                  
|                  
|                  
|                  
|                   | Services        |      |                    | 2,902    |                   |      |          | 58       | %       |      |          | 2,442    |         |      |          | 49       | %       |   |        | 7,145 |  |  |    | 50 | %    |   |        | 6,969 |  |  |    | 45 | %
|                  
|                  
|                  
|                  
|                   | Hosted Services |      |                    | (80      | )                 |      |          | -10      | %       |      |          |         |         |      |          | 0        | %       |   |        | 26    |  |  |    | 1  | %    |   |        | 215   |  |  |    | 6  | %
|                   |                 |      |                    |          |                   |      |          |          |         |      |          |          |         |      |          |          |         |   |        |       |  |  |    |    |      |   |        |       |  |  |    |    |  
|Total gross profit |                 | $    | 4,028              |          |                   |      | 55       | %        |         | $    | 4,010    |          |         |      | 47       | %        |         | $ | 12,287 |       |  |  | 52 | %  |      | $ | 13,121 |       |  |  | 48 | % 
|                   |                 |      |                    |          |                   |      |          |          |         |      |          |          |         |      |          |          |         |   |        |       |  |  |    |    |      |   |        |       |  |  |    |    |  

The gross margin percentage for the quarter ended September 30, 2002 was
55% of net revenue, an increase of 7% when compared to the 47% achieved in the
third quarter of the prior year. The gross margin for the nine-month periods
ended September 30, 2002 and 2001 were 52% and 48% of net revenue,
respectively. In dollar terms, the gross profit for the quarter and nine
months ended September 30, 2002 increased $18,000 and decreased $0.8 million,
or 6%, respectively, which can be accounted for by evaluating product mix,
volume, and change in gross margin percentage. The decrease in net revenue for
the quarter and nine-month period ended September 30, 2002 accounts for
decreases of $0.5 million and $1.7 million, respectively, in the gross profit.
Those decreases are offset by the improved gross margin percentages of 7% and
4%, respectively, which is a positive effect of $0.5 million and $0.8 million,
respectively.

Gross margin for Licenses increased to 77% of Licenses revenue in the
third quarter of 2002 from 68% in the third quarter of 2001 due to the
outsourcing of the hardware components associated with our IMR systems.
Natural speech content declined to $0.2 million, or 13%, of Licenses revenue in
the third quarter of 2002 compared to $0.3 million, or 14%, in the third
quarter of 2001. The domestic gross margin realized for the nine-months ended
September 30, 2002 was approximately 57% for speech-enabled licenses, 67% for
other third-party licenses, and 80% for Vista licenses. Consequently, the
product mix directly affects the gross margin realized for Licenses.

Gross margin for Services increased to 58% for the quarter ended September
30, 2002 from 49% for the quarter ended September 30, 2001, an improvement of
nine percentage points. Gross margin for Services was 50% for the nine-month
period ended September 30, 2002, an increase of five percentage points over the
45% reported for the same period in 2001. During the third quarter of 2002, we
implemented a 10% salary reduction. That salary reduction during the third
quarter of 2002 was the contributing factor to the increase in the quarterly
gross margin. The improvement in the year to date gross margin percentage
resulted from continued cost controls, including the reduced

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use of third party professional services. In addition, our natural speech
and consulting services allow for an increased utilization of our current
resources at higher billing rates.

Hosted Services produced a gross margin of -10% for the quarter ended
September 30, 2002, which is a 10-percentage point decrease from the 0% gross
margin percentage for the quarter ended September 30, 2001. Gross margin for
Hosted Services was 1% for the nine-month period ended September 30, 2002, a
decrease from the 6% gross margin percentage recorded in the same period in
2001. Because our current Hosted Services center operates at significantly
less than full capacity and Hosted Services overhead is fixed by nature, any
decrease in Hosted Services revenue will significantly decrease the gross
margin percentage as was evidenced during the quarter ended September 30, 2002.

The mix of direct versus indirect Licenses revenue and domestic versus
international net revenue affects the gross margin. Direct and indirect
Licenses revenue for the quarter ended September 30, 2002 was $1.6 million and
$1,000. Direct and indirect Licenses revenue for the quarter ended September
30, 2001 was $1.9 million and $0.4 million, or 81% and 19%, respectively. The
change in direct and indirect Licenses revenue were decreases of $0.3 million
and $0.4 million, respectively, or 22% and 100%, respectively, for the third
quarter of 2002 compared to the third quarter of 2001. The change in direct
and indirect Licenses revenue for the nine-months ended September 30, 2002 and
2001 were decreases of $0.4 million and $1.0 million, respectively, or 5% and
67%, respectively. Indirect Licenses revenue was low due to a poor sales
performance in the reseller channel and a $0.1 million credit given to a
certain reseller during the third quarter of 2002. We experience an
approximate 86% gross margin on domestic indirect sales and an approximate 70%
on domestic direct sales. The gross margin on direct sales is lower because
these orders tend to be much larger and therefore carry larger discounts.
Domestic and international gross margins on net revenue were 54% and 57%,
respectively, for the quarter ended September 30, 2002 and 47% and 49%,
respectively, for the quarter ended September 30, 2001. Licenses and Services
gross margins were 75% and 55%, respectively for the nine months ended
September 30, 2002. Accordingly, changes in the product mix among Licenses
versus Services, domestic versus international, and direct versus indirect can
and do have a dramatic impact on our reported gross margin.

Our gross margin will fluctuate on a period-to-period basis as a result of
changes in competitive pressures, sales volume, product mix, period cost
policy, variations in the ratio of domestic versus international sales, or
changes in the mix of direct and indirect sales activity. Accordingly, the
gross margins we report for 2002 and 2001 are not necessarily indicative of the
results you should expect for future periods.

Operating Expenses

The following table summarizes our operating expense experience (in
thousands) for the three and nine-month periods ended September 30, 2002 and
2001.

|                                       |                          |   |                    |       |                   |  |          |    |            |   |          |       |            |  |          |    |            |   |        |        |  |    |    |   |   |        |        |  |    |    |   |  | 
|-------------------------------------- | ------------------------ | - | ------------------ | ----- | ----------------- |  | -------- | -- | ---------- | - | -------- | ----- | ---------- |  | -------- | -- | ---------- | - | ------ | ------ |  | -- | -- | - | - | ------ | ------ |  | -- | -- | - |  | 
|                                       |                          |   | Three-months ended |       | Nine-months ended
|                                       |                          |   |                    |       |                  
|                                       |                          |   | Sept 30,           |       | % of total        |  | Sept 30, |    | % of total |   | Sept 30, |       | % of total |  | Sept 30, |    | % of total
|                                       |                          |   | 2002               |       | revenue           |  | 2001     |    | revenue    |   | 2002     |       | revenue    |  | 2001     |    | revenue   
|Current Results                        |                          |   |                    |       |                   |  |          |    |            |   |          |       |            |  |          |   
|Selling, marketing, and administrative |                          | $ | 3,716              |       |                   |  | 51       | %  |            | $ | 5,285    |       |            |  | 62       | %  |            | $ | 12,784 |        |  | 54 | %  |   | $ | 16,815 |        |  | 62 | % 
|                                      
|                                      
|                                      
|                                      
|Research and development               |                          |   | 1,010              |       |                   |  | 14       | %  |            |   | 952      |       |            |  | 11       | %  |            |   | 3,529  |        |  | 15 | %  |   |   | 3,251  |        |  | 12 | % 
|                                       |                          |   |                    |       |                   |  |          |    |            |   |          |       |            |  |          |    |            |   |        |        |  |    |    |   |   |        |        |  |    |    |  
|                                       | Total operating expenses |   | $                  | 4,726 |                   |  |          | 64 | %          |   | $        | 6,237 |            |  |          | 74 | %          |   | $      | 16,313 |  |    | 69 | % |   | $      | 20,066 |  |    | 73 | %
|                                       |                          |   |                    |       |                   |  |          |    |            |   |          |       |            |  |          |    |            |   |        |        |  |    |    |   |   |        |        |  |    |    |  

Operating expenses for the third quarter of 2002 were $4.7 million, a
decrease of $1.5 million, or 24%, from the third quarter of 2001 operating
expenses of $6.2 million. Operating expenses for the nine months ended
September 30, 2002 were $16.3 million, a decrease of $3.8 million, or 19%, when
compared to the $20.1 million recorded in the same period in 2001.
Furthermore, operating expenses decreased $1.2 million, or 20%, from the second
quarter of 2002. In an overall cost cutting strategy, all areas of costs were
evaluated and excess spending was eliminated.

Selling, marketing and administrative expenses for the quarter and nine
months ended September 30, 2002 decreased $1.6 million, or 30%, and $4.0
million, or 24%, when compared to the prior year periods. The reduced employee
costs, including travel, relocation, and recruiting, accounted for
approximately $1.3 million and $2.5 million of the decrease for the quarter and
nine-month period ended September 30, 2002, respectively, when compared to the
prior

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year period. During the same periods, we experienced additional decreases
of $0.5 million and $1.2 million in other general administrative expenses such
as marketing, telephone, depreciation, shareholder costs, occupancy costs, bad
debt reserves, and insurance expense. The effects of the costs savings
experienced in employee related and general administrative expenses were offset
by increases of $0.2 million and $0.3 million in professional fees for the
three and nine months ended September 30, 2002, respectively, when compared to
the same prior year periods. In the first quarter of 2001, we incurred a $0.6
million charge for a corporate restructuring and a $0.2 million marketing
charge to enhance our corporate image.

Research and development expenses for the quarter and nine-month period
ended September 30, 2002 experienced an increase of $58,000 and $0.3 million,
or 6% and 9%, respectively. These increases were primarily due to fees
associated with certain partner alliances and a non-recurring, employee-related
expense.

During the quarter ended September 30, 2002, we eliminated 22 positions in
sales, marketing, and administration and 13 positions in research and
development. Those 35 positions approximated 31% of total sales, marketing,
administration, and research and development positions. Additionally, on July
15, 2002, we announced a 10% salary cut for all employees. That 10% salary cut
was reinstated as of November 1, 2002. These measures to reduce our overhead
will help us to breakeven at approximately $7.5 million in revenue during the
fourth quarter of 2002.

Backlog

Our backlog represents the amounts of non-cancelable, unfilled orders
received. We expect to recognize as revenue approximately half of the
September 30, 2002 backlog during the fourth quarter of 2002. The following
table summarizes our revenue backlog by business segment at September 30, 2002
and September 30, 2001.

|                        |  |               |   |            |  |               |    |            |  |  |   |       |  |  |    |  
|----------------------- |  | ------------- | - | ---------- |  | ------------- | -- | ---------- |  |  | - | ----- |  |  | -- | -
|                        |  | September 30, |   | % of total |  | September 30, |    | % of total
|Current backlog         |  | 2002          |   | backlog    |  | 2001          |    | backlog   
|                        |  |               |   |            |  |               |    |           
|Licenses backlog        |  |               | $ | 113        |  |               | 3  | %          |  |  | $ | 1,361 |  |  | 22 | %
|                       
|                       
|                       
|                       
|Services backlog        |  |               |   | 3,205      |  |               | 92 | %          |  |  |   | 4,724 |  |  | 78 | %
|                       
|                       
|                       
|                       
|Hosted Services backlog |  |               |   | 161        |  |               | 5  | %          |  |  |   |      |  |  | 0  | %
|                        |  |               |   |            |  |               |    |            |  |  |   |       |  |  |    |  
|                        |  |               | $ | 3,479      |  |               |    |            |  |  | $ | 6,085 |  |  |    |  
|                        |  |               |   |            |  |               |    |            |  |  |   |       |  |  |    |  

Our backlog was $3.5 million at September 30, 2002 and $6.1 million at
September 30, 2001, a decline of $2.6 million, or 43%. This decline in our
backlog was caused by the decline in orders booked during the third quarter of
2002 when compared with the third quarter of 2001. Our orders booked during the
third quarter of 2002 totaled $2.8 million compared to $5.1 million for the
third quarter of 2001, a $2.3 million, or 45%, decline year over year. Our
orders booked for the first and second quarters of 2002 were $4.5 million and
$3.7 million, a decline of $1.7 million and $0.9 million, or 38% and 24%,
respectively, when compared to the current quarter.

Our backlog of Licenses during the quarters ended September 30, 2002 and
June 30, 2002 remained steady at $0.1 million. The Licenses backlog at the
quarters ended September 30, 2002 and 2001 was $0.1 million and $1.4 million,
respectively, a decrease of $1.3 million, or 92%. Licenses usually are
delivered within a few days after receipt of an order. As a result, the
Licenses backlog should be a relatively small amount. At September 30, 2001,
we were unable to recognize revenue on several Licenses orders due to
contractual obligations; therefore the revenue associated with those orders
remained as Licenses backlog for future recognition.

Our Services backlog was $3.2 million and $4.7 million at September 30,
2002 and 2001, respectively, a decrease of $1.5 million, or 32%. Services
revenue from application services, installations, and project management
generally is recognized within six months following the quarter in which an
order has been booked. During that time period, the Services revenue is
reported as backlog. The backlog decreases as we complete orders and recognize
revenue on those orders. Currently, our Services backlog equates to an amount
approximating two quarters of Services revenue at current capacity and is
sufficient for us to attain our projected Services revenue for the remainder of
2002.

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Revenue generated from Hosted Services is generally transaction based.
Although most of our contracts provide for guaranteed monthly transaction
amounts, we do not include those guaranteed amounts in the backlog figure for
Hosted Services. The $0.2 million noted above is related to the application
development and set-up fees for our Service Bureau IMR services, which are
included in other hosted services, as well as the backlog of voice services
associated with the application development of our Vista IMR systems.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents at September 30, 2002 were $2.4 million and at
December 31, 2001 were $4.0 million, a decrease of $1.6 million. Our working
capital deficit increased from $0.7 million at December 31, 2001 to a deficit
of $3.5 million at September 30, 2002, a change of $2.8 million. Our year to
date net loss of $4.2 million was the dominant factor affecting our negative
change in working capital. However, because our deferred revenue is comprised
mainly of prepaid, deferred maintenance revenue, our adjusted quick ratio (as
used as a measurement of liquidity in the software industry), calculated by
dividing the sum of cash and accounts receivable by current liabilities less
deferred revenue, was 1.36 on September 30, 2002. That same measurement was
1.34 on June 30, 2002. At December 31, 2001, our adjusted quick ratio was
1.94. We believe our liquidity position is sufficient to meet our short-term
cash obligations of accounts payable, accrued liabilities, note payable, and
capital lease obligations for the fourth quarter of 2002 and through
2003.

For the first nine months of 2002, we used cash in operating activities of
$1.1 million compared to $3.9 million for the prior year, a positive change of
$2.8 million. The primary factors affecting the difference between net loss
and cash used in operating activities for the nine months ended September 30,
2002 was the positive effect of the decrease in accounts receivable of $2.0
million; the non-cash expenses, such as depreciation and provision for doubtful
accounts, in the amount of $1.5 million; and the positive change to other
balance sheet accounts, such as inventories, accounts payable, customer
deposits, and other assets and liabilities, in the amount of $0.7 million.
These positive effects were offset by a decrease in accrued liabilities of $0.9
million and a decrease in deferred revenue of $0.2 million. The decrease in
accounts receivable resulted from increased collection efforts and decreased
revenue. The decrease in accrued liabilities is evidence of our decreased
spending. The decrease in deferred revenue was caused by the decrease in
revenue and order bookings.

Cash used in investing activities, namely the purchase of property and
equipment, was $0.3 million during the nine-month period ended September 30,
2002 as compared to $1.2 million during the nine-month period ended September
30, 2001. During the first nine months of 2002, we purchased capital assets in
the amount of $403,000 and collected $73,000 due on the note receivable. For
the first nine months of 2001, we purchased capital assets in the amount of
$1.3 million offset by cash received from the sale of a certain asset in the
amount of $26,000 and received proceeds from the sale of a short-term
investment in the amount of $75,000.

Cash provided by financing activities was $0.1 million during the
nine-month period ended September 30, 2002 compared to $1.5 million provided by
financing activities during the nine-month period ended September 30, 2001.
During the first nine months of 2002, the activity on our line of credit
facility resulted in a net borrowing of $0.3 million. Also during 2002, we
made payments on our capital lease obligations in the amount of $0.2 million
and issued common stock in the amount of $18,000. For the first nine months of
2001, we issued common stock in the amount of $0.2 million and borrowed from
our line of credit in the amount of $1.4 million. During that same time
period, we made payments on our capital lease obligations in the amount of $0.1
million.

The Board of Directors approved stock buy-back plans under which we are
authorized to repurchase our shares of common stock. As of November 13, 2002,
we had repurchased a total of 3,322,432 shares under these plans since November
13, 1998 at an average share price of $3.43 and are authorized to repurchase
365,000 additional shares. We have made no stock repurchases since the fourth
quarter of 2000.

Internal Sources of Liquidity

Due to the recent decline in revenue and order bookings, it was necessary
to reduce our operating expenses to a level that can be supported by our
companys revenue. In the third quarter of 2002, we began several initiatives
to address our sales efforts, our cost structures, and our cash management in
light of the changing economic environment. We began to see the favorable
results from these efforts as demonstrated by our lower selling, marketing, and
administrative expenses, cost of revenue, and decreased accounts receivable
balance. We have decreased the estimated

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quarterly sales breakeven level to approximately $7.5 million for the
fourth quarter of 2002 through staff reductions made during the third quarter
of 2002 and further cost reduction strategies, including decreased travel and
marketing programs.

Additionally, we expect to reduce inventory and inventory purchases during
the remainder of 2002 by outsourcing the inventory supply for our Vista product
line and using current inventory to support our maintenance contracts. In
doing so, we will moderately, but positively, affect gross margin and operating
cash.

We believe the continued benefits of these measures will allow us to
generate sufficient operating funds from internal sources to successfully run
our business in the year ahead. We expect our current cash and cash
equivalents, combined with future cash flows from operating activities, to be
sufficient to support our operations for the remainder of 2002 and
through 2003. We will
utilize our credit facility to supplement operational cash needs.

External Sources of Liquidity

On April 30, 2002, we elected an early termination to our $2.5 million
asset-based operating line of credit with a commercial lending institution. In
place of that line of credit, on May 14, 2002, we executed an Accounts
Receivable Financing Agreement (the Agreement) for a one-year, $3.0 million,
asset-based, operating line of credit with a commercial banking institution.
The maximum cash available under the terms of this Agreement is 80% of the $3.0
million loan value, or $2.4 million. The new line of credit has lower interest
rates, lower minimum monthly interest payments, lower facility fee, less
stringent covenants, and an increased borrowing base. On July 22, 2002, we
entered into a Loan Modification and Forbearance Agreement in which the bank
agreed to increase the loan amount to $3.75 million, extend the expiration date
to July 14, 2003, and increase the collateral handling fee to 0.75% during a
time of non-compliance with the covenants of the Agreement. The maximum cash
available under the terms of this Modification is 80% of the $3.75 million loan
value, or $3.0 million.

At September 30, 2002, we were in compliance with all covenants under this
Agreement and Modification. At September 30, 2002, our outstanding balance on
this credit facility was $1.7 million with an additional $1.3 million available
to borrow.

On November 7, 2002, we entered into an Accounts Receivable Financing
Modification Agreement (the Modification #2) to the Agreement in which the
amended an affirmative, financial covenant. Also, Modification #2 extended
the increase in the collateral handling fee until the later of February 1, 2003
or one month following the quarter in which we are in compliance with
affirmative covenants listed in the Agreement and no other event of default has
occurred.

In the event that we are unable to continue to reduce costs and generate
cash flow from operations and alternative financing arrangements are not
available, our operations could be adversely affected.

In an effort to explore strategic opportunities to support our current
business strategies, we have retained the investment banking services of
Alliant Partners, a Silicon Valley Bancshares company. See Part II  Item 5
Other Information in this Form 10-Q for additional information.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK

Our exposure to market risk in connection with interest rate changes
relates to our cash investment portfolio. Our general policy is to limit the
risk of principal loss and to ensure the safety of invested funds by limiting
market and interest rate risk. We place our investments in instruments with
highly rated issuers. We classify all liquid investments with a maturity date
of three months or less as cash equivalents. As of September 30, 2002, our
earned interest rate on our cash equivalents was 0.24% compared to 1.61% at
December 31, 2001. We do not expect any material loss with respect to our cash
investment portfolio.

Our asset-based operating line of credit bears interest at prime plus
3.25%. During the first three quarters of 2002, the prime rate has held steady
at 4.75%. At November 13, 2002, we had an outstanding balance of $1.5 million
under this line of credit. The full amount was classified as current and will
be paid from receipts of customer receivables. Due to the current nature of
the debt, the requirement to make payments on the outstanding balance as
receivables are collected, and the currently low prime rate, we do not believe
that market risk related to this line of credit is significant. We anticipate
no material exposure to market risk in connection with interest rate changes,
as they relate to our current liabilities.

Our only long-term liabilities are capital lease obligations, which bear
interest at a fixed rate. Therefore, we do not believe there is any material
exposure to market risk changes in interest rates as it relates to our current
or long-term liabilities.

FOREIGN CURRENCY EXCHANGE RATE RISK

We invoice all international customers in U.S. dollars except for the
customers of our United Kingdom (U.K.) subsidiary, which are invoiced in
pounds sterling. Our U.K. subsidiarys financials, including balance sheet,
revenue, and operating expenses, are recorded in pounds sterling. Therefore,
our exposure to foreign currency exchange rate risk occurs when we translate
the financial position and operating results of that subsidiary into U.S.
dollars in the course of consolidating our financial statements. At this time,
we do not use instruments to hedge our foreign exchange exposure in the U.K.
because the effects of foreign exchange rate fluctuations do not materially
affect us.

ADDITIONAL CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

Our disclosure and analysis in this Form 10-Q contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify such statements by the fact that
they do not relate strictly to historical or current facts. These statements
may include words such as anticipate, expect, believe, and other words
and phrases of similar meaning in connection with any discussion of future
operating or financial performance. In particular, these forward-looking
statements include, for example, statements relating to future actions, future
performance, results of current and anticipated products, sales efforts, and
operating expenses. From time to time, we also may provide oral or written
forward-looking statements in other materials we release to the public.

We reasonably believe that any or all of our forward-looking statements in
this Form 10-Q and in any other public statements we make are true at the time
they are made. However, such statements may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Consequently, no forward-looking statement can be
guaranteed, and actual future results may vary materially. We undertake no
obligation to publicly update forward-looking statements, whether as a result
of new information, future events or otherwise. We advise you, however, to
review the Section entitled Quantitative and Qualitative Disclosure About
Market Risk in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 for a discussion of important cautionary factors that may
affect future results. We also advise you to review any and all further
disclosures we make on related subjects in our Form 10-Q and Form 8-K filings
with the SEC and in other materials we publicly release.

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures are designed to ensure that information
required to be disclosed in Company reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms.
The controls and procedures also ensure that the required information is
accumulated and communicated to management, including the Companys Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Within the 90 days prior to the filing date of this report, we carried out
an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to the Exchange Act Rule 13a-14.
This evaluation was done under the supervision and with the participation of
the Companys management, including our Chief Executive Officer and our Chief
Financial Officer. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
are effective in gathering, analyzing, and disclosing information needed to
satisfy our disclosure obligations under the Exchange Act.

CHANGES IN INTERNAL CONTROLS

There were no significant changes in our internal controls or in other
factors that could significantly affect those controls since the most recent
evaluation of such controls.




PART IIOTHER INFORMATION




ITEM 5. OTHER INFORMATION

We entered into an Agreement and Plan of Merger (the Merger Agreement)
dated as of November 5, 2002, with Enghouse Systems Limited (Enghouse) and
Arizona Acquisition Corp., a Delaware corporation and wholly-owned subsidiary
of Enghouse (the Purchaser), pursuant to which the Purchaser has commenced a
tender offer to purchase all of our outstanding shares of common stock, par
value $0.01 per share (the Shares), at a price of $0.72 per Share, net to the
seller in cash. This tender offer is upon the terms and subject to the
conditions set forth in the Purchasers Offer to Purchase, dated November 13,
2002 (as amended or supplemented from time to time, the Offer to Purchase),
and in the related Letter of Transmittal (the Letter of Transmittal, which,
together with the Offer to Purchase, as each may be amended or supplemented
from time to time, collectively constitute the Offer). Copies of the Offer
to Purchase and the Letter of Transmittal have been mailed to Syntellect
stockholders and are filed as Exhibits (a)(1) and (a)(2), respectively, to the
Tender Offer Statement on Schedule TO (as amended or supplemented from time to
time, the Schedule TO) filed by the Purchaser with the Securities and
Exchange Commission on November 13, 2002.

Our board has unanimously approved and adopted the Merger Agreement and
the transactions contemplated thereby, and has recommended that our
stockholders accept the Offer and tender their Shares pursuant to the Offer.
MCM Associates, Ltd., Wynnefield Capital Management, LLC and certain of their
respective controlling persons and affiliated entities (the Holders), have
agreed to tender all of their Shares to the Purchaser in the Offer, pursuant to
a Tender and Voting Agreement, dated as of November 5, 2002, among Syntellect,
Enghouse and the Holders. The Holders beneficially own an aggregate of
approximately 15% of the outstanding Shares. The Company filed its
Solicitation/Recommendation Statement on Schedule 14D-9 with the Securities and
Exchange Commission on November 13, 2002, a copy of which is being mailed to
stockholders with the Schedule TO.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

| |  |     |  |              |  |                                                                                                                                                  
| |  | --- |  | ------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (a) |  | Exhibits     |  |                                                                                                                                                  
|
|
|
|
| |  |     |  | (10)(v)      |  | Syntellect Inc. Nonemployee Director Stock Plan (as amended
through August 6, 2002)                                                              
|
|
|
|
| |  |     |  | (10)(vii)(a) |  | Indemnification Agreement Between Syntellect Inc. and
Michael R. Bruce as of August 6, 2002                                                      
|
|
|
|
| |  |     |  | (10)(vii)(b) |  | Indemnification Agreement Between Syntellect Inc. and
Anthony V. Carollo as of August 6, 2002                                                    
|
|
|
|
| |  |     |  | (10)(vii)(c) |  | Indemnification Agreement Between Syntellect Inc. and
Steven W. Dodenhoff as of August 6, 2002                                                   
|
|
|
|
| |  |     |  | (10)(vii)(d) |  | Indemnification Agreement Between Syntellect Inc. and
Dr. Roy A. Herberger as of August 6, 2002                                                  
|
|
|
|
| |  |     |  | (10)(vii)(e) |  | Indemnification Agreement Between Syntellect Inc. and
Camille Jayne as of August 6, 2002                                                         
|
|
|
|
| |  |     |  | (10)(vii)(f) |  | Indemnification Agreement Between Syntellect Inc. and
Michael D. Kaufman as of August 6, 2002                                                    
|
|
|
|
| |  |     |  | (10)(vii)(g) |  | Indemnification Agreement Between Syntellect Inc. and
Kent C. Mueller as of August 6, 2002                                                       
|
|
|
|
| |  |     |  | (10)(vii)(h) |  | Indemnification Agreement Between Syntellect Inc. and
Charles F. Sonneborn, III as of August 6, 2002                                             
|
|
|
|
| |  |     |  | (10)(vii)(i) |  | Indemnification Agreement Between Syntellect Inc. and
Timothy P. Vatuone as of August 6, 2002                                                    
|
|
|
|
| |  |     |  | (10)(x)(b)   |  | Accounts Receivable Loan Modification Agreement between
Syntellect Inc. and Silicon Valley Bank as of November 7, 2002                           
|
|
|
|
| |  |     |  | (10)(xii)(a) |  | Change of Control between Syntellect Inc. and Anthony
V. Carollo as of August 16, 2002                                                           
|
|
|
|
| |  |     |  | (10)(xii)(b) |  | Change of Control between Syntellect Inc. and Steven
W. Dodenhoff as of August 16, 2002                                                          
|
|
|
|
| |  |     |  | (10)(xii)(c) |  | Change of Control between Syntellect Inc. and Charles
F. Sonneborn, III as of August 16, 2002                                                    
|
|
|
|
| |  |     |  | (10)(xii)(d) |  | Change of Control between Syntellect Inc. and Peter K. Trompetter as of August 16, 2002                                                          
|
|
|
|
| |  |     |  | (10)(xii)(e) |  | Change of Control between Syntellect Inc. and Timothy P. Vatuone as of August 16, 2002                                                           
|
|
|
|
| |  |     |  | (99)(a)      |  | Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
| |  |     |  | (99)(b)      |  | Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

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| |  |     |  |                                                                                     |  |                                         
| |  | --- |  | ----------------------------------------------------------------------------------- |  | ----------------------------------------
|
|
|
|
| |  |     |  | (99)(c)                                                                             |  | Certification of Chief Executive Officer
|
|
|
|
| |  |     |  | (99)(d)                                                                             |  | Certification of Chief Financial Officer
|
|
|
|
| |  | (b) |  | Reports on Form 8-K                                                                
|
|
|
|
| |  |     |  | No reports on Form 8-K have been filed during the quarter ended September 30, 2002.




SIGNATURES

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

|                        |  |                                                                                                                                                                
|----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date: November 13, 2002 |  | SYNTELLECT INC.                                                                                                                                                
|                       
|                       
|                       
|                       
|                        |  |                                                                                                                                                                
|                       
|                       
|                       
|                       
|                        |  | By: /s/ Timothy P. Vatuone                                                                                                                                     
|                        |  |                                                                                                                                                                
|                        |  | Timothy P. Vatuone
Vice President, Chief Financial Officer, Secretary and Treasurer
(Principal financial officer and duly authorized officer of the registrant)

20