##### 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 June 30, 2001

OR

[    ] 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, 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

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

11,293,640 shares of common stock, $.01 par value per share, were
outstanding on July 18, 2001





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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO 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                            
|PART II. OTHER INFORMATION   
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBITS                     
|                              | EXHIBIT INDEX                                                                                
|                              |                                                                                               | Exhibit (10)                                        
|                              |                                                                                               | Exhibit (11)                                        
|EX-10                        
|EX-11                        



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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 
June 30, 2001 and December 31, 2000                                         |    |      | 3 | 
|                             
|                             
|                             
|                             
|                              |                                                                                                        |                                                                                                   | Condensed Consolidated Statements of Operations  Three Months
and Six Months Ended June 30, 2001 and June 30, 2000 |    |      | 4 | 
|                             
|                             
|                             
|                             
|                              |                                                                                                        |                                                                                                   | Condensed Consolidated Statements of Cash Flows 
Six Months Ended June 30, 2001 and June 30, 2000                  |    |      | 5 | 
|                             
|                             
|                             
|                             
|                              |                                                                                                        |                                                                                                   | Notes to Condensed Consolidated Financial Statements                                                                 |    |      | 6 | 
|                             
|                             
|                             
|                             
|                              | Item 2.
Managements Discussion and Analysis of Financial Condition and
Results of          Operations |                                                                                                   |                                                                                                                      | 9  |     
|                             
|                             
|                             
|                             
|                              | Item 3.Quantitative and Qualitative Disclosure about Market Risk                                       |                                                                                                   |                                                                                                                      | 12 |     
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION    |                                                                                                        |                                                                                                   |                                                                                                                      |   
|                             
|                             
|                             
|                             
|                              | Item 4.Submission of Matters to a Vote of Security Holders                                             |                                                                                                   |                                                                                                                      | 13 |     
|                             
|                             
|                             
|                             
|                              | Item 6.Exhibits and Reports on Form 8-K                                                                |                                                                                                   |                                                                                                                      | 13 |     
|                             
|                             
|                             
|                             
|SIGNATURES                    |                                                                                                        |                                                                                                   | 15                                                                                                                   |   
|                             
|                             
|                             
|                             
|EXHIBITS                      |                                                                                                        |                                                                                                   |                                                                                                                      |   
|                             
|                             
|                             
|                             
|                              | Exhibit Index                                                                                          |                                                                                                   |                                                                                                                      | 15 |     
|                             
|                             
|                             
|                             
|                              |                                                                                                        | Exhibit (10)  Syntellect Inc. Nonemployee Director Stock Plan (as amended
through May 17, 2001) |                                                                                                                      |    | 16   |  
|                             
|                             
|                             
|                             
|                              |                                                                                                        | Exhibit (11)  Syntellect Inc., Computation of Net Income (Loss) Per Share                       |                                                                                                                      |    | 24   |  

2



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##### Table of Contents






PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




SYNTELLECT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

|                                                 |                                                                                                                                  |                            |                                            |         |             |        |              |         |        |        | 
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------- | ----------- | ------ | ------------ | ------- | ------ | ------ | 
|                                                 |                                                                                                                                  |                            |                                            |         | June 30,    |        | December 31,
|                                                 |                                                                                                                                  |                            |                                            |         | 2001        |        | 2000        
|                                                 |                                                                                                                                  |                            |                                            |         |             |        |             
|                                                 |                                                                                                                                  |                            |                                            |         | (unaudited) |        |              |         |       
|ASSETS                                           |                                                                                                                                  |                            |                                            |         |             |        |              |        
|                                                
|                                                
|                                                
|                                                
|Current assets:                                  |                                                                                                                                  |                            |                                            |         |             |        |              |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Cash and cash equivalents                                                                                                        |                            | $                                          | 4,686   |             |        | $            | 7,334   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Short-term investments  restricted                                                                                              |                            |                                            |       |             |        |              | 75      |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Trade receivables, net of allowance for doubtful accounts
of $198 and $225, at June 30, 2001 and December 31, 2000,
respectively |                            |                                            | 8,063   |             |        |              | 12,423  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Other receivables                                                                                                                |                            |                                            | 4       |             |        |              | 9       |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Note receivable                                                                                                                  |                            |                                            | 48      |             |        |              | 57      |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Inventories, net                                                                                                                 |                            |                                            | 1,012   |             |        |              | 1,415   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Prepaid expenses                                                                                                                 |                            |                                            | 1,219   |             |        |              | 711     |       
|                                                 |                                                                                                                                  |                            |                                            |         |             |        |              |        
|                                                 |                                                                                                                                  | Total current assets       |                                            |         | 15,032      |        |              |         | 22,024 |       
|                                                
|                                                
|                                                
|                                                
|Property and equipment, net                      |                                                                                                                                  |                            | 4,208                                      |         |             |        | 3,814        |        
|                                                
|                                                
|                                                
|                                                
|Note receivable, non-current portion             |                                                                                                                                  |                            | 254                                        |         |             |        | 270          |        
|                                                
|                                                
|                                                
|                                                
|Other assets                                     |                                                                                                                                  |                            | 1,072                                      |         |             |        | 993          |        
|                                                 |                                                                                                                                  |                            |                                            |         |             |        |              |        
|                                                 |                                                                                                                                  | Total assets               |                                            | $       | 20,566      |        |              | $       | 27,101 |       
|                                                 |                                                                                                                                  |                            |                                            |         |             |        |              |        
|LIABILITIES AND SHAREHOLDERS EQUITY             |                                                                                                                                  |                            |                                            |         |             |        |              |        
|                                                
|                                                
|                                                
|                                                
|Current liabilities:                             |                                                                                                                                  |                            |                                            |         |             |        |              |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Accounts payable                                                                                                                 |                            | $                                          | 3,270   |             |        | $            | 2,934   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Accrued liabilities                                                                                                              |                            |                                            | 1,760   |             |        |              | 3,186   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Customer deposits                                                                                                                |                            |                                            | 788     |             |        |              | 2,916   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Deferred revenue                                                                                                                 |                            |                                            | 6,280   |             |        |              | 6,421   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Line of credit                                                                                                                   |                            |                                            | 1,059   |             |        |              |       |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Capital lease obligations                                                                                                        |                            |                                            | 211     |             |        |              | 151     |       
|                                                 |                                                                                                                                  |                            |                                            |         |             |        |              |        
|                                                 |                                                                                                                                  | Total current liabilities  |                                            |         | 13,368      |        |              |         | 15,608 |       
|                                                
|                                                
|                                                
|                                                
|Capital lease obligations  less current portion |                                                                                                                                  |                            | 507                                        |         |             |        | 316          |        
|                                                 |                                                                                                                                  |                            |                                            |         |             |        |              |        
|                                                 |                                                                                                                                  | Total liabilities          |                                            |         | 13,875      |        |              |         | 15,924 |       
|                                                 |                                                                                                                                  |                            |                                            |         |             |        |              |        
|Shareholders equity:                            |                                                                                                                                  |                            |                                            |         |             |        |              |        
|                                                
|                                                
|                                                
|                                                
|                                                 | 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 14,616,072 and 14,505,298,
respectively             |                            |                                            | 146     |             |        |              | 145     |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Additional paid-in capital                                                                                                       |                            |                                            | 62,554  |             |        |              | 62,311  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Accumulated deficit                                                                                                              |                            |                                            | (44,386 | )           |        |              | (39,696 | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Accumulated other comprehensive loss                                                                                             |                            |                                            | (209    | )           |        |              | (169    | )     
|                                                 |                                                                                                                                  |                            |                                            |         |             |        |              |        
|                                                 |                                                                                                                                  |                            | 18,105                                     |         |             |        | 22,591       |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Treasury stock, at cost, 3,332,432 shares                                                                                        |                            |                                            | (11,414 | )           |        |              | (11,414 | )     
|                                                 |                                                                                                                                  |                            |                                            |         |             |        |              |        
|                                                 |                                                                                                                                  | Total shareholders equity |                                            |         | 6,691       |        |              |         | 11,177 |       
|                                                 |                                                                                                                                  |                            |                                            |         |             |        |              |        
|                                                 |                                                                                                                                  |                            | Total liabilities and shareholders equity |         | $           | 20,566 |              |         | $      | 27,101 | 
|                                                 |                                                                                                                                  |                            |                                            |         |             |        |              |        

See accompanying notes to condensed consolidated financial statements.

3



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##### Table of Contents






SYNTELLECT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |      |        |        | 
|---------------------------------------------- | --------------------------------------- | ----------------------------------- | ------------------------ | -- | ------------------ | ------ | ---------------- | ---- | ----- | ------ | ------ | --- | ------ | ------ | ------ | ---- | ------ | ------ | 
|                                               |                                         |                                     |                          |    | Three Months Ended |        | Six Months Ended
|                                               |                                         |                                     |                          |    | June 30,           |        | June 30,        
|                                               |                                         |                                     |                          |    |                    |        |                 
|                                               |                                         |                                     |                          |    | 2001               |        | 2000             |      | 2001  |        | 2000  
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |       
|Net revenues:                                  |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|                                              
|                                              
|                                              
|                                              
|                                               |                                         | Licenses                            |                          | $  | 2,261              |        |                  | $    | 5,268 |        |        | $   | 5,886  |        |        | $    | 11,331 |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                         | Services                            |                          |    | 4,948              |        |                  |      | 5,252 |        |        |     | 10,583 |        |        |      | 10,557 |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                         | Hosted services                     |                          |    | 1,280              |        |                  |      | 1,541 |        |        |     | 2,366  |        |        |      | 2,891  |       
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|                                               |                                         |                                     | Total net revenues       |    |                    | 8,489  |                  |      |       | 12,061 |        |     |        | 18,835 |        |      |        | 24,779 | 
|                                              
|                                              
|                                              
|                                              
|Cost of revenues:                              |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|                                              
|                                              
|                                              
|                                              
|                                               |                                         | Licenses                            |                          |    | 590                |        |                  |      | 1,362 |        |        |     | 1,517  |        |        |      | 3,002  |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                         | Services                            |                          |    | 2,742              |        |                  |      | 2,223 |        |        |     | 6,056  |        |        |      | 5,373  |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                         | Hosted services                     |                          |    | 997                |        |                  |      | 986   |        |        |     | 1,985  |        |        |      | 2,047  |       
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|                                               |                                         |                                     | Total cost of revenues   |    |                    | 4,329  |                  |      |       | 4,571  |        |     |        | 9,558  |        |      |        | 10,422 | 
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|Gross margin                                   |                                         |                                     | 4,160                    |    |                    |        | 7,490            |      |       |        | 9,277  |     |        |        | 14,357 |     
|                                              
|                                              
|                                              
|                                              
|Operating expenses:                            |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|                                              
|                                              
|                                              
|                                              
|                                               |                                         | Selling, general and administrative |                          |    | 5,590              |        |                  |      | 5,927 |        |        |     | 11,696 |        |        |      | 10,720 |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                         | Research and development            |                          |    | 1,051              |        |                  |      | 730   |        |        |     | 2,299  |        |        |      | 1,593  |       
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|                                               |                                         |                                     | Total operating expenses |    |                    | 6,641  |                  |      |       | 6,657  |        |     |        | 13,995 |        |      |        | 12,313 | 
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|Operating income (loss)                        |                                         |                                     | (2,481                   | )  |                    |        | 833              |      |       |        | (4,718 | )   |        |        | 2,044  |     
|                                              
|                                              
|                                              
|                                              
|Other income (expense), net:                   |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|                                              
|                                              
|                                              
|                                              
|                                               |                                         | Interest income                     |                          |    | 24                 |        |                  |      | 117   |        |        |     | 56     |        |        |      | 175    |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                         | Other                               |                          |    | (24                | )      |                  |      | 51    |        |        |     | (28    | )      |        |      | (21    | )     
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|                                               |                                         |                                     | Total other income       |    |                    |      |                  |      |       | 168    |        |     |        | 28     |        |      |        | 154    | 
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|Income (loss) before income taxes              |                                         |                                     | (2,481                   | )  |                    |        | 1,001            |      |       |        | (4,690 | )   |        |        | 2,198  |     
|                                              
|                                              
|                                              
|                                              
|                                               |                                         | Income taxes                        |                          |    |                   |        |                  |      |      |        |        |     |       |        |        |      |       |       
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|                                               |                                         |                                     | Net income (loss)        |    | $                  | (2,481 | )                |      | $     | 1,001  |        |     | $      | (4,690 | )      |      | $      | 2,198  | 
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|Net income (loss) per common share basic      |                                         | $                                   | (.22                     | )  |                    | $      | .08              |      |       | $      | (.42   | )   |        | $      | .19    |     
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|Net income (loss) per common share diluted    |                                         | $                                   | (.22                     | )  |                    | $      | .08              |      |       | $      | (.42   | )   |        | $      | .17    |     
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|Weighted average shares basic                 |                                         |                                     | 11,220                   |    |                    |        | 11,793           |      |       |        | 11,207 |     |        |        | 11,820 |     
|                                              
|                                              
|                                              
|                                              
|Weighted average shares diluted               |                                         |                                     | 11,220                   |    |                    |        | 12,648           |      |       |        | 11,207 |     |        |        | 12,746 |     
|                                              
|                                              
|                                              
|                                              
|Other comprehensive income (loss), net of tax: |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|                                              
|                                              
|                                              
|                                              
|                                               | Foreign currency translation adjustment |                                     |                          | 10 |                    |        |                  | (201 | )     |        |        | (40 | )      |        |        | (110 | )     
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|Other comprehensive income (loss)              |                                         |                                     | 10                       |    |                    |        | (201             | )    |       |        | (40    | )   |        |        | (110   | )   
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     
|Comprehensive income (loss)                    |                                         | $                                   | (2,471                   | )  |                    | $      | 800              |      |       | $      | (4,730 | )   |        | $      | 2,088  |     
|                                               |                                         |                                     |                          |    |                    |        |                  |      |       |        |        |     |        |        |        |     

See accompanying notes to condensed consolidated financial statements.

4



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##### Table of Contents






SYNTELLECT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                  |                                                 |                                                                                          |                                                     |        |                  |        |       |        |        |        |  
|------------------------------------------------- | ----------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------------------------- | ------ | ---------------- | ------ | ----- | ------ | ------ | ------ | -
|                                                  |                                                 |                                                                                          |                                                     |        | Six Months Ended
|                                                  |                                                 |                                                                                          |                                                     |        | June 30,        
|                                                  |                                                 |                                                                                          |                                                     |        |                 
|                                                  |                                                 |                                                                                          |                                                     |        | (unaudited)     
|                                                  |                                                 |                                                                                          |                                                     |        | 2001             |        | 2000 
|                                                  |                                                 |                                                                                          |                                                     |        |                  |        |      
|Cash flows from operating activities:             |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net income (loss)                               |                                                                                          | $                                                   | (4,690 | )                |        | $     | 2,198  |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                 | Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |                                                     |        |                  |        |       |        |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                 | Depreciation and amortization                                                            |                                                     |        | 866              |        |       |        | 954    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                 | Provision for doubtful accounts                                                          |                                                     |        | 148              |        |       |        | 204    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                 | (Increase) decrease in receivables                                                       |                                                     |        | 4,217            |        |       |        | (236   | )     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                 | Decrease in inventories                                                                  |                                                     |        | 403              |        |       |        | 680    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                 | Increase in accounts payable                                                             |                                                     |        | 336              |        |       |        | 219    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                 | Increase (decrease) in deferred revenue                                                  |                                                     |        | (141             | )      |       |        | 1,020  |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                 | Decrease in accrued liabilities                                                          |                                                     |        | (1,426           | )      |       |        | (461   | )     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                 | Decrease in customer deposits                                                            |                                                     |        | (2,128           | )      |       |        | (2,462 | )     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                 | Change in other assets and liabilities                                                   |                                                     |        | (562             | )      |       |        | 116    |       
|                                                  |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|                                                  |                                                 |                                                                                          | Net cash provided by (used in) operating activities |        |                  | (2,977 | )     |        |        | 2,232  |  
|                                                  |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|Cash flows from investing activities:             |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from short term investments            |                                                                                          |                                                     | 75     |                  |        |       |      |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from sale of property and equipment    |                                                                                          |                                                     |      |                  |        |       | 532    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase of property and equipment              |                                                                                          |                                                     | (932   | )                |        |       | (491   | )     
|                                                  |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|                                                  |                                                 |                                                                                          | Net cash provided by (used in) investing activities |        |                  | (857   | )     |        |        | 41     |  
|                                                  |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|Cash flows from financing activities:             |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Borrowings on line of credit                    |                                                                                          |                                                     | 1,059  |                  |        |       |      |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from issuance of common stock          |                                                                                          |                                                     | 244    |                  |        |       | 641    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase of treasury stock                      |                                                                                          |                                                     |      |                  |        |       | (2,761 | )     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Principal payments on capital lease obligations |                                                                                          |                                                     | (78    | )                |        |       | (372   | )     
|                                                  |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|                                                  |                                                 |                                                                                          | Net cash provided by (used in) financing activities |        |                  | 1,225  |       |        |        | (2,492 | )
|                                                  |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|Effect of exchange rates on cash                  |                                                 |                                                                                          | (39                                                 | )      |                  |        | (110  | )     
|                                                  |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|Net decrease in cash and cash equivalents         |                                                 |                                                                                          | (2,648                                              | )      |                  |        | (329  | )     
|                                                 
|                                                 
|                                                 
|                                                 
|Cash and cash equivalents at beginning of period  |                                                 |                                                                                          | 7,334                                               |        |                  |        | 6,185 |       
|                                                  |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|Cash and cash equivalents at end of period        |                                                 | $                                                                                        | 4,686                                               |        |                  | $      | 5,856 |       
|                                                  |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|Supplemental disclosure of cash flow information: |                                                 |                                                                                          |                                                     |        |                  |        |       |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash paid for interest                          |                                                                                          | $                                                   | 29     |                  |        | $     | 23     |       
|                                                  |                                                 |                                                                                          |                                                     |        |                  |        |       |       

See accompanying notes to condensed consolidated financial statements.

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SYNTELLECT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except shares and per share amounts)
(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) and its wholly-owned subsidiaries, Syntellect Canada
Inc., Syntellect Europe Limited, Syntellect Deutschland GmbH and Syntellect
Interactive Services, Inc. (SIS). All significant intercompany balances and
transactions have been eliminated in consolidation.

The financial statements have been prepared in accordance with generally
accepted accounting principles, 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 2000 Annual Report on Form 10-K. The
results of operations for the six months ended June 30, 2001 are not
necessarily indicative of the results to be expected for the full year.

Revenue Recognition

We recognize revenue from sales of Licenses and of Services, two of our
three operating segments, in accordance with 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, and Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements.Revenues from our third operating
segment, Hosted Services, are recognized in accordance with SAB No. 101. These
statements require that revenue be recognized when each of the following four
conditions has been met: 1) persuasive evidence of an arrangement exists, 2)
delivery has occurred or services have been rendered, 3) the sellers price to
the buyer is fixed or determinable, and 4) collectibility is reasonably
assured.

(2) Business Segments

Effective for financial statements for fiscal periods beginning after
December 15, 1997, Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information, requires
that an enterprise disclose certain information about operating segments. An
operating segment is defined as a component of an enterprise that engages in
business activities which may earn revenues 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:

|                                   |  |          |        |          |  |          |       |       |  |        |       |   |  |   |        |  
|---------------------------------- |  | -------- | ------ | -------- |  | -------- | ----- | ----- |  | ------ | ----- | - |  | - | ------ | -
|                                   |  |          |        |          |  |          |       |       |  | HOSTED |       |   |  |  
|Three months ended June 30, 2001   |  | LICENSES |        | SERVICES |  | SERVICES |       | TOTAL
|                                   |  |          |        |          |  |          |       |      
|Revenues from customers            |  | $        | 2,261  |          |  | $        | 4,948 |       |  | $      | 1,280 |   |  | $ | 8,489  |  
|                                  
|                                  
|                                  
|                                  
|Depreciation and amortization      |  |          | 192    |          |  |          | 94    |       |  |        | 165   |   |  |   | 451    |  
|                                  
|                                  
|                                  
|                                  
|Segment loss before income taxes   |  |          | (1,909 | )        |  |          | (530  | )     |  |        | (42   | ) |  |   | (2,481 | )
|                                  
|                                  
|                                  
|                                  
|Expenditures for segment assets    |  |          | 347    |          |  |          | 171   |       |  |        | 26    |   |  |   | 544    |  
|                                   |  |          |        |          |  |          |       |       |  |        |       |   |  |   |        |  
|Three months ended June 30, 2000   |  |          |        |          |  |          |       |       |  |        |       |   |  |   |        |  
|                                   |  |          |        |          |  |          |       |       |  |        |       |   |  |   |        |  
|Revenues from customers            |  | $        | 5,268  |          |  | $        | 5,252 |       |  | $      | 1,541 |   |  | $ | 12,061 |  
|                                  
|                                  
|                                  
|                                  
|Depreciation and amortization      |  |          | 195    |          |  |          | 96    |       |  |        | 150   |   |  |   | 441    |  
|                                  
|                                  
|                                  
|                                  
|Segment income before income taxes |  |          | 742    |          |  |          | 193   |       |  |        | 66    |   |  |   | 1,001  |  
|                                  
|                                  
|                                  
|                                  
|Expenditures for segment assets    |  |          | 179    |          |  |          | 90    |       |  |        | 32    |   |  |   | 301    |  

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##### Table of Contents



|                                          |  |          |        |          |  |          |        |       |  |        |       |   |  |   |        |  
|----------------------------------------- |  | -------- | ------ | -------- |  | -------- | ------ | ----- |  | ------ | ----- | - |  | - | ------ | -
|                                          |  |          |        |          |  |          |        |       |  | HOSTED |       |   |  |  
|Six months ended June 30, 2001            |  | LICENSES |        | SERVICES |  | SERVICES |        | TOTAL
|                                          |  |          |        |          |  |          |        |      
|Revenues from customers                   |  | $        | 5,886  |          |  | $        | 10,583 |       |  | $      | 2,366 |   |  | $ | 18,835 |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 360    |          |  |          | 176    |       |  |        | 330   |   |  |   | 866    |  
|                                         
|                                         
|                                         
|                                         
|Segment loss before income taxes          |  |          | (3,170 | )        |  |          | (1,170 | )     |  |        | (350  | ) |  |   | (4,690 | )
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |          | 521    |          |  |          | 257    |       |  |        | 154   |   |  |   | 932    |  
|                                          |  |          |        |          |  |          |        |       |  |        |       |   |  |   |        |  
|Six months ended June 30, 2000            |  |          |        |          |  |          |        |       |  |        |       |   |  |   |        |  
|                                          |  |          |        |          |  |          |        |       |  |        |       |   |  |   |        |  
|Revenues from customers                   |  | $        | 11,331 |          |  | $        | 10,557 |       |  | $      | 2,891 |   |  | $ | 24,779 |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 438    |          |  |          | 216    |       |  |        | 300   |   |  |   | 954    |  
|                                         
|                                         
|                                         
|                                         
|Segment income (loss) before
income taxes |  |          | 2,384  |          |  |          | 141    |       |  |        | (327  | ) |  |   | 2,198  |  
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |          | 206    |          |  |          | 103    |       |  |        | 182   |   |  |   | 491    |  

(3) Inventories

Inventories consist of the following:

|                                           |  |          |       |              |  |   |       | 
|------------------------------------------ |  | -------- | ----- | ------------ |  | - | ----- | 
|                                           |  | June 30, |       | December 31,
|                                           |  | 2001     |       | 2000        
|                                           |  |          |       |             
|Finished goods                             |  | $        | 440   |              |  | $ | 507   | 
|                                          
|                                          
|                                          
|                                          
|Purchased components                       |  |          | 262   |              |  |   | 460   | 
|                                          
|                                          
|                                          
|                                          
|Repair, warranty and maintenance inventory |  |          | 310   |              |  |   | 448   | 
|                                           |  |          |       |              |  |   |       | 
|                                           |  | $        | 1,012 |              |  | $ | 1,415 | 
|                                           |  |          |       |              |  |   |       | 

(4) Reorganization Costs

As part of an overall strategic plan to reduce costs and increase
operating efficiencies, we began the process of reorganizing the Company during
the first quarter of 2001 with the completion by the end of the second quarter
of 2001. As a result of these plans, we recorded pre-tax charges of $600 as
follows:

|                  |                            |   |                                    |     | 
|----------------- | -------------------------- | - | ---------------------------------- | --- | 
|                  |                            |   | Total Expense as of March 31, 2001
|                  |                            |   |                                   
|Separation costs  |                            | $ | 292                                |    
|                 
|                 
|                 
|                 
|Retention bonuses |                            |   | 79                                 |    
|                 
|                 
|                 
|                 
|Recruitment costs |                            |   | 229                                |    
|                  |                            |   |                                    |    
|                  | Total Reorganization Costs |   | $                                  | 600 | 
|                  |                            |   |                                    |    

Twelve employees were terminated under the reorganization plan and are
included in the separation costs of $292 from the following five departments:
Administration (3), Sales (4), Research and Development (2), Application
Development (2), and System Development (1). All of the reorganization costs
expensed in the first quarter of 2001 were paid prior to June 30, 2001.

(5) Recently Issued Accounting Standards

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, Business
Combinations, and Statement No. 142, Goodwill
and Other Intangible Assets. Statement No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 as well as all purchase method business combinations completed after
June 30, 2001. Statement No. 141 also specifies criteria that intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for separately.
Statement No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement No.
142. Statement No. 142 will also require that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual

7



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##### Table of Contents



values, and reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of.

We have adopted Statement No. 141 as of June 30, 2001 and plan to adopt
Statement No. 142 on January 1, 2002. The adoption of these statements did
not, or is not expected to, have a material impact on our consolidated
financial statements as we do not have unamortized goodwill or unamortized
identifiable intangible assets which are subject to a purchase method business
combination under Statements No. 141 and 142. Our identifiable intangible
assets with definite lives will be amortized under the provisions of Statement
No. 142.

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

NET REVENUES

We develop, market and implement voice, Internet and call processing
software and services to large and mid-sized commercial, industrial and
government entities through a worldwide direct and indirect distribution
network. Through our flagship product, Vista, a client-server, open
standards-based, application development environment, software platform, we
offer customizable software applications including Interactive Voice Response
(IVR), Automatic Speech Recognition (ASR), Vocalpoint Interactive Web
Response® (IWR), and Computer Telephony Integration (CTI). With the
foundation of these products and capabilities, collectively known as Vista
Interactive Media Response (IMR), we create enterprise-wide voice portals.
These voice portals harness the power of the Internet as well as of wired and
wireless telephones, using natural language speech recognition, for unassisted,
self-service access to applications, information, and transactions between an
enterprise and its customers, employees, suppliers, partners, investors and
other constituents.

We also own and operate an interactive transaction-based Hosted Services
Center for our customers who prefer to outsource their voice processing or web
transaction-based applications completely or in conjunction with their
premises-based installation. These services can be deployed from the
customers premises, our Hosted Services Center, or a combination of the two.
Our Hosted Services include, for example, cable and satellite pay-per-view
orders, employee benefits enrollment, and utility outage applications.

Net revenues for the quarter ended June 30, 2001 were $8.5 million, a
decrease of 30% from the $12.1 million reported for the second quarter of 2000.
For the six-month period ended June 30, 2001, net revenues were $18.8 million,
a decrease of 24% from $24.8 million in the corresponding period in 2000. Net
revenues consist of Licenses, Services, and Hosted Services, which represented
27%, 58% and 15% of net revenues, respectively, for the quarter ended June 30,
2001, and 31%, 56%, and 13% of net revenues, respectively, for the six-month
period ended June 30, 2001.

Revenues from Licenses for the three-month period ended June 30, 2001 were
$2.3 million, a decrease of $3.0 million, or 57%, compared to $5.3 million for
the same period last year. For the six months ended June 30, 2001, revenues
from Licenses were $5.9 million, a decrease of 48% from the $11.3 million
reported for 2000. The decrease for the quarter was the result of customer
orders for the period being delayed into future quarters. Other factors that
contributed to the decrease for the six-month period were a slow down in the
software-based economic sector, a general softening of the U.S. economy, and a
decline of hardware revenues from $2.2 million to $1.0 million, or 55%,
compared to the same six-month period last year. Hardware revenues continue to
decline due to our ongoing transition to a software-based business.

Services revenues decreased $0.4 million from $5.3 million to $4.9
million, or 8%, for the three-month period ended June 30, 2001. For the
six-month period ended June 30, 2001, Services revenues remained constant at
$10.6 million as reported for the same period last year. The Services revenues
consistency in a down year was a direct result of more maintenance and
consulting revenues from the Other Services component of Services, which are
normally associated with a software-based business.

For the quarter ended June 30, 2001, the Application Services component
of Services revenues was $1.8 million: $1.2 million from Applications, $0.2
million from Installations, and $0.4 million from Project Management revenues.
Application Services decreased $0.6 million, or 25%, from the comparable prior
year period in which revenues were $2.4 million: $1.5 million from
Applications, $0.4 million from Installations, and $0.5 million from Project
Management. These decreases are due to a decline in customer orders from the
preceding quarter. For, the six-month period ended June 30, 2001, the
Application Services component of Services revenues remained constant at $4.5
million as compared to the prior year period.

For the quarter ended June 30, 2001, the Maintenance component of
Services revenues was $2.5 million, an increase of $0.4 million, or 19%, over
the comparable prior year quarter revenue of $2.1 million. For the six-month
period ending June 30, 2001, the Maintenance component of Services revenues was
$4.8 million, an increase of $0.7 million, or 17%, over the comparable prior
year six-month revenue of $4.1 million. This increase in the revenue stream
was due to a greater number of Vista software installations throughout 2000
resulting in first time maintenance contracts in 2001.

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For the quarter ended June 30, 2001, the Other Services component of
Services revenues was $0.6 million, a decrease of $0.2 million, or 25%, from
the comparable prior year quarter. For the six-month period ending June 30,
2001, the Other Services revenue component of Services was $1.3 million, a
decrease of $0.7 million, or 35%, over the comparable prior year period revenue
of $2.0 million. In the current six-month period ended June 30, 2001, there
were no revenues from patent infringement lawsuits recognized compared to $0.8
million in the corresponding period last year. We do not anticipate future
revenues from patent lawsuits. The revenue generated in 2001 is from
consulting, training, and change orders.

Hosted Services revenues were $1.3 million, a decrease of $0.2 million, or
13%, for the quarter ended June 30, 2001 compared to prior year quarter ended
June 30, 2000, posting revenues of $1.5 million. For the six months ended June
30, 2001, the revenue was $2.4 million, a $0.5 million decrease, or 17%, from
the six-month comparable period for 2000. The primary reason for the decline
rests with our Home Ticket, a pay-per-view service for cable television
providers. The cable television industry has been deploying new order entry
technologies for consumer purchases of pay-per-view events which do not utilize
toll free 800 numbers. These new technologies have resulted in a downward
trend in transaction processing fees for us; a trend which is expected to
continue. To offset the decline in pay-per-view services, Hosted Services has
offered other out-sourced electronic capabilities including DialExpress
(message delivery), Lead Capture, Speech Enabled Directory, Site Locators,
broadcast faxing, call center processing, and audiotext. However, there can be
no assurances as to whether, or when, such efforts will completely supplant
declining pay-per-view revenues.

Domestic and international revenues for the three-month period ended June
30, 2001 were $5.9 million, or 69%, and $2.6 million, or 31%, of total
revenues, respectively, as compared to $8.2 million, or 68%, and $3.9 million,
or 32%, of total revenues, respectively, for the same period in 2000. For the
six-month period ended June 30, 2001, domestic and international revenues were
$14.0 million, or 74%, and $4.8 million, or 26%, of total revenues,
respectively, compared to $15.2 million, or 61%, and $9.6 million, or 39%, of
total revenues, respectively, for the comparable prior year period. The
decrease in revenues from the comparable prior year six-month period was due to
lower than anticipated customer orders received and, internationally, to a
large customer order recognized in the first half of 2000 of $1.7 million.
International revenues typically consist of a small number of larger orders and
are subject to quarter-to-quarter fluctuations.

GROSS MARGIN

The gross margin percentage for the quarter ended June 30, 2001 was 49% of
net revenues compared to 62% in the comparable prior year quarter. The gross
margin percentage for the six months ended June 30, 2001 was 49% of net
revenues compared to 58% in the comparable period in 2000.

Licenses gross margins for the quarter ending June 30, 2001 remained the
same at 74% as the comparable quarter in 2000. For the six-month period ending
June 30, 2001, gross margins on Licenses also remained the same at 74%. The
results of comparable gross margin percentages in both quarterly and six-month
periods remained constant due primarily to decreases in costs of third party
licenses and in content of hardware components in 2001.

Gross margins on Services for the quarter ending June 30, 2001 decreased
to 45% from 58% in the prior year comparable period, and for the six-month
period ending June 30, 2001, decreased to 43% from 49% in the prior year
comparable period. The decrease in margins for the three-month and six-month
period was primarily due to an increase in outside contractor expense in 2001.
Also, for the six-month period, the decrease in margins was affected by
relatively high margin revenues from the settlement of a patent lawsuit in the
first quarter of 2000.

Gross margins on Hosted Services for the quarter ending June 30, 2001
decreased to 22% from 36% in the comparable prior year quarter, and decreased
to 16% from 29% in the comparable prior year six-month period. Margins
decreased due to declining pay-per-view revenues and the relatively fixed cost
structure of this business segment. We have commenced steps to offset this
decline in margins by offering other outsourcing capabilities. We expect these
other capabilities, however, to require initial application development outlays
which may delay their offsetting effects in the short term.

We include those costs directly associated with the generation of revenue
in the computation of gross margin, including direct labor, application
development, travel, maintenance, customer support, supplies and hardware.
Gross margins will fluctuate on a quarterly basis due to changes in competitive
pressures, sales volume, product mix, variations in the ratio of domestic
versus international sales, or changes in the mix of direct and indirect sales
activity. Accordingly, the gross margins reported for the second quarter and
the first six months of 2001 are not necessarily indicative of the results to
be expected for the full year.

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OPERATING EXPENSES

Operating expenses for the second quarter of 2001 were $6.6 million, a
decrease of $0.1 million, or 1%, from the comparable prior year quarter.
Selling, general and administrative expenses decreased $0.3 million, or 5%,
from the comparable prior year quarter and increased $1.0 million, or 9%, over
the comparable prior year six-month period. The primary reasons for the
increase in expenses in the current six-month period are the $0.6 million in
reorganization costs and the $0.5 million expended to reposition our market
presence during 2001. We repositioned our marked presence to increase demand
for our voice processing products and to create market differentiation and
awareness for our Interactive Media Response solution for Enterprise Voice
Portals. As anticipated with the on-going transition to a software-based
company, research and development expenses for the second quarter of 2001
increased $0.4 million, or 57%, over the comparable prior year quarter and
increased by $0.7 million, or 44%, over the comparable six-month period.

NET INCOME (LOSS)

We reported a net loss of $2.5 million, or $(.22) per diluted share, for
the second quarter of 2001, compared to a net income of $1.0 million, or $.08
per diluted share, for the comparable prior year quarter. For the six-month
period ended June 30, 2001, we reported a net loss of $4.7 million, or $(.42)
per diluted share, compared to a net income of $2.2 million, or $.17 per
diluted share, for the comparable prior year period.

LIQUIDITY AND CAPITAL RESOURCES

We had working capital of $1.7 million at June 30, 2001, as compared to
$6.4 million at December 31, 2000. The current ratio was 1.1:1 and 1.4:1 on
such dates, respectively. Cash, cash equivalents and short-term investments at
the end of the second quarter totaled $4.7 million compared with $7.4 million
at year-end.

For the first six months of 2001, we had net loss of $4.7 million. After
adjustments for non-cash activities and changes in certain balance sheet items,
our operations incurred a negative cash flow of $3.0 million compared to a
positive cash flow of $2.2 million in the same period of 2000. The primary
factors affecting the difference between net income and cash flow were a
decrease in accruals and deferred revenues coupled with a decrease in accounts
receivable caused by the decline in anticipated customer orders.

Cash flows from investing activities, for the purchase of property and
equipment, used $0.9 million during the six months ended June 30, 2001 compared
to $0.5 million for the same period last year.

Cash flows from financing activities totaled $1.2 million for the period
primarily from proceeds from the issuance of common stock and borrowings on a
line of credit. For the same period last year, cash flows used in financing
activities were $2.5 million primarily due to the purchase of treasury stock
totaling $2.8 million and proceeds of $0.6 million from the issuance of common
stock.

In order to support our operations as we restructure our organization, the
$4.0 million line of credit that was executed on October 11, 2000 was
terminated on June 26, 2001. In place of that line of credit, we executed a
one-year, $3.0 million asset-based operating line of credit on June 14, 2001
with another financial institution. This line of credit required a
non-refundable commitment fee of $45,000 and bears interest at the prime rate
plus 4.5%, not to be less than 11% per annum. The minimum interest due each
month is $7,500. We may borrow according to a formula based on 65% of eligible
domestic accounts receivable less than 90 days old, excluding maintenance
receivables and customer deposits. Domestic accounts receivable and inventory
collateralize this line of credit. As of June 30, 2001, we had an outstanding
balance of $1.1 million on that line of credit. Based on the formula, we had
an additional $761,000 in available funds under the line of credit at June 30,
2001. The line of credit requires compliance with certain debt covenants. All
covenants were met for the quarter ended June 30, 2001.

We expect our current cash and cash equivalents combined with future cash
flows from operating activities and the borrowings on the line of credit to be
sufficient to support our operations for the remainder of 2001.

On November 13, 1998, the Board of Directors approved a stock buyback plan
to purchase up to 1.5 million shares of our common stock over the following two
years. We completed the buyback plan during the third quarter of 1999. On

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November 5, 1999, we announced a new buyback plan pursuant to which we were
authorized to acquire up to 1 million shares over a one-year period. On August
8, 2000 the Board of Directors revised this plan by approving the buyback of an
additional 500,000 shares and extending the buyback period to August 8, 2001.
On November 10, 2000, the Board of Directors authorized an additional
500,000-share buyback with no time limitation. As of August 13, 2001, we have
repurchased a total of 3,135,000 shares under these plans since November 13,
1998. We continue to be authorized to repurchase 365,000 additional shares,
but we repurchased no additional shares during the first six months of 2001.

OPERATING BUSINESS SEGMENTS

An operating business segment is defined as a component of an enterprise
that engages in business activities which may earn revenues 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
business 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. Vista is an all-in-one software platform for
enterprise customer call centers which includes Interactive Voice Response,
Interactive Web Response, Computer Telephony Integration, fax on demand,
Automatic Speech Recognition, and other applications.

Services is our operating business segment that includes customer support
in the areas of consulting services, project management, application
development, installation, education services, and maintenance. We generally
sell these services as part of the initial sale or in some cases as post
implementation add-ons. This segment also includes patent infringement
litigation against third parties.

Hosted Services is our operating business segment which provides products
and services including Home Ticket Pay-Per-View, DialExpress, Lead Capture,
Speech Enabled Directory, Site Locator, and a variety of out-sourced electronic
capabilities such as benefits enrollment and broadcast faxing which we offer
through our subsidiary, SIS.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK

Our exposure to market risk for changes in interest rates 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 high
credit quality issuers. We classify all liquid investments with a maturity
date of three months or less as cash equivalents. We classify investments with
a maturity date between three and twelve months as either short-term
investments or marketable securities. The average interest rate on short-term
investments is 4.65%. We do not expect any material loss with respect to our
cash investment portfolio since marketable securities have generally been held
until maturity and unrealized gains and losses are negligible.

Our asset-based operating line of credit bears interest at the prime rate
plus 4.5%. For the first six months of 2001, the prime rate ranged between
9.5% at January 1, 2001 and 6.75% at June 30, 2001. At June 30, 2001, we had
approximately $1.1 million outstanding under this line of credit, all of which
is classified as current and is to be paid from receipts of customer
receivables. Due to the current nature of this debt, the requirement to make
payments on the outstanding balance as receivables are paid by customers, and
the currently low prime rates, we do not believe that market risk related to
this line of credit is significant. Our only long-term liabilities are capital
lease obligations 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 at this point in time.

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

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operating expenses are recorded in pounds sterling. Therefore, our
exposure to foreign currency exchange rate risk occurs when we translate the
financial results of that subsidiary to U.S. dollars in consolidation. 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 are not material
for 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, 2000 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 10-Q and 8-K filings with the
SEC and in other materials we publicly release.




PART II. OTHER INFORMATION




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

The Company held its annual meeting of stockholders on June 14, 2001. As
indicated in the Companys proxy statement, three proposals were presented for
stockholder approval.

The first proposal was the re-election of Michael R. Bruce as director of
the Company for a three-year term. There were no other nominees. The election
results were as follows:

| |  |           |           |                   |  |  |         | 
| |  | --------- | --------- | ----------------- |  |  | ------- | 
| |  | Voted For |           | Withheld Vote For
| |  |           |           |                  
| |  |           | 9,551,755 |                   |  |  | 914,904 | 

The second proposal approved an amendment to the Companys 1995 Long-term
Incentive Plan to increase the number of shares of Company common stock
authorized for issuance thereunder from 2,100,000 to 2,400,000. The amendment
was approved by the following vote: 8,549,079 shares voted for approval of the
proposal; 1,887,738 shares voted against the proposal; and 29,842 shares
abstained from voting.

The third proposal concerned the ratification of KPMG LLP as the Companys
independent auditors for the fiscal year ending December 31, 2001. The
proposal was approved by the following vote: 10,436,869 shares voted for
approval of the proposal; 24,601 shares voted against the proposal; and 5,190
shares abstained from voting.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------



| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | Exhibit (10)  Syntellect Inc. Nonemployee Director Stock Plan
(as amended through May 17, 2001)
|
| | Exhibit (11)  Statement Regarding Computation of Net Income (Loss) Per
Share                   

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| | b) |  | Reports on Form 8-K
| | -- |  | -------------------



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | No current reports on Form 8-K were filed during the three months ended
June 30, 2001

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SIGNATURES

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

|                      |  |     |  |                                                                            
|--------------------- |  | --- |  | ---------------------------------------------------------------------------
|                      |  |     |  | SYNTELLECT INC.                                                            
|                      |  |     |  |                                                                            
|                     
|                     
|                     
|                     
|Date: August 13, 2001 |  | 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)







EXHIBIT INDEX




Exhibit (10)  Syntellect Inc. Nonemployee Director Stock Plan (as
amended through May 17, 2001), p.16




Exhibit (11)  Statement Regarding Computation of Net Income (Loss) Per
Share, p.24

15