##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

For the quarterly period ended March 31, 2002

OR

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

For the transition period from    to

Commission File Number: 0  18323

SYNTELLECT INC.
(Exact name of registrant as specified in its charter)

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

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

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

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

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

11,340,515 shares of common stock, $.01 par value per share, were
outstanding on May 14, 2002.





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TABLE OF CONTENTS



|                               |                                                                                               |                                                                        |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- |  |  |  |  |  | 
|PART I -FINANCIAL INFORMATION
|                               | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                               |                                                                                               | Condensed Consolidated Balance Sheets                                 
|                               |                                                                                               | Condensed Consolidated Statements of Operations and Comprehensive Loss
|                               |                                                                                               | 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 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                    



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES
INDEX

|           |  |                                                                                                                               |  |     
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                               |  | Page
|           |  |                                                                                                                               |  |     
|PART I     |  | FINANCIAL INFORMATION                                                                                                         |  |     
|          
|          
|          
|          
|           |  |                                                                                                                               |  |     
|          
|          
|          
|          
|Item 1.    |  | Financial Statements                                                                                                          |  |     
|          
|          
|          
|          
|           |  |                                                                                                                               |  |     
|          
|          
|          
|          
|           |  | Condensed Consolidated Balance Sheets  As of March 31, 2002 and December 31,
2001                                            |  | 3   
|          
|          
|          
|          
|           |  |                                                                                                                               |  |     
|          
|          
|          
|          
|           |  | Condensed Consolidated Statements of Operations and Comprehensive Loss -
Three Months Ended March 31, 2002 and March 31, 2001 |  | 4   
|          
|          
|          
|          
|           |  |                                                                                                                               |  |     
|          
|          
|          
|          
|           |  | Condensed Consolidated Statements of Cash Flows  Three Months Ended
March 31, 2002 and March 31, 2001                        |  | 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                                                                     |  | 14  
|          
|          
|          
|          
|           |  |                                                                                                                               |  |     
|          
|          
|          
|          
|           |  |                                                                                                                               |  |     
|          
|          
|          
|          
|PART II    |  | OTHER INFORMATION                                                                                                             |  |     
|          
|          
|          
|          
|           |  |                                                                                                                               |  |     
|          
|          
|          
|          
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                              |  | 15  
|          
|          
|          
|          
|           |  |                                                                                                                               |  |     
|          
|          
|          
|          
|           |  |                                                                                                                               |  |     
|          
|          
|          
|          
|SIGNATURES |  | 15                                                                                                                           

2



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##### Table of Contents






PART I -FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




SYNTELLECT INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of March 31, 2002 and 2001
(in thousands, except share amounts)

|                                                |                                                                                                                       |                                            |        |         |        |             |        |              |        |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------ | ----------- | ------ | ------------ | ------ |  |  | 
|                                                |                                                                                                                       |                                            |        |         |        | March 31,   |        | December 31,
|                                                |                                                                                                                       |                                            |        |         |        | 2002        |        | 2001        
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             
|                                                |                                                                                                                       |                                            |        |         |        | (unaudited) |        |              |        | 
|Assets                                         
|                                               
|                                               
|                                               
|                                               
|Current assets:                                 |                                                                                                                       |                                            |        |         |        |             |        |             
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                                                                                             |                                            | $      | 3,007   |        |             | $      | 3,997        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Trade receivables, net of allowance for doubtful accounts of
$139 and $416, respectively                              |                                            |        | 7,169   |        |             |        | 7,617        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Note receivable                                                                                                       |                                            |        | 84      |        |             |        | 84           |       
|                                               
|                                               
|                                               
|                                               
|                                                | Other receivables                                                                                                     |                                            |        | 8       |        |             |        | 5            |       
|                                               
|                                               
|                                               
|                                               
|                                                | Inventories, net                                                                                                      |                                            |        | 471     |        |             |        | 634          |       
|                                               
|                                               
|                                               
|                                               
|                                                | Prepaid expenses                                                                                                      |                                            |        | 1,558   |        |             |        | 1,072        |       
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             
|                                                |                                                                                                                       | Total current assets                       |        |         | 12,297 |             |        |              | 13,409 | 
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             
|Property and equipment, net                     |                                                                                                                       |                                            | 3,422  |         |        |             | 3,772  |             
|                                               
|                                               
|                                               
|                                               
|Note receivable, non-current portion            |                                                                                                                       |                                            | 202    |         |        |             | 202    |             
|                                               
|                                               
|                                               
|                                               
|Other assets                                    |                                                                                                                       |                                            | 727    |         |        |             | 816    |             
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             
|                                                |                                                                                                                       | Total assets                               |        | $       | 16,648 |             |        | $            | 18,199 | 
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             
|Liabilities and Shareholders Equity           
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                            |                                                                                                                       |                                            |        |         |        |             |        |             
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts payable                                                                                                      |                                            | $      | 3,068   |        |             | $      | 2,145        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued liabilities                                                                                                   |                                            |        | 1,700   |        |             |        | 1,923        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Customer deposits                                                                                                     |                                            |        | 322     |        |             |        | 232          |       
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred revenue                                                                                                      |                                            |        | 7,967   |        |             |        | 8,129        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Note payable                                                                                                          |                                            |        |        |        |             |        | 1,449        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Capital lease obligations  current portion                                                                           |                                            |        | 234     |        |             |        | 249          |       
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             
|                                                |                                                                                                                       | Total current liabilities                  |        |         | 13,291 |             |        |              | 14,127 | 
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             
|Deferred revenue  non-current portion          |                                                                                                                       |                                            | 358    |         |        |             |       |             
|                                               
|                                               
|                                               
|                                               
|Capital lease obligations  non-current portion |                                                                                                                       |                                            | 486    |         |        |             | 537    |             
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             
|                                                |                                                                                                                       | Total liabilities                          |        |         | 14,135 |             |        |              | 14,664 | 
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             
|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, 14,662,947 and 14,660,485, respectively |                                            |        | 147     |        |             |        | 147          |       
|                                               
|                                               
|                                               
|                                               
|                                                | Additional paid-in capital                                                                                            |                                            |        | 62,632  |        |             |        | 62,628       |       
|                                               
|                                               
|                                               
|                                               
|                                                | Accumulated deficit                                                                                                   |                                            |        | (48,643 | )      |             |        | (47,621      | )     
|                                               
|                                               
|                                               
|                                               
|                                                | Accumulated other comprehensive loss                                                                                  |                                            |        | (209    | )      |             |        | (205         | )     
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             
|                                                |                                                                                                                       |                                            | 13,927 |         |        |             | 14,949 |             
|                                               
|                                               
|                                               
|                                               
|                                                | Treasury stock, at cost, 3,322,432 shares                                                                             |                                            |        | (11,414 | )      |             |        | (11,414      | )     
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             
|                                                |                                                                                                                       | Total shareholders equity                 |        |         | 2,513  |             |        |              | 3,535  | 
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             
|                                                |                                                                                                                       | Total liabilities and shareholders equity |        | $       | 16,648 |             |        | $            | 18,199 | 
|                                                |                                                                                                                       |                                            |        |         |        |             |        |             

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 and Comprehensive Loss
Three-month periods ended March 31, 2002 and 2001
(in thousands, except per share amounts)
(unaudited)

|                                               |                                         |   |                    |        |      |   |        |        |  
|---------------------------------------------- | --------------------------------------- | - | ------------------ | ------ | ---- | - | ------ | ------ | -
|                                               |                                         |   | Three Months Ended
|                                               |                                         |   | March 31,         
|                                               |                                         |   |                   
|                                               |                                         |   | 2002               |        | 2001
|                                               |                                         |   |                    |        |     
|Net revenue:                                   |                                         |   |                    |        |      |   |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Licenses                                |   | $                  | 3,611  |      |   | $      | 3,625  |  
|                                              
|                                              
|                                              
|                                              
|                                               | Services                                |   |                    | 4,463  |      |   |        | 5,635  |  
|                                              
|                                              
|                                              
|                                              
|                                               | Hosted services                         |   |                    | 990    |      |   |        | 1,086  |  
|                                               |                                         |   |                    |        |      |   |        |       
|                                               | Total net revenue                       |   |                    | 9,064  |      |   |        | 10,346 |  
|                                               |                                         |   |                    |        |      |   |        |       
|Cost of revenue:                               |                                         |   |                    |        |      |   |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Licenses                                |   |                    | 1,024  |      |   |        | 927    |  
|                                              
|                                              
|                                              
|                                              
|                                               | Services                                |   |                    | 2,480  |      |   |        | 3,314  |  
|                                              
|                                              
|                                              
|                                              
|                                               | Hosted services                         |   |                    | 868    |      |   |        | 1,071  |  
|                                               |                                         |   |                    |        |      |   |        |       
|                                               | Total cost of revenue                   |   |                    | 4,372  |      |   |        | 5,312  |  
|                                               |                                         |   |                    |        |      |   |        |       
|Gross margin                                   |                                         |   | 4,692              |        |      |   | 5,034  |       
|                                               |                                         |   |                    |        |      |   |        |       
|Operating expenses:                            |                                         |   |                    |        |      |   |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Selling, marketing and administrative   |   |                    | 4,487  |      |   |        | 6,023  |  
|                                              
|                                              
|                                              
|                                              
|                                               | Research and development                |   |                    | 1,163  |      |   |        | 1,248  |  
|                                               |                                         |   |                    |        |      |   |        |       
|                                               | Total operating expenses                |   |                    | 5,650  |      |   |        | 7,271  |  
|                                               |                                         |   |                    |        |      |   |        |       
|                                               | Operating loss                          |   |                    | (958   | )    |   |        | (2,237 | )
|                                               |                                         |   |                    |        |      |   |        |       
|Other income (expense), net:                   |                                         |   |                    |        |      |   |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Interest income (expense), net          |   |                    | (55    | )    |   |        | 32     |  
|                                              
|                                              
|                                              
|                                              
|                                               | Loss of disposal of assets              |   |                    | (5     | )    |   |        |       |  
|                                              
|                                              
|                                              
|                                              
|                                               | Other income (expense), net             |   |                    | (4     | )    |   |        | (4     | )
|                                               |                                         |   |                    |        |      |   |        |       
|                                               | Total other income (expense), net       |   |                    | (64    | )    |   |        | 28     |  
|                                               |                                         |   |                    |        |      |   |        |       
|                                               | Loss before income taxes                |   |                    | (1,022 | )    |   |        | (2,209 | )
|                                               |                                         |   |                    |        |      |   |        |       
|                                               | Net Loss                                |   | $                  | (1,022 | )    |   | $      | (2,209 | )
|                                               |                                         |   |                    |        |      |   |        |       
|Loss per common share  basic                  |                                         | $ | (0.09              | )      |      | $ | (0.20  | )     
|                                               |                                         |   |                    |        |      |   |        |       
|Loss per common share  diluted                |                                         | $ | (0.09              | )      |      | $ | (0.20  | )     
|                                               |                                         |   |                    |        |      |   |        |       
|Weighted average common share  basic          |                                         |   | 11,340             |        |      |   | 11,194 |       
|                                               |                                         |   |                    |        |      |   |        |       
|Weighted average common share  diluted        |                                         |   | 11,340             |        |      |   | 11,194 |       
|                                               |                                         |   |                    |        |      |   |        |       
|                                               | Net Loss                                |   | $                  | (1,022 | )    |   | $      | (2,209 | )
|                                               |                                         |   |                    |        |      |   |        |       
|Other comprehensive income (loss), net of tax: |                                         |   |                    |        |      |   |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Foreign currency translation adjustment |   |                    | (4     | )    |   |        | (51    | )
|                                               |                                         |   |                    |        |      |   |        |       
|                                               | Total other comprehensive loss          |   |                    | (4     | )    |   |        | (51    | )
|                                               |                                         |   |                    |        |      |   |        |       
|                                               | Comprehensive loss                      |   | $                  | (1,026 | )    |   | $      | (2,260 | )
|                                               |                                         |   |                    |        |      |   |        |       

See accompanying notes to condensed consolidated financial statements.

4



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SYNTELLECT INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three-month periods ended March 31, 2002 and 2001
(in thousands)
(unaudited)

|                                                  |                                                                                           |                                                     |       |                    |        |      |        |        |        |  
|------------------------------------------------- | ----------------------------------------------------------------------------------------- | --------------------------------------------------- | ----- | ------------------ | ------ | ---- | ------ | ------ | ------ | -
|                                                  |                                                                                           |                                                     |       | Three Months Ended
|                                                  |                                                                                           |                                                     |       | March 31,         
|                                                  |                                                                                           |                                                     |       |                   
|                                                  |                                                                                           |                                                     |       | 2002               |        | 2001
|                                                  |                                                                                           |                                                     |       |                    |        |     
|Cash flows from operating activities:             |                                                                                           |                                                     |       |                    |        |      |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net loss                                                                                  |                                                     | $     | (1,022             | )      |      | $      | (2,209 | )     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |                                                     |       |                    |        |      |        |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                           | Depreciation and amortization                       |       |                    | 409    |      |        |        | 415    |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                           | Loss on disposal of property, plant, and equipment  |       |                    | 5      |      |        |        |       |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                           | Provision for doubtful accounts                     |       |                    | 36     |      |        |        | 62     |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                           | Stock option compensation expense                   |       |                    | 1      |      |        |        |       |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                           | Decrease in accounts receivable                     |       |                    | 412    |      |        |        | 5,692  |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                           | Decrease in inventories                             |       |                    | 163    |      |        |        | 371    |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                           | Increase in accounts payable                        |       |                    | 923    |      |        |        | 642    |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                           | Decrease in accrued liabilities                     |       |                    | (223   | )    |        |        | (953   | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                           | Increase (decrease )in deferred revenue             |       |                    | 196    |      |        |        | (2,704 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                           | Increase (decrease) in customer deposits            |       |                    | 90     |      |        |        | (1,904 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                           | Change in other assets and liabilities              |       |                    | (400   | )    |        |        | (352   | )
|                                                  |                                                                                           |                                                     |       |                    |        |      |        |       
|                                                  |                                                                                           | Net cash provided by (used in) operating activities |       |                    | 590    |      |        |        | (940   | )
|                                                  |                                                                                           |                                                     |       |                    |        |      |        |       
|Cash flows from investing activities:             |                                                                                           |                                                     |       |                    |        |      |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase of property and equipment                                                        |                                                     |       | (64                | )      |      |        | (388   | )     
|                                                  |                                                                                           |                                                     |       |                    |        |      |        |       
|                                                  |                                                                                           | Net cash used in investing activities               |       |                    | (64    | )    |        |        | (388   | )
|                                                  |                                                                                           |                                                     |       |                    |        |      |        |       
|Cash flows from financing activities:             |                                                                                           |                                                     |       |                    |        |      |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Repayments on line of credit                                                              |                                                     |       | (1,449             | )      |      |        |       |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from issuance of common stock                                                    |                                                     |       | 3                  |        |      |        | 38     |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Payments on capital lease obligations                                                     |                                                     |       | (66                | )      |      |        | (36    | )     
|                                                  |                                                                                           |                                                     |       |                    |        |      |        |       
|                                                  |                                                                                           | Net cash provided by (used in) financing activities |       |                    | (1,512 | )    |        |        | 2      |  
|                                                  |                                                                                           |                                                     |       |                    |        |      |        |       
|Effect of exchange rates on cash                  |                                                                                           |                                                     | (4    | )                  |        |      | (50    | )     
|                                                  |                                                                                           |                                                     |       |                    |        |      |        |       
|Net decrease in cash and cash equivalents         |                                                                                           |                                                     | (990  | )                  |        |      | (1,376 | )     
|                                                 
|                                                 
|                                                 
|                                                 
|Cash and cash equivalents at beginning of year    |                                                                                           |                                                     | 3,997 |                    |        |      | 7,334  |       
|                                                  |                                                                                           |                                                     |       |                    |        |      |        |       
|Cash and cash equivalents at end of year          |                                                                                           | $                                                   | 3,007 |                    |        | $    | 5,958  |       
|                                                  |                                                                                           |                                                     |       |                    |        |      |        |       
|Supplemental disclosure of cash flow information: |                                                                                           |                                                     |       |                    |        |      |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                           | Cash paid for interest                              |       | $                  | 58     |      |        | $      | 12     |  
|                                                  |                                                                                           |                                                     |       |                    |        |      |        |       

See accompanying notes to condensed consolidated financial statements.

5



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

(1) Basis of Presentation

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

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

(2) Revenue Recognition

Our revenue is derived from three business segments: Licenses, Services
and Hosted Services. Revenue derived from Licenses and from Services is
recognized pursuant to Statement of Position 97-2, Software Revenue
Recognition(SOP 97-2); Statement of Position 98-9, Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions (SOP
98-9); and Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements(SAB No. 101). Revenue derived from Hosted Services is
recognized pursuant to the provisions of SAB No. 101. We strictly adhere to
the revenue recognition criteria under the guidance previously discussed and,
based on the nature of the Licenses and Services transactions, there are no
significant estimates or judgements necessary to apply the revenue recognition
policy. See Item 8Financial Statements and Supplementary Data, Notes to
Consolidated Financial Statements in our Form 10K filed with the SEC for
detailed description of our revenue recognition policy.

(3) Inventories

Inventories consist of the following:

|                                              |  |                |     |              |  |   |     | 
|--------------------------------------------- |  | -------------- | --- | ------------ |  | - | --- | 
|                                              |  | (in thousands)
|                                              |  | March 31,      |     | December 31,
|                                              |  |                |     |             
|                                              |  | 2002           |     | 2001        
|                                              |  |                |     |             
|Finished Goods                                |  | $              | 101 |              |  | $ | 168 | 
|                                             
|                                             
|                                             
|                                             
|Purchased Components                          |  |                | 144 |              |  |   | 236 | 
|                                             
|                                             
|                                             
|                                             
|Repair, warranty, and maintenance inventories |  |                | 226 |              |  |   | 230 | 
|                                              |  |                |     |              |  |   |     | 
|                                              |  | $              | 471 |              |  | $ | 634 | 
|                                              |  |                |     |              |  |   |     | 

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

(4) Earnings (Loss) Per Share Computation

|                                              |  |                                          |        |                |  |   |        |  
|--------------------------------------------- |  | ---------------------------------------- | ------ | -------------- |  | - | ------ | -
|                                              |  | (in thousands, except per share amounts)
|                                              |  | For the three-month periods ended       
|                                              |  | March 31, 2002                           |        | March 31, 2001
|                                              |  |                                          |        |               
|Net loss                                      |  | $                                        | (1,022 | )              |  | $ | (2,209 | )
|                                              |  |                                          |        |                |  |   |        |  
|Weighted average share outstanding  basic    |  |                                          | 11,340 |                |  |   | 11,194 |  
|                                              |  |                                          |        |                |  |   |        |  
|Loss per share  basic                        |  | $                                        | (0.09  | )              |  | $ | (0.20  | )
|                                              |  |                                          |        |                |  |   |        |  
|Weighted average shares outstanding  diluted |  |                                          | 11,340 |                |  |   | 11,194 |  
|                                             
|                                             
|                                             
|                                             
|Effect of dilutive securities  stock options |  |                                          | 0      |                |  |   | 0      |  
|                                              |  |                                          |        |                |  |   |        |  
|Weighted average shares outstanding  diluted |  |                                          | 11,340 |                |  |   | 11,194 |  
|                                              |  |                                          |        |                |  |   |        |  
|Loss per share  diluted                      |  | $                                        | (0.09  | )              |  | $ | (0.20  | )
|                                              |  |                                          |        |                |  |   |        |  

The computation of diluted loss per share for the quarters ended March 31,
2002 and 2001 excluded the effect of incremental common shares of 182,777 and
630,634, respectively, attributable to the assumed exercise of common stock
options because their effect would be anti-dilutive.

(5) Credit Facilities

At March 31, 2002, we had a $2.5 million, asset-based, operating line of
credit with a commercial lending institution, which accrued interest at prime
plus 8.5% per annum with a $7,500 minimum monthly finance charge. We could
borrow according to a formula on 65% of eligible domestic accounts receivable
less than 90 days old, excluding maintenance receivables. On April 30, 2002,
we elected an early termination to that $2.5 million asset-based operating line
of credit. In place of that line of credit, we executed a one-year, $3.0
million, asset-based, operating line of credit on May 14, 2002 with a
commercial banking institution. Any outstanding balance on this line of credit
incurs interest at a rate of prime plus 3.25% per annum plus a collateral
handling fee of .25% with a minimum monthly finance charge of $5,000 per month.
At March 31, 2002, the prime rate was 4.75%; the interest rate would have
calculated to be 8% per annum at that date. We may borrow according to a
formula based on 80% of eligible accounts receivable less than 90 days old,
including certain maintenance receivables, selected foreign receivables, and
excluding customer deposits. The commercial bank has a perfected first
priority security interest in all company assets. In addition, all current
depository accounts will be relocated to the new commercial bank.

Furthermore, we issued fully vested warrants to purchase 30,000 shares of
our common stock to this commercial banking institution. These warrants expire
on May 14, 2007. The exercise price is $1.17 per share, which
approximated the market price of the underlying common stock on
the date of grant. The value of the warrants issued in connection with the
line of credit agreement will be capitalized on the balance sheet and amortized
as interest expense over the life of the agreement.

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

(6) 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:

|                                  |  |                |        |          |  |                 |       |       |  |   |       |   |  |   |        |  
|--------------------------------- |  | -------------- | ------ | -------- |  | --------------- | ----- | ----- |  | - | ----- | - |  | - | ------ | -
|                                  |  | (in thousands)
|                                  |  | Licenses       |        | Services |  | Hosted Services |       | Total
|                                  |  |                |        |          |  |                 |       |      
|Three-months ended March 31, 2002 |  |                |        |          |  |                 |       |       |  |   |       |   |  |   |        |  
|Revenue from customers            |  | $              | 3,611  |          |  | $               | 4,463 |       |  | $ | 990   |   |  | $ | 9,064  |  
|                                 
|                                 
|                                 
|                                 
|Depreciation and amortization     |  |                | 153    |          |  |                 | 76    |       |  |   | 180   |   |  |   | 409    |  
|                                 
|                                 
|                                 
|                                 
|Segment Loss before income taxes  |  |                | (968   | )        |  |                 | (27   | )     |  |   | (28   | ) |  |   | (1,022 | )
|                                 
|                                 
|                                 
|                                 
|Expenditures for segment assets   |  |                | 47     |          |  |                 | 17    |       |  |   |      |   |  |   | 64     |  
|                                  | 
|                                 
|                                 
|                                 
|Three-months
ended March 31, 2001 |  |                |        |          |  |                 |       |       |  |   |       |   |  |   |        |  
|Revenue from customers            |  | $              | 3,625  |          |  | $               | 5,635 |       |  | $ | 1,086 |   |  | $ | 10,346 |  
|                                 
|                                 
|                                 
|                                 
|Depreciation and amortization     |  |                | 168    |          |  |                 | 82    |       |  |   | 165   |   |  |   | 415    |  
|                                 
|                                 
|                                 
|                                 
|Segment Loss before income taxes  |  |                | (1,261 | )        |  |                 | (640  | )     |  |   | (308  | ) |  |   | (2,209 | )
|                                 
|                                 
|                                 
|                                 
|Expenditures for segment assets   |  |                | 174    |          |  |                 | 86    |       |  |   | 128   |   |  |   | 388    |  

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

RESULTS OF OPERATIONS

Backlog

Our backlog represents the amounts of unfilled, but firm, orders received.
We expect to earn more than half of the March 31, 2002 backlog during the next
operating quarter. The following table summarizes our revenue backlog by
business segment on March 31, 2002 and March 31, 2001.

|                        |  |           |       |            |  |           |    |            |  |   |       |  |  |  |    |  
|----------------------- |  | --------- | ----- | ---------- |  | --------- | -- | ---------- |  | - | ----- |  |  |  | -- | -
|                        |  | March 31, |       | % of total |  | March 31, |    | % of total
|Current backlog         |  | 2002      |       | backlog    |  | 2001      |    | backlog   
|                        |  |           |       |            |  |           |    |           
|Licenses backlog        |  | $         | 128   |            |  |           | 3  | %          |  | $ | 153   |  |  |  | 4  | %
|                       
|                       
|                       
|                       
|Services backlog        |  |           | 4,395 |            |  |           | 92 | %          |  |   | 3,793 |  |  |  | 96 | %
|                       
|                       
|                       
|                       
|Hosted Services backlog |  |           | 233   |            |  |           | 5  | %          |  |   |      |  |  |  | 0  | %
|                        |  |           |       |            |  |           |    |            |  |   |       |  |  |  |    |  
|                        |  | $         | 4,756 |            |  |           |    |            |  | $ | 3,946 |  |  |  |    |  
|                        |  |           |       |            |  |           |    |            |  |   |       |  |  |  |    |  

Our backlog of Licenses decreased from $1.6 million at December 31, 2001
to $0.1 million at March 31, 2002, a decrease of $1.5 million. That $1.5
million decrease in backlog was recognized as Licenses revenue during the first
quarter of 2002. The backlog of Licenses at December 31, 2000 decreased from
$2.8 million to $0.1 million at March 31, 2001 resulting in $2.7 million of
Licenses revenue recognized in the first quarter of 2001. The Licenses backlog
at the quarter ended March 31, 2002 and 2001 was $0.1 million for both periods.
Historically, we had experienced a sharp decline in orders booked in the
first quarter of a year when compared to the fourth quarter of the previous
year. The bookings decline for the first quarter of 2002 of only 27% compared
to the sharp decline of 49% for the first quarter of 2001 was a result of our
sales organizations effort to shorten the sales cycle.

Our Services backlog decreased $0.3 million during the first quarter of
2002 compared to a decrease of $3.3 million during the first quarter of 2001.
The backlog decreases as we complete orders and recognize those orders as
revenue. Currently, our Services backlog equates to an amount approximating
two quarters of Services revenue at current capacity and is sufficient for us
to attain our planned revenue for the first three quarters of 2002.
Furthermore, Services backlog is $0.6 million greater at March 31, 2002 than it
was at March 31, 2001.

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

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Net Revenue

The following table summarizes our net revenue performance (in thousands)
for the three-month period ended March 31, 2002 and 2001.

|                      |                         |           |         |            |      |           |         |            |   |       |        |  |  |    |     |  
|--------------------- | ----------------------- | --------- | ------- | ---------- | ---- | --------- | ------- | ---------- | - | ----- | ------ |  |  | -- | --- | -
|                      |                         | March 31, |         | % of total |      | March 31, |         | % of total
|Current results       | 2002                    |           | revenue |            | 2001 |           | revenue
|                      |                         |           |         |            |      |           |        
|Licenses              | $                       | 3,611     |         |            |      | 40        | %       |            | $ | 3,625 |        |  |  | 43 | %  
|                     
|                     
|                     
|                     
|Services              |                         |           |         |            |      |           |         |            |   |       |        |  |  |    |     |  
|                     
|                     
|                     
|                     
|                      | Application development |           | 1,117   |            |      |           | 12      | %          |   |       | 2,023  |  |  |    | 20  | %
|                     
|                     
|                     
|                     
|                      | Project management      |           | 226     |            |      |           | 3       | %          |   |       | 396    |  |  |    | 4   | %
|                     
|                     
|                     
|                     
|                      | Maintenance             |           | 2,393   |            |      |           | 26      | %          |   |       | 2,263  |  |  |    | 22  | %
|                     
|                     
|                     
|                     
|                      | Installation            |           | 227     |            |      |           | 3       | %          |   |       | 333    |  |  |    | 3   | %
|                     
|                     
|                     
|                     
|                      | Other services          |           | 500     |            |      |           | 6       | %          |   |       | 620    |  |  |    | 6   | %
|                      |                         |           |         |            |      |           |         |            |   |       |        |  |  |    |     |  
|Total Services        |                         | 4,463     |         |            |      | 49        | %       |            |   | 5,635 |        |  |  | 54 | %  
|                     
|                     
|                     
|                     
|                      | Hosted Services         |           |         |            |      |           |         |            |   |       |        |  |  |    |     |  
|                     
|                     
|                     
|                     
|                      | Home Ticket             |           | 284     |            |      |           | 3       | %          |   |       | 547    |  |  |    | 5   | %
|                     
|                     
|                     
|                     
|                      | Voice services          |           | 130     |            |      |           | 1       | %          |   |       | 154    |  |  |    | 1   | %
|                     
|                     
|                     
|                     
|                      | Other hosted services   |           | 576     |            |      |           | 6       | %          |   |       | 385    |  |  |    | 4   | %
|                      |                         |           |         |            |      |           |         |            |   |       |        |  |  |    |     |  
|Total Hosted Services |                         | 990       |         |            |      | 11        | %       |            |   | 1,086 |        |  |  | 10 | %  
|                      |                         |           |         |            |      |           |         |            |   |       |        |  |  |    |     |  
|                      | Total net revenue       | $         | 9,064   |            |      |           | 100     | %          |   | $     | 10,346 |  |  |    | 100 | %
|                      |                         |           |         |            |      |           |         |            |   |       |        |  |  |    |     |  
|Domestic              | $                       | 7,508     |         |            |      | 83        | %       |            | $ | 8,100 |        |  |  | 79 | %  
|                     
|                     
|                     
|                     
|International         |                         | 1,556     |         |            |      | 17        | %       |            |   | 2,200 |        |  |  | 21 | %  
|                      |                         |           |         |            |      |           |         |            |   |       |        |  |  |    |     |  
|                      | Total net revenue       | $         | 9,064   |            |      |           |         |            |   | $     | 10,300 |  |  |    |     |  
|                      |                         |           |         |            |      |           |         |            |   |       |        |  |  |    |     |  

Net revenue for the quarter ended March 31, 2002 was $9.1 million, a
decrease of $1.2 million or 12% from the $10.3 million reported for the first
quarter of 2001. Net revenue consists of Licenses, Services, and Hosted
Services, which represented 40%, 49%, and 11% of net revenue, respectively, for
the quarter ended March 31, 2002, and 43%, 54% and 10% of net revenue,
respectively, for the comparable prior year period.

Licenses revenue for the period ended March 31, 2002 and 2001 remained
constant at $3.6 million. However, we have experienced Licenses revenue
increases for the past three sequential quarters. At December 31, 2000,
approximately $1.6 million of Licenses revenue originally shipped and invoiced
in the fourth quarter of 2000 was deferred in compliance with our revenue
recognition policy regarding clear evidence of an arrangement, thereby
increasing backlog as of December 31, 2000. Those orders were subsequently
recognized as revenue in the first quarter of 2001. Licenses revenue
recognized as a result from the decrease in Licenses backlog for the quarters
ended March 31, 2002 and 2001 was $1.4 million and $2.7 million, respectively.
The amount of Licenses revenue recognized from new orders for those same
periods was $2.1 million and $0.9 million, respectively, an increase of $1.2
million or 129% of Licenses revenue recognized from new orders for the quarter.

Services revenue decreased $1.1 million or 21% from $5.6 million to $4.5
million for the three-month period ended March 31, 2002 when compared to the
same period in 2001. The change in Services revenue consists of application
services, $0.9 million decrease; project management, $0.1 million decrease;
maintenance, $0.1 million increase; installation, $0.1 million decrease; and
other services, $0.1 million decrease. Services revenue from application
services, installations, and project management is generally recognized within
six months following the quarter in which an order has been accepted. During
that time period, the Services revenue is reported as backlog. We experienced a
sharp decrease in order bookings during the second and third quarters of 2001
compared to the previous year. Services

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revenue recognized as a result of the decrease in Services backlog for the
quarters ended March 31, 2002 and 2001 was $0.2 million and $3.3 million,
respectively. Therefore, the amount of Services revenue recognized from new
orders for those same periods was $4.2 million and $2.3 million, respectively,
an increase of $1.8 million or 78% of Services revenue recognized from new
orders for the quarter. This increase in Services revenue recognized from new
orders is a direct result of our efforts to shorten the turn-around of our
application services and improve the delivery and implementation of those
applications.

Hosted Services revenue for the period ended March 31, 2002 was $1.0
million compared to $1.1 million for the same period in 2001, a decrease of
$0.1 million or 9%. Hosted Services consists of Home Ticket, voice services,
and other hosted services, which represented 29%, 13%, and 58% of Hosted
Services revenue, respectively, for the quarter ended March 31, 2002, and 51%,
14% and 35% of Hosted Services revenue, respectively, for the comparable prior
year period. Home Ticket, a pay-per-view service for cable television
providers, revenue for the first quarter of 2002 declined $0.2 million or 48%
when compared to the first quarter of 2001. The cable TV industry has been
deploying digital order entry technologies for consumer purchases of
pay-per-view events, which does not utilize our technology. These digital
technologies have resulted in a downward trend in our transaction processing
fees. To offset the decline in pay-per-view services, Hosted Services has
offered other outsourced electronic capabilities including DialExpress (message
delivery), Lead Capture, Speech Enabled Directory, Site Locator, disaster
mitigation, disaster recovery, electronic payment processing, broadcast faxing,
and call center processing. The revenue resulting from these new hosted
services was $0.5 million for the quarter ended March 31, 2002, a $0.2 million
or 50% increase compared to the quarter ended March 31, 2001. Voice services
provide media voice files for all of our application services, hosted and
on-site systems. We experienced a slight revenue decrease of $25,000 in voice
services quarter-over-quarter, a direct result of the decrease in the
application services revenue.

Domestic and International revenue for the period ended March 31, 2002 was
$7.5 million or 83% and $1.5 million or 17% of total revenue, respectively,
compared to $8.1 million or 79% and $2.2 million or 21% of total revenue,
respectively, for the same period in 2001.

Gross Margin

The following table summarizes our gross margin performance (in thousands)
for the three-month period ended March 31, 2002 and 2001.

|                   |                 |      |           |          |              |      |           |          |              |   |       |       |  |  |    |    |  
|------------------ | --------------- | ---- | --------- | -------- | ------------ | ---- | --------- | -------- | ------------ | - | ----- | ----- |  |  | -- | -- | -
|                   |                 |      | March 31, |          | % of revenue |      | March 31, |          | % of
revenue
|Current results    |                 | 2002 |           | category |              | 2001 |           | category
|                   |                 |      |           |          |              |      |           |         
|                   | Licenses        |      | $         | 2,587    |              |      |           | 72       | %            |   | $     | 2,698 |  |  |    | 74 | %
|                  
|                  
|                  
|                  
|                   | Services        |      |           | 1,983    |              |      |           | 44       | %            |   |       | 2,321 |  |  |    | 41 | %
|                  
|                  
|                  
|                  
|                   | Hosted Services |      |           | 122      |              |      |           | 12       | %            |   |       | 15    |  |  |    | 1  | %
|                   |                 |      |           |          |              |      |           |          |              |   |       |       |  |  |    |   
|Total gross margin |                 | $    | 4,692     |          |              |      | 52        | %        |              | $ | 5,034 |       |  |  | 49 | % 
|                   |                 |      |           |          |              |      |           |          |              |   |       |       |  |  |    |   

The gross margin percentage for the quarter ended March 31, 2002 was 52%
of net revenue when compared to 49% in the first quarter of the prior year.
The decrease in net revenue of $1.2 million would have produced a negative
impact of approximately $0.1 million. The negative impact of the revenue volume
was offset by the change in the gross margin percentage of $0.2 million, the
combination of which resulted in a positive net effect to the gross margin of
$0.1 million.

Gross margin for Licenses decreased to 72% from 74% between comparable
quarters due to our product mix shifting towards natural speech recognition,
which has a higher cost of third party licenses. Natural speech content
continues to grow to 35% of Licenses revenue in the first quarter of 2002
compared to 6% in the first quarter of 2001.

Gross margin for Services increased to 44% from 41%. In the first half of
2001, we initiated programs to improve the long-term Services margin. The
improvement in the gross margin percentage resulted from labor efficiencies and
cost controls, including the reduced use of third party professional services.
In addition, our natural speech and consulting services allow for an increased
utilization of our current resources at higher billing rates. We plan to
continue to improve our Services margin and we believe we can continue to
improve the Services margin during 2002.

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Hosted Services gross margin increased to 12% from 1% for the quarters
ended March 31, 2002 and 2001, respectively. The gross margin for our Hosted
Services improved during the first quarter of 2002 due to a reduced number of
employees, decreased telecommunication costs, and decreased costs from third
party maintenance contracts in the amounts of $0.3 million, $72,000, and
$27,000, respectively, for a total savings of $0.4 million. The direct costs
associated with our new hosted service offerings are lower than those
associated with the labor-intensive pay-per-view service. Telecommunications
costs decreased because the new hosted services offerings can share telephone
lines while the pay-per-view product utilizes dedicated circuits. The costs
associated with third party maintenance contracts decreased as a result of a
reduction in the number of servers required to support the pay-per-view
customers and the lower costs associated with the maintenance of the new hosted
services platforms. Because our current Hosted Services center operates at
significantly less than full capacity and Hosted Services overhead is fixed by
nature, any increases in Hosted Services revenue will more efficiently utilize
the existing infrastructure while adding little incremental cost. As a result,
the anticipated revenue increase in 2002 should positively impact our gross
margin. We have restated the gross margin for Hosted Services to reflect the
effect of depreciation for the first quarter of 2001, which has been
reclassified from selling, marketing, and administrative expenses.

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

Operating Expenses

The following table summarizes our operating expense experience (in
thousands) for the three-month period ended March 31, 2002 and 2001.

|                                       |  |      |           |         |            |      |           |         |            |   |       |  |  |  |    |   | 
|-------------------------------------- |  | ---- | --------- | ------- | ---------- | ---- | --------- | ------- | ---------- | - | ----- |  |  |  | -- | - | 
|                                       |  |      | March 31, |         | % of total |      | March 31, |         | % of total
|Current Results                        |  | 2002 |           | revenue |            | 2001 |           | revenue
|                                       |  |      |           |         |            |      |           |        
|Selling, marketing, and administrative |  | $    | 4,487     |         |            |      | 50        | %       |            | $ | 6,023 |  |  |  | 58 | %
|                                      
|                                      
|                                      
|                                      
|Research and development               |  |      | 1,163     |         |            |      | 13        | %       |            |   | 1,248 |  |  |  | 12 | %
|                                       |  |      |           |         |            |      |           |         |            |   |       |  |  |  |    |  
|Total operating expenses               |  | $    | 5,650     |         |            |      | 62        | %       |            | $ | 7,271 |  |  |  | 70 | %
|                                       |  |      |           |         |            |      |           |         |            |   |       |  |  |  |    |  

Operating expenses for the first quarter of 2002 were $5.7 million, a
decrease of $1.6 million or 22% from the first quarter of 2001 of $7.3 million.
In an overall cost cutting strategy, all areas of costs were evaluated and
excess spending eliminated. Selling, marketing and administrative expenses
decreased $1.5 million or 26% compared to the prior year period. The reduced
employee costs, including travel, relocation, and recruiting, accounted for
approximately $0.5 million of the decrease experienced during the first
quarter. We experienced an additional decrease of $0.3 million in other
general administrative expenses such as professional fees, telephone,
depreciation, shareholder costs, and insurance. At March 31, 2001, we incurred
a $0.6 million charge for a corporate restructuring. Also in the first quarter
of 2001, we incurred $0.2 million to reposition the marketing structure to
enhance our corporate image, increase demand for our voice processing products,
and create market differentiation and awareness for our Interactive Media
Response solution for Enterprise Voice Portals. Due to our ongoing cost
controls combined with our commitment to reinvesting in future product
development, research and development expenses for the quarter ended March 31,
2002 remained relatively stable with a decrease of $0.1 million or 7% compared
to the first quarter of the prior year.

LIQUIDITY AND CAPITAL RESOURCES

For the past two quarters, we have generated a positive cash flow from
operations. This has enables us to operate strictly out of operating cash
flows without drawing cash from our operating line of credit since January
2002. That cash flow from operations has also enabled us to pay down the line
of credit and maintain the zero balance throughout the first quarter.
Additionally, we were able to secure a new line of credit with a commercial
banking facility under more favorable terms than the previous line of credit.

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Cash and cash equivalents at March 31, 2002 were $3.0 million and at
December 31, 2001 were $4.0 million, a decrease of $1.0 million. Our working
capital deficit increased from $0.7 million at December 31, 2001 to a deficit
of $1.0 million at March 31, 2002. The ratio of our current assets to current
liabilities decreased from 0.95 to 0.93 for the same periods. Our net loss of
$1.0 million and repayment of the line of credit were the dominant factors
affecting our cash position and negative change in working capital.

For the first three months of 2002, we generated cash from operating
activities of $0.6 million compared to cash used by operating activities of
$0.9 million for the quarter ended March 31, 2001, a positive change of $1.5
million. The primary factor affecting the difference between net loss and cash
provided for the three months ended March 31, 2002 was the positive effect of
the decrease in accounts receivable of $0.4 million, the increase in accounts
payable and accrued liabilities of $0.7 million, and the
non-cash expenses,
such as depreciation and provision for doubtful accounts, in the amount of $0.4
million.

Cash used in investing activities, namely the purchase of property and
equipment, was $64,000 during the quarter ended March 31, 2002 as compared to
$0.4 million during the quarter ended March 31, 2001.

Cash used in financing activities was $1.5 million during the quarter
ended March 31, 2002 as compared to $2,000 provided by financing activities
during the quarter ended March 31, 2001. During the quarter, we repaid the
line of credit in the amount of $1.5 million and made payments on capital lease
obligations of $66,000.

The Board of Directors approved certain stock buy-back plans under which
we are authorized to repurchase our shares of common stock. As of May 14,
2002, we had repurchased a total of 3,322,432 shares under these plans since
November 13, 1998 at an average share price of $3.43 and are authorized to
repurchase 365,000 additional shares. We made no stock repurchases since the
fourth quarter of 2000.

Internal Sources of Liquidity

During the year ended December 31, 2001, we began several initiatives to
address our sales efforts, our cost structures, our cash management and our
Services delivery efficiencies in light of the changing economic environment.
In the first quarter of 2002, we continue to see favorable results from these
efforts. We believe the continued benefits of these measures will allow us to
generate sufficient operating funds from internal sources to successfully run
our business in the year ahead. We expect our current cash and cash
equivalents, combined with future cash flows from operating activities, to be
sufficient to support our operations for the remainder of 2002.

At December 31, 2001, the average time required to collect an accounts
receivable, or days sales outstanding (DSO), was 58 days, compared to 60
days at December 31, 2000. At March 31, 2002, we were able to decrease the DSO
to 56 days. We continue to intensify our collection efforts with the purpose
of further decreasing the DSO to 55 days. We expect these improved collection
efforts could provide additional operating cash of approximately $0.1 million
in 2002.

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

External Sources of Liquidity

On April 30, 2002, we elected an early termination to our $2.5 million
asset-based operating line of credit with a commercial lending institution. In
place of that line of credit, we executed a one-year, $3.0 million,
asset-based, operating line of credit on May 14, 2002 with a commercial banking
institution. The new line of credit has lower interest rates, lower minimum
monthly interest payments, lower facility fee, less stringent covenants, and an
increased borrowing base. We will utilize the line, if necessary, for
operational cash needs, but do not expect to borrow on the line of credit due
to our efforts to generate cash from internal activities, a lower cost
structure, and increased management efforts to control spending.

We have held discussions with third parties regarding warrant backed debt
financing and other alternative financing arrangements in the event that we
need funding beyond our ability to generate cash internally and borrow on the
line of credit.

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OPERATING BUSINESS SEGMENTS

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

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

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

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




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK

Our exposure to market risk in connection with interest rate changes
relates to our cash investment portfolio. Our general policy is to limit the
risk of principal loss and to ensure the safety of invested funds by limiting
market and interest rate risk. We place our investments in instruments with
highly rated issuers. We classify all liquid investments with a maturity date
of three months or less as cash equivalents. As of March 31, 2002, our earned
interest rate on our cash equivalents was 1.16% compared to 1.61% at December
31, 2001. We do not expect any material loss with respect to our cash
investment portfolio.

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.

Our asset-based operating line of credit bears interest at prime plus
3.25%. During the first quarter of 2002, the prime rate has held steady at
4.75%. At May 14, 2002, we did not have an outstanding balance under this line
of credit. If we did have an outstanding balance, all of it would be
classified as current and paid from receipts of customer receivables. Due to
the current nature of the debt, the requirement to make payments on the
outstanding balance as receivables are collected, and the currently low prime
rate, we do not believe that market risk related to this line of credit is
significant. We anticipate no material exposure to market risk in connection
with interest rate changes, as they relate to our current liabilities.

FOREIGN CURRENCY EXCHANGE RATE RISK

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

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ADDITIONAL CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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




PART II  OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits                                                                       
| | --- |  | -------------------------------------------------------------------------------
|
| |     |  | No exhibits are filed with this Form 10-Q.                                     
|
| | (b) |  | Reports on Form 8-K                                                            
|
| |     |  | No reports on Form 8-K have been filed during the quarter ended March 31, 2002.




SIGNATURES

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

|      |  |              |  |                                                                                                                                                                 |  |                      
|----- |  | ------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------
|Date: |  | May 14, 2002 |  | SYNTELLECT INC.                                                                                                                                                
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|      |  |              |  |                                                                                                                                                                 |  |                      
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|      |  |              |  | 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)

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