##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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

For the quarterly period ended September 30, 2001

OR

|      |  |                                                         
|----- |  | --------------------------------------------------------
|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|     
|     
|     
|     
|      |  | SECURITIES EXCHANGE ACT OF 1934                         

|                               |  |    |  |  |  | 
|------------------------------ |  | -- |  |  |  | 
|For the transition period from |  | to | 
|                               |  |    | 

Commission File Number: 0-18323

SYNTELLECT INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

|    |   |  |    |  |  | 
|--- | - |  | -- |  |  | 
|YES | X |  | NO | 
|    |   |  |    | 

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

11,292,070 shares of common stock, $.01 par value per share, were
outstanding on October 31, 2001



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TABLE OF CONTENTS



|                               |                                                                                                    |                                                      |  |  |  |  |  | 
|------------------------------ | -------------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM 1. FINANCIAL STATEMENTS                                                                      
|                               |                                                                                                    | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                                    | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                                    | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                                    | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                               | ITEM&NBSP;2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | ITEM&NBSP;3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                            
|PART II. OTHER INFORMATION    
|                               | ITEM&NBSP;6. EXHIBITS AND REPORTS ON FORM&NBSP;8-K                                                
|SIGNATURES                    
|EXHIBIT&NBSP;INDEX            
|EX-10                         
|EX-11                         



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES
INDEX

|                              |                                                                                              |                                                                                           |                                                                                                                                             |    |      |   |  |  |  |  | 
|----------------------------- | -------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | - |  |  |  |  | 
|                              |                                                                                              |                                                                                           |                                                                                                                                             |    | Page |   |  |  | 
|                              |                                                                                              |                                                                                           |                                                                                                                                             |    |      |   |  |  | 
|PART I. FINANCIAL INFORMATION |                                                                                              |                                                                                           |                                                                                                                                             |   
|                             
|                             
|                             
|                             
|                              | Item 1.Financial Statements                                                                  |                                                                                           |                                                                                                                                             |    |     
|                             
|                             
|                             
|                             
|                              |                                                                                              |                                                                                           | Condensed Consolidated Balance Sheets 
September 30, 2001 (unaudited) and December 31, 2000                                               |    |      | 3 | 
|                             
|                             
|                             
|                             
|                              |                                                                                              |                                                                                           | Condensed Consolidated Statements of Operations  Three Months and Nine Months
Ended September 30, 2001 and September 30, 2000 (unaudited) |    |      | 4 | 
|                             
|                             
|                             
|                             
|                              |                                                                                              |                                                                                           | Condensed Consolidated Statements of Cash Flows 
Nine Months Ended September 30, 2001 and September 30, 2000 (unaudited)                  |    |      | 5 | 
|                             
|                             
|                             
|                             
|                              |                                                                                              |                                                                                           | Notes to Condensed Consolidated Financial Statements                                                                                        |    |      | 6 | 
|                             
|                             
|                             
|                             
|                              | Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                           |                                                                                                                                             | 9  |     
|                             
|                             
|                             
|                             
|                              | Item 3.Quantitative and Qualitative Disclosure about Market Risk                             |                                                                                           |                                                                                                                                             | 12 |     
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION    |                                                                                              |                                                                                           |                                                                                                                                             |   
|                             
|                             
|                             
|                             
|                              | Item 6.Exhibits and Reports on Form 8-K                                                      |                                                                                           |                                                                                                                                             | 14 |     
|                             
|                             
|                             
|                             
|SIGNATURES                    |                                                                                              |                                                                                           | 14                                                                                                                                          |   
|                             
|                             
|                             
|                             
|EXHIBITS                      |                                                                                              |                                                                                           |                                                                                                                                             |   
|                             
|                             
|                             
|                             
|                              | Exhibit Index                                                                                |                                                                                           |                                                                                                                                             | 14 |     
|                             
|                             
|                             
|                             
|                              |                                                                                              | Exhibit (10)  By-Laws of Syntellect Inc. as Amended and Restated Through August 9, 2001 |                                                                                                                                             |    | 15   |  
|                             
|                             
|                             
|                             
|                              |                                                                                              | Exhibit (11)  Syntellect Inc. Computation of Net Income (Loss) Per Share                |                                                                                                                                             |    | 24   |  



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##### Table of Contents






PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




SYNTELLECT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                                 |                                                                                                                       |  |                                            |                           |   |               |        |              |   |        |        | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------------------------- | - | ------------- | ------ | ------------ | - | ------ | ------ | 
|                                                 |                                                                                                                       |  |                                            |                           |   | September 30, |        | December 31,
|                                                 |                                                                                                                       |  |                                            |                           |   | 2001          |        | 2000        
|                                                 |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                 |                                                                                                                       |  |                                            |                           |   | (unaudited)   |        |              |   |       
|ASSETS                                           |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                
|                                                
|                                                
|                                                
|Current assets:                                  |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                
|                                                
|                                                
|                                                
|                                                 | Cash and cash equivalents                                                                                             |  | $                                          | 3,689                     |   |               | $      | 7,334        |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Trade receivables, net of allowance for doubtful
accounts of $234 and $225, respectively                              |  |                                            | 7,547                     |   |               |        | 12,423       |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Other receivables                                                                                                     |  |                                            | 8                         |   |               |        | 9            |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Note receivable                                                                                                       |  |                                            | 67                        |   |               |        | 57           |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Inventories, net                                                                                                      |  |                                            | 709                       |   |               |        | 1,415        |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Prepaid expenses                                                                                                      |  |                                            | 1,197                     |   |               |        | 711          |  
|                                                 |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                 |                                                                                                                       |  | Total current assets                       |                           |   | 13,217        |        |              |   | 21,949 |       
|                                                
|                                                
|                                                
|                                                
|Property and equipment, net                      |                                                                                                                       |  | 4,270                                      |                           |   |               | 3,814  |             
|                                                
|                                                
|                                                
|                                                
|Note receivable, non-current portion             |                                                                                                                       |  | 219                                        |                           |   |               | 270    |             
|                                                
|                                                
|                                                
|                                                
|Restricted cash                                  |                                                                                                                       |  |                                           |                           |   |               | 75     |             
|                                                
|                                                
|                                                
|                                                
|Other assets                                     |                                                                                                                       |  | 1,002                                      |                           |   |               | 993    |             
|                                                 |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                 |                                                                                                                       |  | Total assets                               |                           | $ | 18,708        |        |              | $ | 27,101 |       
|                                                 |                                                                                                                       |  |                                            |                           |   |               |        |             
|LIABILITIES AND SHAREHOLDERS EQUITY             |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                
|                                                
|                                                
|                                                
|Current liabilities:                             |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                
|                                                
|                                                
|                                                
|                                                 | Accounts payable                                                                                                      |  | $                                          | 2,905                     |   |               | $      | 2,934        |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Accrued liabilities                                                                                                   |  |                                            | 1,998                     |   |               |        | 3,186        |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Customer deposits                                                                                                     |  |                                            | 917                       |   |               |        | 2,916        |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Deferred revenue                                                                                                      |  |                                            | 6,280                     |   |               |        | 6,421        |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Line of credit                                                                                                        |  |                                            | 1,422                     |   |               |        |             |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Capital lease obligations                                                                                             |  |                                            | 247                       |   |               |        | 151          |  
|                                                 |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                 |                                                                                                                       |  |                                            | Total current liabilities |   |               | 13,769 |              |   |        | 15,608 | 
|                                                
|                                                
|                                                
|                                                
|Capital lease obligations  less current portion |                                                                                                                       |  | 534                                        |                           |   |               | 316    |             
|                                                 |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                 |                                                                                                                       |  | Total liabilities                          |                           |   | 14,303        |        |              |   | 15,924 |       
|                                                 |                                                                                                                       |  |                                            |                           |   |               |        |             
|Shareholders equity:                            |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                
|                                                
|                                                
|                                                
|                                                 | Preferred stock, $.01 par value per share. Authorized
2,500,000 shares; no shares issued or outstanding               |  |                                            |                          |   |               |        |             |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Common stock, $.01 par value per share. Authorized
25,000,000 shares; issued, 14,616,072 and 14,505,298,
respectively |  |                                            | 146                       |   |               |        | 145          |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Additional paid-in capital                                                                                            |  |                                            | 62,556                    |   |               |        | 62,311       |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Accumulated deficit                                                                                                   |  |                                            | (46,666                   | ) |               |        | (39,696      | )
|                                                
|                                                
|                                                
|                                                
|                                                 | Accumulated other comprehensive loss                                                                                  |  |                                            | (217                      | ) |               |        | (169         | )
|                                                 |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                 |                                                                                                                       |  | 15,819                                     |                           |   |               | 22,591 |             
|                                                
|                                                
|                                                
|                                                
|                                                 | Treasury stock, at cost, 3,332,432 shares                                                                             |  |                                            | (11,414                   | ) |               |        | (11,414      | )
|                                                 |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                 |                                                                                                                       |  | Total shareholders equity                 |                           |   | 4,405         |        |              |   | 11,177 |       
|                                                 |                                                                                                                       |  |                                            |                           |   |               |        |             
|                                                 |                                                                                                                       |  | Total liabilities and shareholders equity |                           | $ | 18,708        |        |              | $ | 27,101 |       
|                                                 |                                                                                                                       |  |                                            |                           |   |               |        |             

See accompanying notes to condensed consolidated financial statements.

3



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##### Table of Contents






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

|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |      |        |        | 
|-------------------------------------------- | --------------------------------------- | ----------------------------------- | --------------------------------- | -- | ------------------ | --------------- | ----------------- | ---- | ----- | ------ | ------ | --------------- | ------ | ------ | ------ | ---- | ------ | ------ | 
|                                             |                                         |                                     |                                   |    | Three Months Ended |                 | Nine Months Ended
|                                             |                                         |                                     |                                   |    | September 30,      |                 | September 30,    
|                                             |                                         |                                     |                                   |    |                    |                 |                  
|                                             |                                         |                                     |                                   |    | 2001               |                 | 2000              |      | 2001  |        | 2000  
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |       
|Net revenues:                                |                                         |                                     |                                   |    |                    | (notes 3 and 5) |                   |      |       |        |        | (notes 3 and 5)
|                                            
|                                            
|                                            
|                                            
|                                             |                                         | Licenses                            |                                   | $  | 2,316              |                 |                   | $    | 5,396 |        |        | $               | 8,202  |        |        | $    | 16,727 |       
|                                            
|                                            
|                                            
|                                            
|                                             |                                         | Services                            |                                   |    | 5,020              |                 |                   |      | 4,945 |        |        |                 | 15,603 |        |        |      | 15,502 |       
|                                            
|                                            
|                                            
|                                            
|                                             |                                         | Hosted services                     |                                   |    | 1,131              |                 |                   |      | 1,354 |        |        |                 | 3,497  |        |        |      | 4,245  |       
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|                                             |                                         |                                     | Total net revenues                |    |                    | 8,467           |                   |      |       | 11,695 |        |                 |        | 27,302 |        |      |        | 36,474 | 
|                                            
|                                            
|                                            
|                                            
|Cost of revenues:                            |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|                                            
|                                            
|                                            
|                                            
|                                             |                                         | Licenses                            |                                   |    | 748                |                 |                   |      | 1,269 |        |        |                 | 2,265  |        |        |      | 4,271  |       
|                                            
|                                            
|                                            
|                                            
|                                             |                                         | Services                            |                                   |    | 2,578              |                 |                   |      | 2,373 |        |        |                 | 8,634  |        |        |      | 7,745  |       
|                                            
|                                            
|                                            
|                                            
|                                             |                                         | Hosted services                     |                                   |    | 1,131              |                 |                   |      | 1,067 |        |        |                 | 3,282  |        |        |      | 3,269  |       
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|                                             |                                         |                                     | Total cost of revenues            |    |                    | 4,457           |                   |      |       | 4,709  |        |                 |        | 14,181 |        |      |        | 15,285 | 
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|Gross margin                                 |                                         |                                     | 4,010                             |    |                    |                 | 6,986             |      |       |        | 13,121 |                 |        |        | 21,189 |     
|                                            
|                                            
|                                            
|                                            
|Operating expenses:                          |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|                                            
|                                            
|                                            
|                                            
|                                             |                                         | Selling, general and administrative |                                   |    | 5,285              |                 |                   |      | 5,854 |        |        |                 | 16,815 |        |        |      | 16,420 |       
|                                            
|                                            
|                                            
|                                            
|                                             |                                         | Research and development            |                                   |    | 952                |                 |                   |      | 738   |        |        |                 | 3,251  |        |        |      | 2,332  |       
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|                                             |                                         |                                     | Total operating expenses          |    |                    | 6,237           |                   |      |       | 6,592  |        |                 |        | 20,066 |        |      |        | 18,752 | 
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|Operating income (loss)                      |                                         |                                     | (2,227                            | )  |                    |                 | 394               |      |       |        | (6,945 | )               |        |        | 2,437  |     
|                                            
|                                            
|                                            
|                                            
|Other income (expense), net:                 |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|                                            
|                                            
|                                            
|                                            
|                                             |                                         | Interest income                     |                                   |    | 7                  |                 |                   |      | 70    |        |        |                 | 63     |        |        |      | 245    |       
|                                            
|                                            
|                                            
|                                            
|                                             |                                         | Interest expense and other          |                                   |    | (75                | )               |                   |      | 12    |        |        |                 | (103   | )      |        |      | (8     | )     
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|                                             |                                         |                                     | Total other income (expense), net |    |                    | (68             | )                 |      |       | 82     |        |                 |        | (40    | )      |      |        | 237    | 
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|Income (loss) before income taxes            |                                         |                                     | (2,295                            | )  |                    |                 | 476               |      |       |        | (6,985 | )               |        |        | 2,674  |     
|                                            
|                                            
|                                            
|                                            
|                                             |                                         | Income tax benefit                  |                                   |    | (16                | )               |                   |      |      |        |        |                 | (16    | )      |        |      |       |       
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|                                             |                                         | Net income (loss)                   |                                   | $  | (2,279             | )               |                   | $    | 476   |        |        | $               | (6,969 | )      |        | $    | 2,674  |       
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|Net income (loss) per common share  basic   |                                         | $                                   | (0.20                             | )  |                    | $               | 0.04              |      |       | $      | (0.62  | )               |        | $      | 0.23   |     
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|Net income (loss) per common share  diluted |                                         | $                                   | (0.20                             | )  |                    | $               | 0.04              |      |       | $      | (0.62  | )               |        | $      | 0.21   |     
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|Weighted average shares  basic              |                                         |                                     | 11,294                            |    |                    |                 | 11,894            |      |       |        | 11,236 |                 |        |        | 11,845 |     
|                                            
|                                            
|                                            
|                                            
|Weighted average shares  diluted            |                                         |                                     | 11,294                            |    |                    |                 | 13,047            |      |       |        | 11,236 |                 |        |        | 12,856 |     
|                                            
|                                            
|                                            
|                                            
|Other comprehensive loss:                    |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|                                            
|                                            
|                                            
|                                            
|                                             | Foreign currency translation adjustment |                                     |                                   | (8 | )                  |                 |                   | (141 | )     |        |        | (48             | )      |        |        | (251 | )     
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|Other comprehensive loss                     |                                         |                                     | (8                                | )  |                    |                 | (141              | )    |       |        | (48    | )               |        |        | (251   | )   
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     
|Comprehensive income (loss)                  |                                         | $                                   | (2,287                            | )  |                    | $               | 335               |      |       | $      | (7,017 | )               |        | $      | 2,423  |     
|                                             |                                         |                                     |                                   |    |                    |                 |                   |      |       |        |        |                 |        |        |        |     

See accompanying notes to condensed consolidated financial statements.

4



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##### Table of Contents






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

|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |       |        |        |        |  
|----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ------ | ----------------- | ------ | ----- | ------ | ------ | ------ | -
|                                                                                                |                                                                                                    |                                                     |                                                     |        | Nine Months Ended
|                                                                                                |                                                                                                    |                                                     |                                                     |        | September 30,    
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                  
|                                                                                                |                                                                                                    |                                                     |                                                     |        | 2001              |        | 2000 
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |      
|Cash flows from operating activities:                                                           |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Net income (loss)                                                                                  |                                                     | $                                                   | (6,969 | )                 |        | $     | 2,674  |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |                                                     |                                                     |        |                   |        |       |        |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                |                                                                                                    | Depreciation and amortization                       |                                                     |        | 1,302             |        |       |        | 1,352  |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                |                                                                                                    | Provision for doubtful accounts                     |                                                     |        | 232               |        |       |        | 316    |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                |                                                                                                    | (Increase) decrease in receivables                  |                                                     |        | 4,644             |        |       |        | (1,304 | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                |                                                                                                    | Decrease in inventories                             |                                                     |        | 706               |        |       |        | 782    |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                |                                                                                                    | Increase (decrease) in accounts payable             |                                                     |        | (29               | )      |       |        | 804    |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                |                                                                                                    | Decrease in accrued liabilities                     |                                                     |        | (1,188            | )      |       |        | (546   | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                |                                                                                                    | Decrease in customer deposits                       |                                                     |        | (1,999            | )      |       |        | (2,253 | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                |                                                                                                    | Increase (decrease) in deferred revenues            |                                                     |        | (141              | )      |       |        | 1,576  |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                |                                                                                                    | Increase (decrease) in other assets and liabilities |                                                     |        | (453              | )      |       |        | 367    |       
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|                                                                                                |                                                                                                    |                                                     | Net cash provided by (used in) operating activities |        |                   | (3,895 | )     |        |        | 3,768  |  
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|Cash flows from investing activities:                                                           |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Proceeds from short term investments                                                               |                                                     |                                                     | 75     |                   |        |       |      |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Sale of property and equipment                                                                     |                                                     |                                                     | 26     |                   |        |       | 534    |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Purchase of property and equipment                                                                 |                                                     |                                                     | (1,338 | )                 |        |       | (839   | )     
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|                                                                                                |                                                                                                    |                                                     | Net cash used in investing activities               |        |                   | (1,237 | )     |        |        | (305   | )
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|Cash flows from financing activities:                                                           |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Borrowings on line of credit                                                                       |                                                     |                                                     | 1,422  |                   |        |       |      |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Proceeds from issuance of common stock                                                             |                                                     |                                                     | 246    |                   |        |       | 904    |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Purchase of treasury stock                                                                         |                                                     |                                                     |      |                   |        |       | (2,761 | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Principal payments on capital lease obligations                                                    |                                                     |                                                     | (133   | )                 |        |       | (401   | )     
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|                                                                                                |                                                                                                    |                                                     | Net cash provided by (used in) financing activities |        |                   | 1,535  |       |        |        | (2,258 | )
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|Effect of exchange rates on cash                                                                |                                                                                                    |                                                     | (48                                                 | )      |                   |        | (251  | )     
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|Net increase (decrease) in cash and cash equivalents                                            |                                                                                                    |                                                     | (3,645                                              | )      |                   |        | 954   |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Cash and cash equivalents at beginning of period                                                |                                                                                                    |                                                     | 7,334                                               |        |                   |        | 6,185 |       
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|Cash and cash equivalents at end of period                                                      |                                                                                                    | $                                                   | 3,689                                               |        |                   | $      | 7,139 |       
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|Supplemental disclosure of cash flow information:                                               |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Cash paid for interest                                                                             |                                                     | $                                                   | 86     |                   |        | $     | 26     |       
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |       |       
|Non-cash
Investing and Financing Activities
Property and equipment acquired under capital lease |                                                                                                    | $                                                   | 446                                                 |        |                   | $      | 362   |       
|                                                                                                |                                                                                                    |                                                     |                                                     |        |                   |        |       |       

See accompanying notes to condensed consolidated financial statements.

5



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##### Table of Contents






SYNTELLECT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except shares and per share amounts)
(unaudited)



|(1) |  | Basis of Presentation
|--- |  | ---------------------

The accompanying unaudited, condensed, consolidated financial statements
include the accounts of Syntellect Inc. (together with its subsidiaries,
collectively, the 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 generally
accepted accounting principles, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). In our opinion, the financial
statements include all adjustments of a normal recurring nature which are
necessary for a fair presentation of the results for the interim periods
presented. Certain information and footnote disclosures normally included in
financial statements have been condensed or omitted pursuant to such rules and
regulations. Although we believe that the disclosures are adequate to make the
information presented not misleading, we suggest that these financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto included in our December 31, 2000 Annual Report on Form
10-K. The results of operations for the nine months ended September 30, 2001
are not necessarily indicative of the results to be expected for the full year.

Revenue Recognition

We recognize revenue from sales of Licenses and of Services, two of our
three operating segments, in accordance with Statement of Position 97-2,
Software Revenue Recognition(SOP 97-2), Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions, and Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements.Revenues from our third operating
segment, Hosted Services, are recognized in accordance with SAB No. 101.



|(2) |  | Business Segments
|--- |  | -----------------

Effective for financial statements for fiscal periods beginning after
December 15, 1997, Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information, requires
that an enterprise disclose certain information about operating segments. An
operating segment is defined as a component of an enterprise that engages in
business activities which may earn revenues and incur expenses, whose results
are regularly reviewed by a chief operating decision maker, and for which
discrete financial information is available. We have three operating segments,
which are organized around differences in products and services: Licenses,
Services, and Hosted Services:

|                                          |  |          |        |          |  |          |       |       |  |        |       |   |  |   |        |  
|----------------------------------------- |  | -------- | ------ | -------- |  | -------- | ----- | ----- |  | ------ | ----- | - |  | - | ------ | -
|                                          |  |          |        |          |  |          |       |       |  | HOSTED |       |   |  |  
|Three months ended September 30, 2001     |  | LICENSES |        | SERVICES |  | SERVICES |       | TOTAL
|                                          |  |          |        |          |  |          |       |      
|Revenues from customers                   |  | $        | 2,316  |          |  | $        | 5,020 |       |  | $      | 1,131 |   |  | $ | 8,467  |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 182    |          |  |          | 89    |       |  |        | 165   |   |  |   | 436    |  
|                                         
|                                         
|                                         
|                                         
|Segment loss before income taxes          |  |          | (1,890 | )        |  |          | (184  | )     |  |        | (221  | ) |  |   | (2,295 | )
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |          | 39     |          |  |          |     |       |  |        | 367   |   |  |   | 406    |  
|                                         
|                                         
|                                         
|                                         
|                                          |  |          |        |          |  |          |       |       |  |        |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Three months ended September 30, 2000     |  |          |        |          |  |          |       |       |  |        |       |   |  |   |        |  
|                                          |  |          |        |          |  |          |       |      
|Revenues from customers                   |  | $        | 5,396  |          |  | $        | 4,945 |       |  | $      | 1,354 |   |  | $ | 11,695 |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 166    |          |  |          | 82    |       |  |        | 150   |   |  |   | 398    |  
|                                         
|                                         
|                                         
|                                         
|Segment income (loss) before income
taxes |  |          | 784    |          |  |          | (272  | )     |  |        | (36   | ) |  |   | 476    |  
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |          | 233    |          |  |          | 115   |       |  |        |     |   |  |   | 348    |  

6



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##### Table of Contents



|                                          |  |          |        |          |  |          |        |       |  |        |       |   |  |   |        |  
|----------------------------------------- |  | -------- | ------ | -------- |  | -------- | ------ | ----- |  | ------ | ----- | - |  | - | ------ | -
|                                          |  |          |        |          |  |          |        |       |  | HOSTED |       |   |  |  
|Nine months ended September 30, 2001      |  | LICENSES |        | SERVICES |  | SERVICES |        | TOTAL
|                                          |  |          |        |          |  |          |        |      
|Revenues from customers                   |  | $        | 8,202  |          |  | $        | 15,603 |       |  | $      | 3,497 |   |  | $ | 27,302 |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 542    |          |  |          | 265    |       |  |        | 495   |   |  |   | 1,302  |  
|                                         
|                                         
|                                         
|                                         
|Segment loss before income taxes          |  |          | (5,060 | )        |  |          | (1,354 | )     |  |        | (571  | ) |  |   | (6,985 | )
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |          | 560    |          |  |          | 257    |       |  |        | 521   |   |  |   | 1,338  |  
|                                         
|                                         
|                                         
|                                         
|                                          |  |          |        |          |  |          |        |       |  |        |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Nine months ended September 30, 2000      |  |          |        |          |  |          |        |       |  |        |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Revenues from customers                   |  | $        | 16,727 |          |  | $        | 15,502 |       |  | $      | 4,245 |   |  | $ | 36,474 |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 604    |          |  |          | 298    |       |  |        | 450   |   |  |   | 1,352  |  
|                                         
|                                         
|                                         
|                                         
|Segment income (loss) before income
taxes |  |          | 3,168  |          |  |          | (131   | )     |  |        | (363  | ) |  |   | 2,674  |  
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |          | 444    |          |  |          | 219    |       |  |        | 176   |   |  |   | 839    |  



|(3) |  | Depreciation and Amortization Expense
|--- |  | -------------------------------------

Depreciation and amortization expense related to cost of revenues has been
reclassified from selling, general and administrative expenses to cost of
revenues for all periods presented. The impact of this reclassification on our
Statement of Operations for the three-month and nine-month periods ended
September 30, 2000 is an increase in our cost of revenues and a decrease in our
selling, general and administrative expenses, as previously reported by $79 and
$234, respectively. Depreciation and amortization included in cost of revenues
for the three-month and nine-month periods ended September 30, 2001 was $92 and
$258, respectively.



|(4) |  | Reorganization Costs
|--- |  | --------------------

As part of an overall strategic plan to reduce costs and increase
operating efficiencies, we began the process of reorganization during the first
quarter of 2001 and completed the process by the end of the second quarter of
2001. As a result of these plans, we recorded pre-tax charges of $600 during
the quarter ended March 31, 2001 as follows:

|                  |                            |   |               |     | 
|----------------- | -------------------------- | - | ------------- | --- | 
|                  |                            |   | Total Expense
|                  |                            |   |              
|Separation costs  |                            | $ | 292           |    
|                 
|                 
|                 
|                 
|Retention bonuses |                            |   | 79            |    
|                 
|                 
|                 
|                 
|Recruitment costs |                            |   | 229           |    
|                  |                            |   |               |    
|                  | Total Reorganization Costs |   | $             | 600 | 
|                  |                            |   |               |    

In accordance with our reorganization plan, we terminated twelve employees
from the five departments indicated and incurred $292 in separation costs:
Administration (3), Sales (4), Research and Development (2), Application
Development (2), and System Development (1). All of the reorganization costs
expensed in the first quarter of 2001 were paid prior to June 30, 2001.



|(5) |  | Restatement of Earnings for the Third Quarter 2000
|--- |  | --------------------------------------------------

Earnings for the third quarter of 2000 were restated. This restatement
effected the correction of an error. In connection with our December 31, 2000
audit, we determined that approximately $729 of revenues previously recognized
during the three-month and nine-month periods ended September 30, 2000 did not
satisfy the existence of persuasive evidence of an arrangement in selected
instances because we had not executed the relevant contracts prior to
period-end, although the respective customers had done so. This correction was
made in our December 31, 2000 Form 10-K where the impact of this restatement on
previously reported net revenues was disclosed.

7



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##### Table of Contents



The effect of this restatement on our previously issued unaudited
consolidated financial statements is summarized as follows:

|                             |  |                    |        |                   |  |            |        |          |  |   |        |  |  |   |        | 
|---------------------------- |  | ------------------ | ------ | ----------------- |  | ---------- | ------ | -------- |  | - | ------ |  |  | - | ------ | 
|                             |  | September 30, 2000
|                             |  |                   
|                             |  | Three months ended |        | Nine months ended
|                             |  |                    |        |                  
|                             |  | As                 |        |                   |  |            |        | As       |  |   |        | 
|                             |  | previously         |        | As                |  | previously |        | As      
|                             |  | reported           |        | restated          |  | reported   |        | restated
|                             |  |                    |        |                   |  |            |        |         
|Net revenues                 |  | $                  | 12,424 |                   |  | $          | 11,695 |          |  | $ | 37,203 |  |  | $ | 36,474 | 
|                            
|                            
|                            
|                            
|Gross profit                 |  |                    | 7,620  |                   |  |            | 6,986  |          |  |   | 21,978 |  |  |   | 21,189 | 
|                            
|                            
|                            
|                            
|Operating income             |  |                    | 949    |                   |  |            | 394    |          |  |   | 2,992  |  |  |   | 2,437  | 
|                            
|                            
|                            
|                            
|Net income                   |  |                    | 1,031  |                   |  |            | 476    |          |  |   | 3,229  |  |  |   | 2,674  | 
|                            
|                            
|                            
|                            
|Basic:                       |  |                    |        |                   |  |            |        |          |  |   |        |  |  |   |        | 
|                            
|                            
|                            
|                            
|Net income per
common share: |  | $                  | 0.09   |                   |  | $          | 0.04   |          |  | $ | 0.27   |  |  | $ | 0.23   | 
|                            
|                            
|                            
|                            
|Diluted:                     |  |                    |        |                   |  |            |        |          |  |   |        |  |  |   |        | 
|                            
|                            
|                            
|                            
|Net income per
common share: |  |                    | 0.08   |                   |  | $          | 0.04   |          |  | $ | 0.25   |  |  | $ | 0.21   | 

Since the September 30, 2000 10-Q is a Securities Exchange Act filing
which was updated by the subsequent December 31, 2000 10-K 1934 Act filing, we
did not refile the September 30, 2000 10-Q to reflect these changes.



|(6) |  | Inventories
|--- |  | -----------

Inventories consist of the following:

|                                           |  |               |     |              |  |   |       | 
|------------------------------------------ |  | ------------- | --- | ------------ |  | - | ----- | 
|                                           |  | September 30, |     | December 31,
|                                           |  | 2001          |     | 2000        
|                                           |  |               |     |             
|Finished goods                             |  | $             | 187 |              |  | $ | 507   | 
|                                          
|                                          
|                                          
|                                          
|Purchased components                       |  |               | 250 |              |  |   | 460   | 
|                                          
|                                          
|                                          
|                                          
|Repair, warranty and maintenance inventory |  |               | 272 |              |  |   | 448   | 
|                                           |  |               |     |              |  |   |       | 
|                                           |  | $             | 709 |              |  | $ | 1,415 | 
|                                           |  |               |     |              |  |   |       | 

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8



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##### Table of Contents






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

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

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

OPERATING BUSINESS SEGMENTS

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

Licenses is our operating business segment that includes our contact
center software platform Vista. Vista is an all-in-one software platform for
enterprise customer call centers, which includes Interactive Voice Response,
Interactive Web Response, Computer Telephony Integration, fax on demand,
Automatic Speech Recognition, and other applications.

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

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

NET REVENUES

Net revenues for the quarter ended September 30, 2001 were $8.5 million, a
decrease of 27% from the $11.7 million reported for the third quarter of 2000.
For the nine-month period ended September 30, 2001, net revenues were $27.3
million, a decrease of 25% from $36.5 million in the corresponding period in
2000. Net revenues consist of Licenses, Services, and Hosted Services, which
represented 28%, 59% and 13% of net revenues, respectively, for the quarter
ended September 30, 2001, and 30%, 57%, and 13% of net revenues, respectively,
for the nine-month period ended September 30, 2001.

Revenues from Licenses for the three-month period ended September 30, 2001
were $2.3 million, a decrease of $3.1 million, or 57%, compared to $5.4 million
for the same period last year. For the nine months ended September 30, 2001,
revenues from Licenses were $8.2 million, a decrease of 51% from the $16.7
million reported for the corresponding period in 2000. The decrease for the
quarter was the result of customer orders for the period being delayed into
future quarters, primarily due to a continued weakening of the economy creating
uncertainty and

9



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##### Table of Contents



elongated sales cycles. Other factors that contributed to the decrease
for the nine-month period were a slow down in the software-based economic
sector, a general down turn in the U.S. economy, and a decline of hardware
revenues from $3.0 million to $1.1 million, or 63%, compared to the same
nine-month period last year. Hardware revenues continue to decline due to our
ongoing transition to a software-based business.

Services revenues increased $0.1 million from $4.9 million to $5.0
million, or 2%, for the three-month period ended September 30, 2001. For the
nine-month period ended September 30, 2001, Services revenues increased $0.1
million from $15.5 million to $15.6 million, or 1%. The consistency of our
Services revenues in a down year was the direct result of our increased
maintenance and consulting revenues generated by the Other Services component
of Services, which are normally associated with a software-based business.

For the quarter ended September 30, 2001, the Application Services
component of Services revenues was $2.2 million: $1.6 million from
Applications, $0.3 million from Installations, and $0.3 million from Project
Management revenues. Application Services remained constant at $2.2 million
for the comparable prior year period: $1.6 million from Applications, $0.3
million from Installations, and $0.3 million from Project Management. For, the
nine-month period ended September 30, 2001, the Application Services component
of Services revenues increased from $6.6 million to $6.7 million, or $0.1
million, as compared to the prior year period, due to applications.

For the quarter ended September 30, 2001, the Maintenance component of
Services revenues was $2.3 million, a decrease of $0.1 million, or 4%, under
the comparable prior year quarter revenue of $2.4 million. For the nine-month
period ending September 30, 2001, the Maintenance component of Services
revenues was $7.1 million, an increase of $0.6 million, or 9%, over the
comparable prior year nine-month revenue of $6.5 million. The decline in the
quarter ended September 30, 2001 resulted from a reduced number of maintenance
contracts renewed by our legacy customers. The increase in our revenue stream
in the nine-month period resulted from a greater number of Vista software
installations in 2000 and early 2001 which, in turn, caused an increase in
first time maintenance contracts in 2001.

For the quarter ended September 30, 2001, the Other Services component
of Services revenues was $0.5 million, an increase of $0.1 million, or 25%,
over the comparable prior year quarter. For the nine-month period ending
September 30, 2001, the Other Services revenue component of Services was $1.7
million, a decrease of $0.7 million, or 29%, under the comparable prior year
period revenue of $2.4 million. In the current nine-month period ended
September 30, 2001, there were no revenues from patent infringement lawsuits
recognized compared to $0.8 million in the corresponding period last year. We
do not anticipate future revenues from patent lawsuits. The revenue generated
in 2001 is from consulting, training, and change orders.

Hosted Services revenues were $1.1 million, a decrease of $0.3 million, or
21%, for the quarter ended September 30, 2001, compared to the prior year
period revenues of $1.4 million. For the nine months ended September 30, 2001,
Hosted Services revenue was $3.5 million, a $0.7 million decrease, or 17%, from
the nine-month comparable period for 2000. The reason for the decline rests
with our Home Ticket, a pay-per-view service for cable television providers.
The cable television industry has been deploying new order entry technologies
for consumer purchases of pay-per-view events that do not utilize toll free 800
numbers. These new technologies have resulted in a downward trend in
transaction processing fees for us, a trend that is expected to continue. To
offset the decline in pay-per-view services, Hosted Services has offered other
out-sourced electronic capabilities including DialExpress (message delivery),
Lead Capture, Speech Enabled Directory, Site Locators, outage ticket, broadcast
faxing, call center processing, and audiotext. However, there can be no
assurances as to whether, or when, such efforts will completely supplant
declining pay-per-view revenues.

Domestic and international revenues for the three-month period ended
September 30, 2001 were $6.4 million, or 75%, and $2.1 million, or 25%, of
total revenues, respectively, as compared to $8.7 million, or 74%, and $3.0
million, or 26%, of total revenues, respectively, for the same period in 2000.
For the nine-month period ended September 30, 2001, domestic and international
revenues were $20.4 million, or 75%, and $6.9 million, or 25%, of total
revenues, respectively, compared to $23.9 million, or 65%, and $12.6 million,
or 35%, of total revenues, respectively, for the comparable prior year period.
Domestically, the decrease in revenues from the comparable nine-month period of
the prior year was due to lower than anticipated customer orders received and,
internationally, to smaller than anticipated orders in the third quarter of
2001 compared to the same period in 2000. International revenues typically
consist of a small number of large orders and are subject to quarter-to-quarter
fluctuations.

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GROSS MARGIN

The gross margin percentage for the quarter ended September 30, 2001 was
47% of net revenues compared to 60% in the comparable prior year quarter. The
gross margin percentage for the nine months ended September 30, 2001 was 48% of
net revenues compared to 58% in the comparable period in 2000.

Licenses gross margins for the quarter ending September 30, 2001 decreased
from 76% to 68% in the same quarter of 2000. For the nine-month period ending
September 30, 2001, gross margins on Licenses decreased to 72% from 74% in the
same period of the prior year. This decrease in the gross margin is primarily
due to an increase in the volume of licenses sold which resulted in an
associated third party licenses cost in the three-month period ended September
30, 2001. Also, increased reseller activity in the quarter and associated
costs lowered the gross margin percentage in the nine-month period ended
September 30, 2001.

Gross margins on Services for the quarter ending September 30, 2001
decreased to 49% from 52% in the prior year comparable period, and for the
nine-month period ending September 30, 2001, decreased to 45% from 50% in the
prior year. The decrease in margins for the three-month and nine-month period
was primarily due to an increase in outside contractor expense in 2001. Also,
for the nine-month period, the decrease in margins was affected by relatively
high margin revenues from the settlement of a patent lawsuit in the first
quarter of 2000.

Gross margins on Hosted Services for the quarter ending September 30, 2001
decreased to 0% from 21% in the comparable prior year quarter, and decreased to
6% from 23% in the comparable prior year nine-month period. Margins decreased
primarily due to declining pay-per-view revenues and the relatively fixed cost
structure of this business segment. We have commenced steps to offset this
decline in margins by offering other outsourcing capabilities. We expect these
other capabilities, however, to require initial application development outlays
which may delay their offsetting effects in the short term. Depreciation
expense of $0.3 million compared to $0.2 million was included in the
calculation of gross margin for the nine-month period ending September 30, 2001
and September 30, 2000, respectively.

We include those costs directly associated with the generation of revenue
in the computation of gross margin including direct labor, depreciation and
amortization, application development, travel, maintenance, customer support,
supplies and hardware. Gross margins will fluctuate on a quarterly basis due
to changes in competitive pressures, sales volume, product mix, variations in
the ratio of domestic versus international sales, or changes in the mix of
direct and indirect sales activity. Accordingly, the gross margins reported
for the third quarter and the nine months ending September 30, 2001 are not
necessarily indicative of the results to be expected for the full year.

OPERATING EXPENSES

Operating expenses for the third quarter of 2001 were $6.2 million, a
decrease of $0.4 million, or 6%, as compared to the same quarter of the prior
year. Selling, general and administrative expenses including depreciation and
amortization, decreased $0.6 million, or 10%, from the comparable prior year
quarter and increased $0.4 million, or 2%, over the comparable prior year
nine-month period. The primary reasons for the increase in expenses in the
current nine-month period consist of the $0.6 million we expended in
reorganization costs and the $0.5 million we expended to reposition our market
presence during the first quarter of 2001. We repositioned our marked presence
to increase demand for our voice processing products and to create market
differentiation and awareness for our Interactive Media Response solution for
Enterprise Voice Portals. As anticipated with our on-going transition to a
software-based company, research and development expenses for the third quarter
of 2001 increased $0.3 million, or 43%, over the comparable prior year quarter
and increased by $1.0 million, or 43%, over the comparable nine-month period.

NET INCOME (LOSS)

We reported net loss of $2.3 million, or $(0.20) per diluted share, for
the third quarter of 2001, compared to net income of $0.5 million, or $0.04 per
diluted share, for the prior year quarter. For the nine-month period ended
September 30, 2001, we reported net loss of $7.0 million, or $(0.62) per
diluted share, compared to net income of $2.7 million, or $0.21 per diluted
share, for the comparable prior year period.

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LIQUIDITY AND CAPITAL RESOURCES

We had a working capital deficit of $(0.6) million at September 30, 2001,
as compared to working capital of $6.3 million at December 31, 2000. The
current ratio was 0.96:1 and 1.4:1 on such dates, respectively. Cash and cash
equivalents at the end of the third quarter 2001 totaled $3.7 million compared
with $7.3 million at the previous year-end. A reduction of receivables and
cash resulted in the change in working capital.

For the nine months ending September 30, 2001, we had a net loss of $7.0
million. After adjustments for non-cash activities and changes in certain
balance sheet items, our operations incurred a negative cash flow of $3.9
million compared to a positive cash flow of $3.8 million in the same period of
2000. The primary factors affecting the difference between net income and cash
flow were a decrease in accruals and customer deposits coupled with a decrease
in accounts receivable caused by the decline in customer orders.

Cash flows from investing activities, primarily for the purchase of
property and equipment, used $1.2 million during the nine months ended
September 30, 2001, compared to $0.3 million, net of a sale of property and
equipment of $0.5 million, for the same period last year.

Cash flows from financing activities totaled $1.5 million for the period
generated primarily from the proceeds of common stock issuances and borrowings
on a line of credit. For the same period last year, cash flows used in
financing activities were $2.3 million primarily due to the purchase of
treasury stock totaling $2.8 million and proceeds of $0.9 million from the
issuance of common stock.

In order to support our operations as we restructure our organization, the
$4.0 million line of credit that was executed on October 11, 2000 was
terminated on June 26, 2001. In place of that line of credit, we executed a
one-year, $3.0 million asset-based operating line of credit on June 14, 2001
with another financial institution. On October 1, 2001, we executed an
amendment to this line of credit agreement, reducing the available limit from
$3.0 million to $2.0 million, and increasing the interest rate from the prime
rate plus 4.5% to the prime rate plus 8.5%, not to be less than 15% per annum.
The minimum interest due each month is $7,500. We may borrow according to a
formula based on 65% of eligible domestic accounts receivable less than 90 days
old, excluding maintenance receivables and customer deposits. Domestic
accounts receivable and inventory collateralize the line of credit. As of
September 30, 2001, we had an outstanding balance of $1.4 million on the line
of credit. Based on the formula, we had an additional $0.6 million in
available funds under the line of credit at September 30, 2001. The line of
credit requires compliance with certain debt covenants. Although we were in
violation of certain debt covenants pertaining to the line of credit as of
September 30, 2001, the financial institution waived these violations.

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

On November 13, 1998, the Board of Directors approved a stock buyback plan
to purchase up to 1.5 million shares of our common stock over the following two
years. We completed the buyback plan during the third quarter of 1999. On
November 5, 1999, we announced a new buyback plan in accordance with which we
were authorized to acquire up to 1 million shares over a one-year period. On
August 8, 2000, the Board of Directors revised this plan by approving the
buyback of an additional 500,000 shares and extending the buyback period to
August 8, 2001. On November 10, 2000, the Board of Directors authorized an
additional 500,000-share buyback with no time limitation. As of November 1,
2001, we had repurchased a total of 3,135,000 shares under these plans since
November 13, 1998. Although we continue to be authorized to repurchase 365,000
additional shares, we repurchased no additional shares during the first nine
months of 2001.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK

Our exposure to market risk for changes in interest rates relates to our
cash investment portfolio. Our general policy is to limit the risk of
principal loss and to ensure the safety of invested funds by limiting market
and
interest rate risk. We place our investments in instruments with high credit
quality issuers. We classify all liquid

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investments with a maturity date of
three months or less as cash equivalents. We classify investments with a
maturity date between three and twelve months as either short-term investments
or marketable securities. The average interest rate on short-term investments
is 2.35%. We do not expect any material loss with respect to our cash
investment portfolio since marketable securities have generally been held until
maturity and unrealized gains and losses are negligible.

Our asset-based operating line of credit bears interest at the prime rate
plus 8.5%. For the first nine months of 2001, the prime rate ranged between
9.5% at January 1, 2001 and 6.0% at September 30, 2001. At September 30, 2001,
we had approximately $1.4 million outstanding under this line of credit, all of
which is classified as current and is to be paid from receipts of customer
receivables. Due to the current nature of this debt, the requirement to make
payments on the outstanding balance as receivables are paid by customers, and
the currently low prime rates, we do not believe that market risk related to
this line of credit is significant. Our only long-term liabilities are capital
lease obligations at a fixed rate. An increase in the interest rate on our line
of credit of 10 basis points would result in an increase in interest expense of
$10,352 on an annualized basis. Therefore, we do not believe there is any
material exposure to market risk changes in interest rates as it relates to our
current or long-term liabilities at this point in time.

FOREIGN CURRENCY EXCHANGE RATE RISK

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

ADDITIONAL CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

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

We reasonably believe that any or all of our forward-looking statements in
this Form 10-Q and in any other public statements we make are true at the time
they are made. However, such statements may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Consequently, no forward-looking statement can be
guaranteed, and actual future results may vary materially. We undertake no
obligation to publicly update forward-looking statements, whether as a result
of new information, future events or otherwise. We advise you, however, to
review the Section entitled Quantitative and Qualitative Disclosure About
Market Risk in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 for a discussion of important cautionary factors that may
affect future results. We also advise you to review any and all further
disclosures we make on related subjects in our 10-Q and 8-K filings with the
SEC and in other materials we publicly release.

(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)

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PART II. OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Exhibit (10)  By-Laws of Syntellect Inc. as Amended and
Restated Through August 9, 2001
|
| | Exhibit (11)  Syntellect Inc. Computation of Net Income (Loss) Per Share               



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



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










SIGNATURES

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

|                       |  |                 |  |                                         
|---------------------- |  | --------------- |  | ----------------------------------------
|                       |  | SYNTELLECT INC.
|                      
|                      
|                      
|                      
|                       |  |                 |  |                                         
|                      
|                      
|                      
|                      
|Date: November 1, 2001 |  | By:             |  | /s/ Timothy P. Vatuone                  
|                      
|                      
|                      
|                      
|                       |  |                 |  |                                         
|                      
|                      
|                      
|                      
|                       |  |                 |  | Timothy P. Vatuone                      
|                      
|                      
|                      
|                      
|                       |  |                 |  | Vice President, Chief Financial Officer,
|                      
|                      
|                      
|                      
|                       |  |                 |  | Secretary and Treasurer                 
|                      
|                      
|                      
|                      
|                       |  |                 |  | (Principal financial officer and duly   
|                      
|                      
|                      
|                      
|                       |  |                 |  | authorized officer of the registrant)   




EXHIBIT INDEX

Exhibit (10)  By-Laws of Syntellect Inc. as Amended and Restated Through
August 9, 2001, page 15

Exhibit (11)  Syntellect Inc. Computation of Net Income (Loss) Per
Share, page 24

14