##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

| |  |                                                                                         
| |  | ----------------------------------------------------------------------------------------
| |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 
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| |  | For the quarterly period ended March 31, 2001                                           
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| |  | OR                                                                                      
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| |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number: 0 - 18323

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

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

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

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

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

YES      NO

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

11,212,746 shares of common stock, $.01 par value per share, were
outstanding on May 10, 2001





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TABLE OF CONTENTS



|                               |                                                                                               |  |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I.  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               | Condensed Consolidated Balance Sheets                                                        
|                               | Condensed Consolidated Statements of Operations                                              
|                               | Condensed Consolidated Statements of Cash Flows                                              
|                               | Notes to Condensed Consolidated Financial Statements                                         
|                               | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|                               | Item 3. Quantitative and Qualitative Disclosure about Market Risk                            
|                               | PART II.  OTHER INFORMATION                                                                  
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    
|EXHIBITS                      
|                               | Exhibit Index                                                                                
|EX-11                         



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES
INDEX

|                              |                                                                                               |                                                      |                                                      |    |      |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------- | -- | ---- | - | 
|                              |                                                                                               |                                                      |                                                      |    | Page |  
|                              |                                                                                               |                                                      |                                                      |    |      |  
|PART I. FINANCIAL INFORMATION
|                             
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|                             
|                              | Item 1. Financial Statements                                                                  |                                                      |                                                      |    |     
|                             
|                             
|                             
|                             
|                              |                                                                                               | Condensed Consolidated Balance Sheets -             
|                             
|                             
|                             
|                             
|                              |                                                                                               |                                                      | March 31, 2001 and December 31, 2000                 |    |      | 3 | 
|                             
|                             
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|                             
|                              |                                                                                               | Condensed Consolidated Statements of Operations -   
|                             
|                             
|                             
|                             
|                              |                                                                                               |                                                      | Three Months Ended March 31, 2001 and March 31, 2000 |    |      | 4 | 
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|                             
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows -   
|                             
|                             
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|                             
|                              |                                                                                               |                                                      | Three Months Ended March 31, 2001 and March 31, 2000 |    |      | 5 | 
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|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements |                                                      |    | 6    |  
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|                              | Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations |                                                      |                                                      | 8  |     
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|                              | Item 3. Quantitative and Qualitative Disclosure about Market Risk                             |                                                      |                                                      | 10 |     
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|PART II. OTHER INFORMATION   
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|                             
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|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                      |                                                      | 11 |     
|                             
|SIGNATURES                    |                                                                                               |                                                      | 12                                                   |   
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|EXHIBITS                     
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|                              | Exhibit Index                                                                                 |                                                      |                                                      | 12 |     
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|                              | Exhibit (11), Syntellect Inc., Computation of Net Income (Loss) Per Share                     |                                                      |                                                      | 13 |     

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##### Table of Contents









PART I --- FINANCIAL INFORMATION







ITEM 1. FINANCIAL STATEMENTS







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

|                                                 |                                                                                                                                  |                            |                                            |         |             |        |        |              |        |        | 
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------- | ----------- | ------ | ------ | ------------ | ------ | ------ | 
|                                                 |                                                                                                                                  |                            |                                            |         | March 31,   |        |        | December 31, |       
|                                                 |                                                                                                                                  |                            |                                            |         | 2001        |        |        | 2000         |       
|                                                 |                                                                                                                                  |                            |                                            |         |             |        |        |              |       
|                                                 |                                                                                                                                  |                            |                                            |         | (unaudited) |       
|ASSETS                                          
|                                                
|                                                
|                                                
|                                                
|Current assets:                                 
|                                                
|                                                
|                                                
|                                                
|                                                 | Cash and cash equivalents                                                                                                        |                            | $                                          | 5,958   |             |        | $      | 7,334        |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Short-term investments  restricted                                                                                              |                            |                                            | 75      |             |        |        | 75           |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Trade receivables, net of allowance for doubtful accounts
of $230 and $225 at March 31, 2001 and December 31, 2000,
respectively |                            |                                            | 6,669   |             |        |        | 12,423       |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Other receivables                                                                                                                |                            |                                            | 9       |             |        |        | 9            |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Note receivable                                                                                                                  |                            |                                            | 58      |             |        |        | 57           |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Inventories, net                                                                                                                 |                            |                                            | 1,044   |             |        |        | 1,415        |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Prepaid expenses                                                                                                                 |                            |                                            | 1,121   |             |        |        | 711          |       
|                                                 |                                                                                                                                  |                            |                                            |         |             |       
|                                                 |                                                                                                                                  | Total current assets       |                                            |         | 14,934      |        |        |              | 22,024 |       
|                                                
|                                                
|                                                
|                                                
|Property and equipment, net                      |                                                                                                                                  |                            | 3,828                                      |         |             |        | 3,814  |             
|                                                
|                                                
|                                                
|                                                
|Note receivable, non-current portion             |                                                                                                                                  |                            | 254                                        |         |             |        | 270    |             
|                                                
|                                                
|                                                
|                                                
|Other assets                                     |                                                                                                                                  |                            | 951                                        |         |             |        | 993    |             
|                                                 |                                                                                                                                  |                            |                                            |         |             |       
|                                                 |                                                                                                                                  |                            | Total assets                               |         | $           | 19,967 |        |              | $      | 27,101 | 
|                                                 |                                                                                                                                  |                            |                                            |         |             |       
|LIABILITIES AND SHAREHOLDERS EQUITY            
|                                                
|                                                
|                                                
|                                                
|Current liabilities:                            
|                                                
|                                                
|                                                
|                                                
|                                                 | Accounts payable                                                                                                                 |                            | $                                          | 3,576   |             |        | $      | 2,934        |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Accrued liabilities                                                                                                              |                            |                                            | 2,233   |             |        |        | 3,186        |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Customer deposits                                                                                                                |                            |                                            | 1,012   |             |        |        | 2,916        |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Deferred revenue                                                                                                                 |                            |                                            | 3,717   |             |        |        | 6,421        |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Capital lease obligations                                                                                                        |                            |                                            | 161     |             |        |        | 151          |       
|                                                 |                                                                                                                                  |                            |                                            |         |             |       
|                                                 |                                                                                                                                  | Total current liabilities  |                                            |         | 10,699      |        |        |              | 15,608 |       
|                                                
|                                                
|                                                
|                                                
|Capital lease obligations  less current portion |                                                                                                                                  |                            | 312                                        |         |             |        | 316    |             
|                                                 |                                                                                                                                  |                            |                                            |         |             |       
|                                                 |                                                                                                                                  |                            | Total liabilities                          |         |             | 11,011 |        |              |        | 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 14,526,978 and 14,505,298,
respectively             |                            |                                            | 145     |             |        |        | 145          |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Additional paid-in capital                                                                                                       |                            |                                            | 62,349  |             |        |        | 62,311       |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Accumulated deficit                                                                                                              |                            |                                            | (41,905 | )           |        |        | (39,696      | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Accumulated other comprehensive loss                                                                                             |                            |                                            | (219    | )           |        |        | (169         | )     
|                                                 |                                                                                                                                  |                            |                                            |         |             |       
|                                                 |                                                                                                                                  |                            | 20,370                                     |         |             |        | 22,591 |             
|                                                
|                                                
|                                                
|                                                
|                                                 | Treasury stock, at cost, 3,332,432 shares                                                                                        |                            |                                            | (11,414 | )           |        |        | (11,414      | )     
|                                                 |                                                                                                                                  |                            |                                            |         |             |       
|                                                 |                                                                                                                                  | Total shareholders equity |                                            |         | 8,956       |        |        |              | 11,177 |       
|                                                 |                                                                                                                                  |                            |                                            |         |             |       
|                                                 |                                                                                                                                  |                            | Total liabilities and shareholders equity |         | $           | 19,967 |        |              | $      | 27,101 | 
|                                                 |                                                                                                                                  |                            |                                            |         |             |       

See accompanying notes to condensed consolidated financial statements.

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##### Table of Contents









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

|                                               |                                         |                                   |                             |       |                    |        |        |       |        |       | 
|---------------------------------------------- | --------------------------------------- | --------------------------------- | --------------------------- | ----- | ------------------ | ------ | ------ | ----- | ------ | ----- | 
|                                               |                                         |                                   |                             |       | Three Months Ended |       
|                                               |                                         |                                   |                             |       | March 31,          |       
|                                               |                                         |                                   |                             |       |                    |       
|                                               |                                         |                                   |                             |       | (unaudited)        |       
|                                               |                                         |                                   |                             |       |                    |       
|                                               |                                         |                                   |                             |       | 2001               |        |        | 2000  |       
|                                               |                                         |                                   |                             |       |                    |        |        |       |       
|Net revenues:                                 
|                                              
|                                              
|                                              
|                                              
|                                               | Licenses and hardware                   |                                   | $                           | 3,625 |                    |        | $      | 6,063 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Services                                |                                   |                             | 5,635 |                    |        |        | 5,305 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Hosted services                         |                                   |                             | 1,086 |                    |        |        | 1,350 |       
|                                               |                                         |                                   |                             |       |                    |       
|                                               |                                         | Total net revenues                |                             |       | 10,346             |        |        |       | 12,718 |      
|                                              
|                                              
|                                              
|                                              
|Cost of revenues:                             
|                                              
|                                              
|                                              
|                                              
|                                               | Licenses and hardware                   |                                   |                             | 927   |                    |        |        | 1,640 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Services                                |                                   |                             | 3,314 |                    |        |        | 3,150 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Hosted services                         |                                   |                             | 988   |                    |        |        | 1,061 |       
|                                               |                                         |                                   |                             |       |                    |       
|                                               |                                         | Total cost of revenues            |                             |       | 5,229              |        |        |       | 5,851  |      
|                                               |                                         |                                   |                             |       |                    |       
|Gross margin                                   |                                         |                                   | 5,117                       |       |                    |        | 6,867  |      
|                                              
|                                              
|                                              
|                                              
|Operating expenses:                           
|                                              
|                                              
|                                              
|                                              
|                                               | Selling, marketing and administrative   |                                   |                             | 6,106 |                    |        |        | 4,793 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Research and development                |                                   |                             | 1,248 |                    |        |        | 864   |       
|                                               |                                         |                                   |                             |       |                    |       
|                                               |                                         | Total operating expenses          |                             |       | 7,354              |        |        |       | 5,657  |      
|                                               |                                         |                                   |                             |       |                    |       
|Operating income (loss)                        |                                         |                                   | (2,237                      | )     |                    |        | 1,210  |      
|                                              
|                                              
|                                              
|                                              
|Other income (expense)                        
|                                              
|                                              
|                                              
|                                              
|                                               | Interest income                         |                                   |                             | 32    |                    |        |        | 58    |       
|                                              
|                                              
|                                              
|                                              
|                                               | Other                                   |                                   |                             | (4    | )                  |        |        | (71   | )     
|                                               |                                         |                                   |                             |       |                    |       
|                                               |                                         | Total other income (expense)      |                             |       | 28                 |        |        |       | (13    | )    
|                                               |                                         |                                   |                             |       |                    |       
|Income (loss) before income taxes              |                                         |                                   | (2,209                      | )     |                    |        | 1,197  |      
|                                               |                                         |                                   |                             |       |                    |       
|Net income (loss)                              |                                         | $                                 | (2,209                      | )     |                    | $      | 1,197  |      
|                                               |                                         |                                   |                             |       |                    |       
|Net income (loss) per common share - basic     |                                         | $                                 | (.20                        | )     |                    | $      | .10    |      
|                                               |                                         |                                   |                             |       |                    |       
|Net income (loss) per common share - diluted   |                                         | $                                 | (.20                        | )     |                    | $      | .09    |      
|                                               |                                         |                                   |                             |       |                    |       
|Weighted average shares  basic                |                                         |                                   | 11,194                      |       |                    |        | 11,859 |      
|                                               |                                         |                                   |                             |       |                    |       
|Weighted average shares  diluted              |                                         |                                   | 11,194                      |       |                    |        | 12,860 |      
|                                               |                                         |                                   |                             |       |                    |       
|Other comprehensive income (loss), net of tax:
|                                              
|                                              
|                                              
|                                              
|                                               | Foreign currency translation adjustment |                                   |                             | (51   | )                  |        |        | 91    |       
|                                               |                                         |                                   |                             |       |                    |       
|                                               |                                         | Other comprehensive income (loss) |                             |       | (51                | )      |        |       | 91     |      
|                                               |                                         |                                   |                             |       |                    |       
|                                               |                                         |                                   | Comprehensive income (loss) |       | $                  | (2,260 | )      |       | $      | 1,288 | 
|                                               |                                         |                                   |                             |       |                    |       

See accompanying notes to condensed consolidated financial statements.

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

|                                                  |                                                        |                                             |                                         |                                                     |   |                    |        |        |      |        |        |  
|------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------- | --------------------------------------- | --------------------------------------------------- | - | ------------------ | ------ | ------ | ---- | ------ | ------ | -
|                                                  |                                                        |                                             |                                         |                                                     |   | Three Months Ended |       
|                                                  |                                                        |                                             |                                         |                                                     |   | March 31,          |       
|                                                  |                                                        |                                             |                                         |                                                     |   |                    |       
|                                                  |                                                        |                                             |                                         |                                                     |   | (unaudited)        |       
|                                                  |                                                        |                                             |                                         |                                                     |   |                    |       
|                                                  |                                                        |                                             |                                         |                                                     |   | 2001               |        |        | 2000 |       
|                                                  |                                                        |                                             |                                         |                                                     |   |                    |        |        |      |       
|Cash flows from operating activities:            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net income (loss)                                      |                                             | $                                       | (2,209                                              | ) |                    | $      | 1,197  |     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Adjustments to reconcile net income (loss) to net cash
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                        | provided by (used in) operating activities:
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                        |                                             | Depreciation and amortization           |                                                     |   | 415                |        |        |      | 513    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                        |                                             | Provision for doubtful accounts         |                                                     |   | 62                 |        |        |      | 102    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                        |                                             | (Increase) decrease in receivables      |                                                     |   | 5,692              |        |        |      | (56    | )     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                        |                                             | Decrease in inventories                 |                                                     |   | 371                |        |        |      | 288    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                        |                                             | Increase in accounts payable            |                                                     |   | 642                |        |        |      | 87     |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                        |                                             | Increase (decrease) in deferred revenue |                                                     |   | (2,704             | )      |        |      | 622    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                        |                                             | Decrease in accrued liabilities         |                                                     |   | (953               | )      |        |      | (65    | )     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                        |                                             | Change in other assets and liabilities  |                                                     |   | (2,256             | )      |        |      | (1,809 | )     
|                                                  |                                                        |                                             |                                         |                                                     |   |                   
|                                                  |                                                        |                                             |                                         | Net cash provided by (used in) operating activities |   |                    | (940   | )      |      |        | 879    |  
|                                                  |                                                        |                                             |                                         |                                                     |   |                   
|Cash flows from investing activities:            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase of property and equipment                     |                                             |                                         | (388                                                | ) |                    |        | (190   | )   
|                                                  |                                                        |                                             |                                         |                                                     |   |                   
|                                                  |                                                        |                                             |                                         | Net cash used in investing activities               |   |                    | (388   | )      |      |        | (190   | )
|                                                  |                                                        |                                             |                                         |                                                     |   |                   
|Cash flows from financing activities:            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from issuance of common stock                 |                                             |                                         | 38                                                  |   |                    |        | 503    |     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase of treasury stock                             |                                             |                                         |                                                    |   |                    |        | (2,738 | )   
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Principal payments on capital lease obligations        |                                             |                                         | (36                                                 | ) |                    |        | (72    | )   
|                                                  |                                                        |                                             |                                         |                                                     |   |                   
|                                                  |                                                        |                                             |                                         | Net cash provided by (used in) financing activities |   |                    | 2      |        |      |        | (2,307 | )
|                                                  |                                                        |                                             |                                         |                                                     |   |                   
|Effect of exchange rates on cash                  |                                                        |                                             | (50                                     | )                                                   |   |                    | 91     |       
|                                                  |                                                        |                                             |                                         |                                                     |   |                   
|Net decrease in cash and cash equivalents         |                                                        |                                             | (1,376                                  | )                                                   |   |                    | (1,527 | )     
|                                                 
|                                                 
|                                                 
|                                                 
|Cash and cash equivalents at beginning of period  |                                                        |                                             | 7,334                                   |                                                     |   |                    | 6,184  |       
|                                                  |                                                        |                                             |                                         |                                                     |   |                   
|Cash and cash equivalents at end of period        |                                                        | $                                           | 5,958                                   |                                                     |   | $                  | 4,657  |       
|                                                  |                                                        |                                             |                                         |                                                     |   |                   
|Supplemental disclosure of cash flow information:
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash paid for interest                                 |                                             | $                                       | 12                                                  |   |                    | $      | 16     |     
|                                                  |                                                        |                                             |                                         |                                                     |   |                   

See accompanying notes to condensed consolidated financial statements.

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



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

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

The financial statements have been prepared in accordance with generally
accepted accounting principles, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). In our opinion, the financial
statements include all adjustments of a normal recurring nature which are
necessary for a fair presentation of the results for the interim periods
presented. Certain information and footnote disclosures normally included in
financial statements have been condensed or omitted pursuant to such rules and
regulations. Although we believe that the disclosures are adequate to make the
information presented not misleading, we suggest that these financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto included in our 2000 Annual Report on Form 10-K. The
results of operations for the three months ended March 31, 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 Hardware and of Services,
two of our three operating segments, in accordance with Statement of Position
97-2, Software Revenue Recognition(SOP 97-2), Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions, and Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements.Revenues from our third operating
segment, Hosted Services, are recognized in accordance with SAB No. 101. These
statements require that revenue be recognized when each of the following four
conditions has been met: 1) persuasive evidence of an arrangement exists, 2)
delivery has occurred or services have been rendered, 3) the sellers price to
the buyer is fixed or determinable, and 4) collectibility is reasonably
assured.



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

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

|                                          |  |            |        |          |  |          |       |        |  |   |       |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | -------- |  | -------- | ----- | ------ |  | - | ----- | - |  | - | ------ | -
|                                          |  | LICENSES & |        |          |  |          |       | HOSTED |  |   |       |  
|Quarter ended March 31, 2001              |  | HARDWARE   |        | SERVICES |  | SERVICES |       | TOTAL 
|                                          |  |            |        |          |  |          |       |       
|Revenues from customers                   |  | $          | 3,625  |          |  | $        | 5,635 |        |  | $ | 1,086 |   |  | $ | 10,346 |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |            | 168    |          |  |          | 82    |        |  |   | 165   |   |  |   | 415    |  
|                                         
|                                         
|                                         
|                                         
|Segment loss before income taxes          |  |            | (1,261 | )        |  |          | (640  | )      |  |   | (308  | ) |  |   | (2,209 | )
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |            | 174    |          |  |          | 86    |        |  |   | 128   |   |  |   | 388    |  
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|Quarter ended March 31, 2000             
|                                         
|Revenues from customers                   |  | $          | 6,063  |          |  | $        | 5,305 |        |  | $ | 1,350 |   |  | $ | 12,718 |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |            | 243    |          |  |          | 120   |        |  |   | 150   |   |  |   | 513    |  
|                                         
|                                         
|                                         
|                                         
|Segment income (loss) before
income taxes |  |            | 1,645  |          |  |          | (52   | )      |  |   | (396  | ) |  |   | 1,197  |  
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |            | 27     |          |  |          | 13    |        |  |   | 150   |   |  |   | 190    |  

6



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##### Table of Contents





|(3) |  | Inventories
|--- |  | -----------

Inventories consist of the following:

|                                           |  |           |       |  |              |   |       | 
|------------------------------------------ |  | --------- | ----- |  | ------------ | - | ----- | 
|                                           |  | March 31, |       |  | December 31, |  
|                                           |  | 2001      |       |  | 2000         |  
|                                           |  |           |       |  |              |  
|Finished goods                             |  | $         | 364   |  |              | $ | 507   | 
|                                          
|                                          
|                                          
|                                          
|Purchased components                       |  |           | 305   |  |              |   | 460   | 
|                                          
|                                          
|                                          
|                                          
|Repair, warranty and maintenance inventory |  |           | 375   |  |              |   | 448   | 
|                                           |  |           |       |  |              |  
|                                           |  | $         | 1,044 |  |              | $ | 1,415 | 
|                                           |  |           |       |  |              |  



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

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

|                  |                            |   |         |     |  |          |         |     |              |            |     |     | 
|----------------- | -------------------------- | - | ------- | --- |  | -------- | ------- | --- | ------------ | ---------- | --- | --- | 
|                  |                            |   |         |     |  |          | Paid by |     |              | Accrued as |    
|                  |                            |   | Total   |     |  | March    |         |     | of March 31, |           
|                  |                            |   | Expense |     |  | 31, 2001 |         |     | 2001         |           
|                  |                            |   |         |     |  |          |         |     |              |           
|Separation costs  |                            | $ | 292     |     |  | $        | 93      |     |              | $          | 199 |    
|                 
|                 
|                 
|                 
|Retention bonuses |                            |   | 79      |     |  |          | 79      |     |              |            |   |    
|                 
|                 
|                 
|                 
|Recruitment costs |                            |   | 229     |     |  |          | 229     |     |              |            |   |    
|                  |                            |   |         |     |  |          |         |     |             
|                  | Total Reorganization Costs |   | $       | 600 |  |          | $       | 401 |              |            | $   | 199 | 
|                  |                            |   |         |     |  |          |         |     |             

Twelve employees to be
terminated under the reorganization plan are included in the separation costs of $292 from the
following five departments: Administration (3), Sales (4), Research and
Development (2), Application Development (2), and System Development (1). As
of March 31, 2001, $93 of separation costs have been paid for five employees
who were terminated prior to March 31, 2001.

7



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##### Table of Contents









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

NET REVENUES

Net revenues for the quarter ended March 31, 2001 were $10.3 million, a
decrease of 19% from the $12.7 million reported for the first quarter of 2000.
Net revenues consist of Licenses and Hardware, Services, and Hosted Services,
which represented 35%, 55% and 10% of net revenues, respectively, for the
quarter ended March 31, 2001, and 48%, 42% and 10% of net revenues,
respectively, for the comparable prior year period.

Our core product is Vista, an open standards-based Interactive
Communications Management software platform for enterprise customer call
centers. Vista combines several call center technologies with a distributed
client-server architecture, open standard components, web-based management
system and a graphical application development tool. We believe Vista provides
customers with flexibility, scalability and efficiency, high degrees of
redundancy, and superior processing performance. Vista Interactive Voice
Response (IVR), Computer Telephony Integration (CTI), Interactive Web
Response (IWR) and Automatic Speech Recognition are currently available.
Non-core or legacy products include VocalPoint, an IVR platform; and VocalPoint
Interactive Services, providing CTI functionality, IWR, and Premier and Premier
030 proprietary IVR systems.

In late 1998, we began the transition from a hardware/software-based
company to a software-based company. During 2000, we began to change the
reporting of business segments to Licenses and Hardware, Services, and Hosted
Services from the previous structure of Systems, Hosted Services (SIS), and
Patents. Revenues from System Sales and Maintenance and Other Services as
reported in the Form 10-Q for the first quarter of 2000 have been restated as
Licenses and Hardware and as Services in this Form 10-Q.

Licenses and Hardware revenues for the period ended March 31, 2001 were
$3.6 million, a decrease of $2.5 million, or 41%, compared to the $6.1 million
for the same period last year. The decrease was a result of anticipated
customer orders for the period ended March 31, 2001 being delayed into future
quarters of 2001. In addition, the transition to a software-based company has
resulted in the decline of Hardware revenues from $2 million to $0.4 million,
or 80%, as compared to the same period last year.

Services revenues increased $0.3 million from $5.3 million to $5.6
million, or 6%, for the period ended March 31, 2001 as compared to the same
period last year. The components of Services revenues consist of application
services, $0.5 million increase; installations, $0.1 million increase; project
management, $0.1 million increase; maintenance, $0.3 million increase; patent
infringement litigation revenues, $0.8 million decrease; and other services,
$0.1 million increase. Although anticipated customer orders have declined
during this period as noted above, Services revenues from application services,
installations, and project management are generally recognized in the two
quarters following the quarter in which an order has been accepted. Therefore,
these revenues are primarily due to orders received in the second half of 2000.
In addition, Services revenues have increased as a result of our ongoing
transition to a software-based company. No revenues from patent infringement
lawsuits were recognized in the period ended March 31, 2001 as compared to $0.8
million in the same period last year. We do not anticipate future revenues
from patent lawsuits.

Hosted Services revenues for the period ended March 31, 2001 were $1.1
million compared to $1.4 million for the same period in 2000. This is a
decrease of 0.3 million, or 21%. The primary reason for the decline was due to
Home Ticket, a pay-per-view service for cable television providers which is
offered through our subsidiary, SIS. The cable TV industry has been deploying
new order entry technologies for consumer purchases of pay-per-view events
which do not utilize toll free 800 numbers. This has resulted in a downward
trend in transaction processing fees; a trend which is expected to continue. To
offset the decline in pay-per-view services, Hosted Services has offered other
outsourced electronic capabilities including DialExpress (message delivery),
Lead Capture, Speech Enabled Directory, Site Locators, broadcast faxing, call
center processing, and audiotext; however, there can be no assurances as to
whether, or when, such efforts will completely supplant declining pay-per-view
revenues.

Domestic and International revenues for the period ended March 31, 2001
were $8.1 million, or 79%, and $2.2 million, or 21%, of total revenues,
respectively, compared to $7 million, or 55%, and $5.7 million, or 45% of total
revenues, respectively, for the same period in 2000. Internationally, the
decrease in revenues for the period ended March 31, 2001 from the same period
last year was primarily due to lower than anticipated customer orders received
and to a large customer order recognized in the first quarter of 2000 of $1.7
million.

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##### Table of Contents



GROSS MARGIN

The gross margin percentage for the quarter ended March 31, 2001 was 49%
of net revenues as compared to 54% in the prior year first quarter. Gross
margins for Licenses and Hardware increased from 73% to 74% between comparable
quarters due to a decrease in third party consulting fees. Gross margins for
Services remained stable at 41%. Hosted Services gross margins decreased from
21% to 9% quarter-over-quarter due to the continued decline in pay-per-view
revenues. We have begun to offset this decline by offering other outsourcing
capabilities which require additional application developmental costs causing
margins to decline. We include those costs directly associated with the
generation of revenue in our computation of gross margin, including direct
labor, application development, travel, maintenance, customer support, supplies
and hardware. Gross margins will fluctuate on a quarterly basis due to changes
in competitive pressures, sales volume, product mix, variations in the ratio of
domestic versus international sales, or changes in the mix of direct and
indirect sales activity. Accordingly, the gross margins reported for the first
quarter of 2001 are not necessarily indicative of the results to be expected
for the full year.

OPERATING EXPENSES

Operating expenses for the first quarter of 2001 were $7.4 million, an
increase of $1.7 million, or 30%, from the prior year first quarter of $5.7
million. Selling, marketing and administrative expenses increased $1.3
million, or 27%, compared to the prior year period. The primary reasons for
the increase are the reorganization costs of $0.6 million and $0.5 million for
the repositioning of the marketing structure to enhance our corporate image,
increase demand for our voice processing products, and create market
differentiation and awareness for our Interactive Media Response solution for
Enterprise Voice Portals. As anticipated due to our ongoing transition to a
software-based company, research and development expenses increased $0.4
million, or 44%, compared to the prior year period.

NET INCOME (LOSS)

We reported a net loss of $2.2 million, or $ (.20) per diluted share, for
the first quarter of 2001, compared to a net income of $1.2 million, or $ .09
per diluted share, for the prior year quarter. The net loss was indicative of
anticipated customer orders being delayed into future quarters of 2001 and the
charge for reorganization costs. We have not recorded income tax
expense due to net operating loss carry-forwards, which offset any taxable
income.

LIQUIDITY AND CAPITAL RESOURCES

We had working capital of $4.2 million at March 31, 2001, as compared with
$6.4 million at December 31, 2000. The current ratio
remained consistent at
1.4:1 on such dates. Cash, cash equivalents and short-term investments at the
end of the first quarter totaled $6 million as compared with $7.4 million at
year-end.

For the first three months of 2001, we had a net loss of $2.2 million.
After adjustment for non-cash activities and the changes in certain balance
sheet items, our operations incurred negative cash flows of $0.9 million
compared to a positive cash flow of $0.9 million in the same period of 2000.
The primary factor affecting the difference between net income and cash flow
was the decrease in customer deposits and deferred revenue caused by the
decline in anticipated customer orders.

Cash flows from investing activities, namely the purchase of property and
equipment, used $0.4 million during the quarter ended March 31, 2001 as
compared to $0.2 million during the same period in 2000.

We expect our current cash and cash equivalents, combined with future cash
flows from operating activities, to be sufficient to support our operations for
the remainder of 2001. We use a letter of credit, secured by a $75,000
restricted certificate of deposit, to secure the lease on our Chicago facility.
On October 11, 2000, we entered into a $4 million revolving line of credit
with a financial institution. The purpose of this line of credit is to fund
general operations with all of our assets as collateral. This line of credit
is subject to certain debt covenants. At March 31, 2001, we were not in
compliance with the quarterly net profit covenant which the financial institution has
waived. This waiver does not permit additional borrowings until debt
compliance with covenants has been achieved. As of March 31, 2001, we have no
outstanding borrowings under this line of credit.

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

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 and Hardware, Services, and Hosted Services.

Licenses and Hardware 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, Cyberstats, and a variety of
out-sourced electronic capabilities such as benefits enrollment and broadcast
faxing which we offer through our subsidiary, SIS.







ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK

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

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

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.

10



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##### Table of Contents



ADDITIONAL CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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







PART II --- OTHER INFORMATION







ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits                                                                       
| | --- |  | -------------------------------------------------------------------------------
| |     | 
| |     |  | Exhibit (11)  Statement Regarding Computation of Net Income (Loss)
Per Share  
|
| | (b) |  | Reports on Form 8-K                                                            
|
| |     |  | No reports on Form 8-K have been filed during the quarter ended March 31,
2001.

11



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##### Table of Contents









SIGNATURES

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

|                   |  |                                                                                                                                                                                                                        
|------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date: May 14, 2001 |  | SYNTELLECT INC.                                                                                                                                                                                                        
|                  
|                  
|                  
|                  
|                  
|                  
|                  
|                  
|                  
|                   |  | By: /s/ Timothy P Vatuone
      Timothy P. Vatuone
      Vice President, Chief Financial Officer,
      Secretary and Treasurer
      (Principal financial officer and duly authorized
      officer of the registrant)













EXHIBIT INDEX

Exhibit (11)  Statement Regarding Computation of Net Income (Loss) Per Share,
p. 13.

12