##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED
August 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 1-15045
 INTERVOICE, INC.
 (Exact name of registrant as specified in its charter)
 TEXAS
(State or other jurisdiction of 
incorporation or organization)
    
    75-1927578
(I.R.S. Employer
Identification No.)17811 WATERVIEW PARKWAY, DALLAS, TX
(Address of principal executive offices)
    
    75252
(Zip Code)
 972-454-8000
(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 þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
 Large accelerated filer o Accelerated filer þ Non-Accelerated Filer o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
 The Registrant had 38,627,877 shares of common stock, no par value per share, outstanding as of
October 1, 2007.




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 4. Submission of Matters to a Vote of Security HoldersItem 6. ExhibitsSIGNATURESIndex to ExhibitsCertification of CEO Pursuant to Rule 13a-14(a) or Rule 15d-14(a)Certification of CFO Pursuant to Rule 13a-14(a) or Rule 15d-14(a)Certification of CEO Pursuant to Rule 13a-14(b)Certification of CFO Pursuant to Rule 13a-14(b)    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 (In Thousands, Except Share and Per Share Data)August 31, 2007
    
    
    February 28, 2007ASSETSCurrent AssetsCash and cash equivalents
    
    $
    30,615
    
    
    $
    28,215Trade accounts receivable, net of allowance for
doubtful accounts of $885 in fiscal 2008 and
$1,476 in fiscal 2007
    
    
    31,036
    
    
    
    36,837Inventory
    
    
    19,266
    
    
    
    13,751Prepaid expenses and other current assets
    
    
    4,520
    
    
    
    3,909Income taxes receivable
    
    
    
    
    
    
    1,098Deferred income taxes
    
    
    4,596
    
    
    
    3,880Total current assets
    
    
    90,033
    
    
    
    87,690Property and Equipment, net of accumulated depreciation of
$67,129 in fiscal 2008 and $62,419 in fiscal 2007
    
    
    32,689
    
    
    
    34,429Other AssetsIntangible assets, net of accumulated amortization of $21,551
in fiscal 2008 and $20,040 in fiscal 2007
    
    
    8,472
    
    
    
    9,505Goodwill
    
    
    32,193
    
    
    
    32,193Long term deferred income taxes
    
    
    3,000
    
    
    
    4,613Other assets
    
    
    158
    
    
    
    135$
    166,545
    
    
    $
    168,565LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    13,500
    
    
    $
    12,881Accrued expenses
    
    
    11,614
    
    
    
    15,571Customer deposits
    
    
    6,045
    
    
    
    4,365Deferred income
    
    
    32,583
    
    
    
    32,368Income taxes payable
    
    
    513
    
    
    
    Deferred income taxes
    
    
    170
    
    
    
    196Total current liabilities
    
    
    64,425
    
    
    
    65,381Commitments and contingencies (See Notes E and J)Stockholders EquityPreferred stock, $100 par value2,000,000
shares authorized: none issuedCommon stock, no par value, at nominal
assigned value62,000,000 shares
authorized: 38,609,108 issued and
outstanding in fiscal 2008 and 38,727,628 issued
and outstanding in fiscal 2007
    
    
    19
    
    
    
    19Additional capital
    
    
    102,186
    
    
    
    101,608Retained earnings (deficit)
    
    
    (159
    )
    
    
    1,861Accumulated other comprehensive income (loss)
    
    
    74
    
    
    
    (304
    )Stockholders equity
    
    
    102,120
    
    
    
    103,184$
    166,545
    
    
    $
    168,565
  2




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(In Thousands, Except Per Share Data)Three Months Ended August 31,
    
    
    Six Months Ended August 31,2007
    
    
    2006
    
    
    2007
    
    
    2006SalesSolutions
    
    $
    22,741
    
    
    $
    24,245
    
    
    $
    44,443
    
    
    $
    43,714Recurring services
    
    
    25,947
    
    
    
    26,235
    
    
    
    51,976
    
    
    
    52,43448,688
    
    
    
    50,480
    
    
    
    96,419
    
    
    
    96,148Cost of goods soldSolutions
    
    
    15,523
    
    
    
    15,286
    
    
    
    30,705
    
    
    
    27,590Recurring services
    
    
    7,405
    
    
    
    7,192
    
    
    
    14,696
    
    
    
    14,66622,928
    
    
    
    22,478
    
    
    
    45,401
    
    
    
    42,256Gross marginSolutions
    
    
    7,218
    
    
    
    8,959
    
    
    
    13,738
    
    
    
    16,124Recurring services
    
    
    18,542
    
    
    
    19,043
    
    
    
    37,280
    
    
    
    37,76825,760
    
    
    
    28,002
    
    
    
    51,018
    
    
    
    53,892Research and development expenses
    
    
    3,798
    
    
    
    5,239
    
    
    
    9,115
    
    
    
    11,021Selling, general and administrative expenses
    
    
    18,956
    
    
    
    20,208
    
    
    
    39,649
    
    
    
    41,008Amortization of acquisition related intangible assets
    
    
    714
    
    
    
    582
    
    
    
    1,409
    
    
    
    1,163Income from operations
    
    
    2,292
    
    
    
    1,973
    
    
    
    845
    
    
    
    700Interest income
    
    
    442
    
    
    
    448
    
    
    
    1,032
    
    
    
    947Interest expense
    
    
    (32
    )
    
    
    
    
    
    
    (32
    )
    
    
    Other income (expense)
    
    
    (204
    )
    
    
    (125
    )
    
    
    (348
    )
    
    
    82Income before taxes
    
    
    2,498
    
    
    
    2,296
    
    
    
    1,497
    
    
    
    1,729Income taxes
    
    
    1,099
    
    
    
    700
    
    
    
    970
    
    
    
    538Net income
    
    $
    1,399
    
    
    $
    1,596
    
    
    $
    527
    
    
    $
    1,191Net income per share  basic
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.03Shares used in basic per share computation
    
    
    38,843
    
    
    
    38,552
    
    
    
    38,825
    
    
    
    38,528Net income per share  diluted
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.03Shares used in diluted per share computation
    
    
    39,586
    
    
    
    39,114
    
    
    
    39,366
    
    
    
    39,143
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(In Thousands)Six Months Ended August 31,2007
    
    
    2006Operating ActivitiesNet income
    
    $
    527
    
    
    $
    1,191Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    6,371
    
    
    
    5,251Non-cash compensation expenses
    
    
    2,474
    
    
    
    2,749Change in accounts receivable
    
    
    6,117
    
    
    
    (6,003
    )Other changes in operating activities
    
    
    (7,911
    )
    
    
    (4,442
    )Net cash provided by (used in) operating activities
    
    
    7,578
    
    
    
    (1,254
    )Investing ActivitiesPurchases of property and equipment
    
    
    (3,183
    )
    
    
    (8,614
    )Purchase of Edify Corporation
    
    
    
    
    
    
    (926
    )Net cash used in investing activities
    
    
    (3,183
    )
    
    
    (9,540
    )Financing ActivitiesExercise of stock options
    
    
    1,272
    
    
    
    258Repurchase of common stock
    
    
    (3,168
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (1,896
    )
    
    
    258Effect of exchange rate changes on cash
    
    
    (99
    )
    
    
    423Increase (decrease) in cash and cash equivalents
    
    
    2,400
    
    
    
    (10,113
    )Cash and cash equivalents, beginning of period
    
    
    28,215
    
    
    
    42,076Cash and cash equivalents, end of period
    
    $
    30,615
    
    
    $
    31,963
  4




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Accumulated OtherCommon Stock
    
    
    Additional
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings (Deficit)
    
    
    Income (Loss)
    
    
    TotalBalances at February 28, 2007
    
    
    38,727,628
    
    
    $
    19
    
    
    $
    101,608
    
    
    $
    1,861
    
    
    $
    (304
    )
    
    $
    103,184Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    527
    
    
    
    
    
    
    
    527Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    378
    
    
    
    378Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    905Cumulative effect of adopting
FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,547
    )
    
    
    
    
    
    
    (2,547
    )Exercise of stock options
    
    
    281,480
    
    
    
    
    
    
    
    1,272
    
    
    
    
    
    
    
    
    
    
    
    1,272Repurchase and retirement
of shares
    
    
    (400,000
    )
    
    
    
    
    
    
    (3,168
    )
    
    
    
    
    
    
    
    
    
    
    (3,168
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,474
    
    
    
    
    
    
    
    
    
    
    
    2,474Balances at August 31, 2007
    
    
    38,609,108
    
    
    $
    19
    
    
    $
    102,186
    
    
    $
    (159
    )
    
    $
    74
    
    
    $
    102,120
  5




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INTERVOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED AUGUST 31, 2007
 Note A  Basis of Presentation
   Note B  Inventory
  August 31, 2007
    
    
    February 28, 2007Purchased parts
    
    $
    7,008
    
    
    $
    4,475Work in progress
    
    
    12,258
    
    
    
    9,276$
    19,266
    
    
    $
    13,751
 Note C  Property and Equipment
  August 31, 2007
    
    
    February 28, 2007Land and buildings
    
    $
    17,417
    
    
    $
    17,385Computer equipment and software
    
    
    54,892
    
    
    
    52,364Furniture and fixtures
    
    
    3,483
    
    
    
    3,344Hosted solutions equipment
    
    
    17,219
    
    
    
    16,481Maintenance services equipment
    
    
    6,807
    
    
    
    7,27499,818
    
    
    
    96,848Less allowance for accumulated depreciation
    
    
    67,129
    
    
    
    62,419Property and equipment, net
    
    $
    32,689
    
    
    $
    34,429
 Note D  Stock-based Compensation
  6




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Note E  Stockholders Equity
   Note F  Restructuring and other charges
 Fiscal 2008
   7




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Accrued BalanceOriginal Charge
    
    Payments
    
    August 31, 2007Severance payments and related benefits
    
    $
    1,804
    
    
    $
    (927
    )
    
    $
    877
  Fiscal 2007
  Accrued Balance
    
    
    
    
    
    
    Accrued BalanceFebruary 28, 2007
    
    
    Payments
    
    
    August 31, 2007Severance payments and related benefits
    
    $
    886
    
    
    $
    (708
    )
    
    $
    178Facility costs
    
    
    134
    
    
    
    (134
    )
    
    
    Total
    
    $
    1,020
    
    
    $
    (842
    )
    
    $
    178
  Note G  Income Taxes
   Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
  8




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Note H  Earnings Per Share
 (in thousands, except per share data)Three Months Ended August 31,
    
    
    Six Months Ended August 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income
    
    $
    1,399
    
    
    $
    1,596
    
    
    $
    527
    
    
    $
    1,191Denominator:Denominator for basic earnings per share
    
    
    38,843
    
    
    
    38,552
    
    
    
    38,825
    
    
    
    38,528Dilutive potential common sharesEmployee stock-based awards
    
    
    743
    
    
    
    562
    
    
    
    541
    
    
    
    615Denominator for diluted earnings per share
    
    
    39,586
    
    
    
    39,114
    
    
    
    39,366
    
    
    
    39,143Net income per shareBasic
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.03Diluted
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.03
  Note I  Operating Segment Information and Major Customers
  9




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Three Months Ended August 31,
    
    
    Six Months Ended August 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Voice portal solution sales
    
    $
    13,528
    
    
    $
    19,254
    
    
    $
    26,777
    
    
    $
    32,998Messaging solution sales
    
    
    7,992
    
    
    
    3,569
    
    
    
    14,518
    
    
    
    7,287Payment solution sales
    
    
    1,221
    
    
    
    1,422
    
    
    
    3,148
    
    
    
    3,429Total solution sales
    
    
    22,741
    
    
    
    24,245
    
    
    
    44,443
    
    
    
    43,714Maintenance and related
services revenues
    
    
    21,581
    
    
    
    20,666
    
    
    
    42,856
    
    
    
    40,851Hosted solutions revenues
    
    
    4,366
    
    
    
    5,569
    
    
    
    9,120
    
    
    
    11,583Total recurring services revenues
    
    
    25,947
    
    
    
    26,235
    
    
    
    51,976
    
    
    
    52,434Total sales
    
    $
    48,688
    
    
    $
    50,480
    
    
    $
    96,419
    
    
    $
    96,148
 Geographic Operations
  Three Months Ended August 31,
    
    
    Six Months Ended August 31,2007
    
    
    2006
    
    
    2007
    
    
    2006North America
    
    $
    31,052
    
    
    $
    32,206
    
    
    $
    62,216
    
    
    $
    59,247Europe
    
    
    8,106
    
    
    
    6,647
    
    
    
    16,357
    
    
    
    15,383Middle East and Africa
    
    
    5,636
    
    
    
    4,482
    
    
    
    10,567
    
    
    
    7,559Central and South America
    
    
    2,210
    
    
    
    4,718
    
    
    
    3,246
    
    
    
    9,444Pacific Rim
    
    
    1,684
    
    
    
    2,427
    
    
    
    4,033
    
    
    
    4,515Total
    
    $
    48,688
    
    
    $
    50,480
    
    
    $
    96,419
    
    
    $
    96,148
 Concentration of Revenue
  Note J  Contingencies
 Intellectual Property Matters
  10




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Pending Litigation
 David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v.
InterVoice-Brite, Inc., et al.,
    Phoenix Solutions, Inc. vs. Sony Electronics, Inc., Phoenix
Solutions, Inc. vs. Sony Electronics, Inc.,
 Audit Committee Investigation and Settlement with the SEC
  12




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Other Matters
   13




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14




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Note K  Subsequent Event
  15




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Critical Accounting Policies.
 Sales.
 Three Months Ended August 31,
    
    
    Six Months Ended August 31,2007
    
    
    % Change
    
    
    2006
    
    
    2007
    
    
    % Change
    
    
    2006Voice portal solution sales
    
    $
    13,528
    
    
    
    (29.7
    )%
    
    $
    19,254
    
    
    $
    26,777
    
    
    
    (18.9
    )%
    
    $
    32,998Messaging solution sales
    
    
    7,992
    
    
    
    123.9
    %
    
    
    3,569
    
    
    
    14,518
    
    
    
    99.2
    %
    
    
    7,287Payment solution sales
    
    
    1,221
    
    
    
    (14.1
    )%
    
    
    1,422
    
    
    
    3,148
    
    
    
    (8.2
    )%
    
    
    3,429Total solution sales
    
    
    22,741
    
    
    
    (6.2
    )%
    
    
    24,245
    
    
    
    44,443
    
    
    
    1.7
    %
    
    
    43,714Maintenance and related services revenues
    
    
    21,581
    
    
    
    4.4
    %
    
    
    20,666
    
    
    
    42,856
    
    
    
    4.9
    %
    
    
    40,851Hosted solutions revenues
    
    
    4,366
    
    
    
    (21.6
    )%
    
    
    5,569
    
    
    
    9,120
    
    
    
    (21.3
    )%
    
    
    11,583Total recurring services revenues
    
    
    25,947
    
    
    
    (1.1
    )%
    
    
    26,235
    
    
    
    51,976
    
    
    
    (0.9
    )%
    
    
    52,434Total sales
    
    $
    48,688
    
    
    
    (3.5
    )%
    
    $
    50,480
    
    
    $
    96,419
    
    
    
    0.3
    %
    
    $
    96,148
  Three Months Ended August 31,
    
    
    Six Months Ended August 31,2007
    
    
    % Change
    
    
    2006
    
    
    2007
    
    
    % Change
    
    
    2006North America
    
    $
    31,052
    
    
    
    (3.6
    )%
    
    $
    32,206
    
    
    $
    62,216
    
    
    
    5.0
    %
    
    $
    59,247Europe
    
    
    8,106
    
    
    
    21.9
    %
    
    
    6,647
    
    
    
    16,357
    
    
    
    6.3
    %
    
    
    15,383Middle East and Africa
    
    
    5,636
    
    
    
    25.7
    %
    
    
    4,482
    
    
    
    10,567
    
    
    
    39.8
    %
    
    
    7,559Central and South America
    
    
    2,210
    
    
    
    (53.2
    )%
    
    
    4,718
    
    
    
    3,246
    
    
    
    (65.6
    )%
    
    
    9,444Pacific Rim
    
    
    1,684
    
    
    
    (30.6
    )%
    
    
    2,427
    
    
    
    4,033
    
    
    
    (10.7
    )%
    
    
    4,515Total
    
    $
    48,688
    
    
    
    (3.5
    )%
    
    $
    50,480
    
    
    $
    96,419
    
    
    
    0.3
    %
    
    $
    96,148
    16




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Three Months Ended August 31,
    
    Six Months Ended August 31,2007
    
    2006
    
    2007
    
    2006Sales from recurring services and support contracts,
including contracts for hosted solutions
    
    
    53
    %
    
    
    52
    %
    
    
    54
    %
    
    
    55
    %Sales from beginning solutions backlog
    
    
    37
    %
    
    
    21
    %
    
    
    35
    %
    
    
    25
    %Sales from the quarters pipeline
    
    
    10
    %
    
    
    27
    %
    
    
    11
    %
    
    
    20
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  17




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##### Table of Contents



Quarter Ended
    
    BacklogAugust 31, 2007
    
    $
    64,463May 31, 2007
    
    $
    60,411February 28, 2007
    
    $
    54,115November 30, 2006
    
    $
    46,345August 31, 2006
    
    $
    41,639
   Cost of Goods Sold.
 Three Months Ended August 31,
    
    Six Months Ended August 31,2007
    
    2006
    
    2007
    
    2006Solutions COGS
    
    $
    15,523
    
    
    $
    15,286
    
    
    $
    30,705
    
    
    $
    27,590As percentage of solutions sales
    
    
    68.3
    %
    
    
    63.0
    %
    
    
    69.1
    %
    
    
    63.1
    %Recurring services COGS
    
    $
    7,405
    
    
    $
    7,192
    
    
    $
    14,696
    
    
    $
    14,666As percentage of services sales
    
    
    28.5
    %
    
    
    27.4
    %
    
    
    28.3
    %
    
    
    28.0
    %Total COGS
    
    $
    22,928
    
    
    $
    22,478
    
    
    $
    45,401
    
    
    $
    42,256As percentage of total sales
    
    
    47.1
    %
    
    
    44.5
    %
    
    
    47.1
    %
    
    
    43.9
    %
  18




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##### Table of Contents



Research and Development Expenses.
 Three Months Ended August 31,
    
    Six Months Ended August 31,2007
    
    2006
    
    2007
    
    2006Research and development expenses
(in thousands)
    
    $
    3,798
    
    
    $
    5,239
    
    
    $
    9,115
    
    
    $
    11,021As percentage of total sales
    
    
    7.8
    %
    
    
    10.4
    %
    
    
    9.5
    %
    
    
    11.5
    %
  ®
  Selling, General and Administrative Expenses.
 Three Months Ended August 31,
    
    Six Months Ended August 31,2007
    
    2006
    
    2007
    
    2006Selling, general and administrative
expenses (in thousands)
    
    $
    18,956
    
    
    $
    20,208
    
    
    $
    39,649
    
    
    $
    41,008As percentage of total sales
    
    
    38.9
    %
    
    
    40.0
    %
    
    
    41.1
    %
    
    
    42.7
    %
  19




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##### Table of Contents



Amortization of Acquired Intangible Assets.
 Income Taxes.
  Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
   20




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##### Table of Contents



Liquidity and Capital Resources.
        21




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##### Table of Contents



Adequacy of Cash Reserves.
 Impact of Inflation.
 
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
  Changes in internal control.
 22




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
    
    Our operating results may fluctuate significantly from period to period, and this may
cause our stock price to decline.Our revenue and operating results have fluctuated in the
past and we expect further fluctuations in the future. Given these fluctuations, we believe
that quarter to quarter comparisons of our revenue and operating results are not
necessarily meaningful or an accurate indicator of our future performance. As a result, our
results of operations may not meet the expectations of securities analysts or investors in
the future, which could cause our stock price to decline. Factors that contribute to
fluctuations in our operating results and can preclude our ability to accurately forecast
our results include the following:
 
    
    variability in the time periods necessary to complete projects and achieve
project milestones in order to recognize revenue, which may be influenced by
volume, size, timing, contractual terms of new licenses and renewals of existing
licenses and cash basis revenues;
    
    the components of our revenue that are deferred, including our
subscription-based hosted solutions and that portion of our software licenses
attributable to support and maintenance;
    
    volume, timing and fulfillment of customer orders, particularly with respect to
large orders (sales of approximately $1.0 million or more), some of which are
completed in the same quarter in which they are ordered and some of which are
completed over several quarters, and fluctuations in demand for our products and
services;
    
    our ability to complete orders from our solutions backlog, subject to timing
changes requested by our customers, and projects accounted for on a percentage of
completion basis, including estimates based on a variety of factors and subject to
revision;
    
    our ability to convert our pipeline of opportunities into sales;
    
    the use of low pricing to win important customers, and the possible recognition
of loss contingencies for certain projects that we estimate will be delivered at a
negative gross margin;
    
    the lengthy sales cycle for our products, which typically involve comprehensive
solutions that may require detailed customer evaluations;
    
    the performance of our international business, which accounts for a significant
portion of our consolidated revenues, and fluctuations in foreign currency exchange
rates;
    
    the mix of products we sell and services we offer and whether our products are
sold through our direct sales force or through an intermediary;
    
    introduction of new products, product upgrades or updates by us or our
competitors, and any resulting customer delays in purchasing products;
    
    any increased price sensitivity by our customers, particularly due to increased
competition including open source or free software;
    
    periodic difficult economic conditions, particularly affecting the technology
industry, as well as economic uncertainties;
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##### Table of Contents




    
    higher than anticipated costs related to fixed-price contracts with our
customers;
    
    our ability to effectively manage our operating expense levels;
    
    timing of significant marketing and sales promotions, and expenses incurred
pursuing new product or market opportunities;
    
    stock-based compensation expense, which we began recognizing for our stock-based
compensation plans in the first quarter of fiscal 2007;
    
    costs and charges related to certain events, including Sarbanes-Oxley compliance
efforts, matters relating to our litigation;
    
    the structure, timing and integration of acquisitions of businesses, products
and technologies and related disruption of our current business;
    
    factors that lead to substantial declines in estimated values of long-lived
assets below their carrying value; and
    
    changes in generally accepted accounting principles.
 Due to these and other factors, our revenue and operating results are difficult to forecast
and are prone to fluctuate, which may cause a decline in our stock price. Our expense levels
are based in significant part on our expectations of future revenue, and we may not be able
to reduce our expenses quickly to respond to a shortfall in projected revenue. Therefore,
our failure to meet revenue expectations could seriously harm our business, operating
results and financial condition. See the discussion entitled Sales in Item 2 of Part I
for a discussion of our system for estimating sales and tracking sales trends in our
business.
 
    
    We are subject to potential and pending lawsuits and other claims.We are subject to
certain potential and pending lawsuits and other claims discussed in Note J in Item 1 of
Part I of this quarterly report on Form 10-Q. Furthermore, we may become subject to claims.
Any adverse judgment, penalty or settlement related to any lawsuit or other such claim
could have consequences that would be material to our financial position or results of
operations. We may be required to indemnify certain of our current and former directors
and officers under existing arrangements in connection with the defense, or advancement of
defense-related expenses, we are currently providing to certain individuals in connection
with the class action lawsuit. Our insurance policies provide coverage for certain losses
and expenses incurred by us and our current and former directors and officers in connection
with claims made under the federal securities laws. These policies, however, exclude
losses and expenses related to the Barrie class action lawsuit discussed in Note J or to
other litigation based on claims that are substantially the same as the claims in the
Barrie class action and contain other customary provisions to limit or exclude coverage for
certain losses and expenses.
 
    
    We face intense competition based on product capabilities and we experience ever
increasing demands from our actual and prospective customers for our products to be
compatible with a variety of rapidly proliferating computing, telephony and computer
networking technologies and standards.Our success is dependent, to a large degree, on our
effectiveness in allocating resources to developing and improving products compatible with
those technologies, standards and functionalities that ultimately become widely accepted by
our current and prospective customers. Our success is also dependent, to a large degree, on
our ability to implement arrangements with vendors of complementary product offerings so
that we can provide our current and prospective customers greater functionality. Our
principal competitors include Avaya, Nortel, Nuance Communications, Comverse Technology,
Unisys and Alcatel/Lucent. Many of our competitors have greater financial, technological
and marketing resources than we have, as well as greater name recognition. Although we have
committed substantial resources to enhance our existing products and to develop and market
new products, there is no assurance we will be successful. In addition, it is possible
that new entrants to the market and strategic acquisitions and partnerships between
existing companies could increase the competition in the markets in which we participate.
An increase in such competition could materially adversely affect our ability to sell our
products, thereby adversely affecting our business, operating results and financial
condition.
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##### Table of Contents




    
    We may not be successful in selling and implementing our products and services in the
face of the new, standards-based market.Intervoice has historically provided complete,
bundled hardware and software solutions using internally developed components to address
our customers total business needs. The markets for our products have required a shift to
the development of products and services
based on an open, standards-based architecture such as the J2EE and Microsofts â.NET
environments utilizing VoiceXML and/or SALT standards. Such an open, standards-based
approach allows customers to independently purchase and combine hardware components,
standardized software modules, and customization, installation and integration services from
individual vendors deemed to offer the best value in the particular class of product or
service. In such an environment, we believe we may sell less hardware and fewer bundled
systems and may become increasingly dependent on our development and sale of software
application packages, customized software and consulting and integration services. This
shift places new challenges on us to hire and retain the mix of personnel necessary to
respond to this business environment, to adapt to the changing expense structure that the
new environment may tend to foster, to respond to potentially different competitors, and to
increase sales of services, customized software and application packages to offset reduced
sales of hardware and bundled solutions. Failure to develop, enhance, acquire and introduce
new products and services to respond to continually changing market conditions or customer
requirements, or lack of customer acceptance of our products or services will materially
adversely affect the value of our intellectual property, barriers to entry to our business,
customer retention, gross margins, and the results of operations and financial condition.
 
    
    We may not be able to retain our customer base, and, in particular, our more significant
customers.Our success is heavily dependent on our ability to retain our significant
customers. The loss of one of our significant customers could negatively impact our
operating results. Our installed base of customers generally is not contractually
obligated to place further solutions orders with us or to extend their services contracts
with us at the expiration of their current contracts.
    
    We will be harmed if we lose key business and technical personnel.We rely upon the
services of a relatively small number of key technical, project management and senior
management personnel, most of whom do not have employment contracts. If we were to lose
any of our key personnel, replacing them could be difficult and costly. If we were unable
to successfully and promptly replace such personnel, our business could be materially
harmed.
    
    Our reliance on significant vendor relationships could result in significant expense or
an inability to serve our customers if we lose these relationships.Although we generally
use standard parts and components in our products, some of our hardware components are
available only from a small number of vendors. Likewise, we license speech recognition
technology primarily from Nuance Communications, Inc., the dominant vendor for this
technology. As we continue to migrate to open, standards-based systems, we will become
increasingly dependent on our component suppliers and software vendors. To date, we have
been able to obtain adequate supplies of needed components and licenses in a timely manner,
and we expect to continue to be able to do so. Nevertheless, if our significant vendors are
unable to supply components or licenses at current levels, we may not be able to obtain
these items from another source or at historical prices. In such instances, we would be
unable to provide products and services to our customers or generate historical operating
margins, and our business and operating results would suffer.
 
    
    If third parties assert claims that our products or services infringe on their
technology and related intellectual property rights, whether the claims are made directly
against us or against our customers, we could incur substantial costs.We believe software
and technology companies, including us and others in our industry, increasingly may become
subject to infringement claims. Such claims may require us to enter into costly license
agreements or result in even more costly litigation. To the extent a licensing arrangement
is required, the arrangement may not be available at all, or, if available, may be very
expensive or even prohibitively expensive. As with any legal proceeding, there is no
guarantee we will prevail in any litigation instituted against us asserting infringement of
intellectual property rights. To the extent we suffer an adverse judgment, we might have to
pay substantial damages, discontinue the use and sale of infringing products, repurchase
infringing products from our customers in accordance with indemnity obligations, expend
significant resources to acquire non-infringing alternatives, and/or obtain licenses to the
intellectual property that has been infringed upon. As with licensing arrangements,
non-infringing substitute technologies may not be available and, if available, may be very
expensive, or even prohibitively expensive, to implement. Accordingly, for all of the
foregoing reasons, a claim of infringement could ultimately have a material adverse effect
on our business, financial condition and results of operations.
    
    We are exposed to risks related to our international operations that could increase our
costs and hurt our business.Our products are currently sold in more than 75 countries.
Our international sales were
 25




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##### Table of Contents



36% of total sales for each of the quarters ended August 31, 2007 and 2006. International
sales, personnel and property are subject to certain risks, including:
 
    
    terrorism;
    
    fluctuations in currency exchange rates;
    
    ability to collect on accounts receivable;
    
    the difficulty and expense of maintaining foreign offices and distribution
channels;
    
    tariffs and other barriers to trade;
    
    greater difficulty in protecting and enforcing intellectual property rights;
    
    general economic and political conditions in each country, including
nationalization of customers or channel partners;
    
    loss of revenue, property and equipment from expropriation;
    
    import and export licensing requirements; and
    
    additional expenses and risks inherent in conducting operations in
geographically distant locations, including risks arising from differences in
language and cultural approaches to the conduct of business.
 
    
    Our inability to meet contracted performance targets could subject us to significant
penalties.Many of our contracts, particularly for hosted solutions, foreign contracts and
contracts with telecommunication companies, include provisions for the assessment of
damages for delayed project completion and/or for our failure to achieve certain minimum
service levels. We have had to pay damages in the past and may have to pay additional
damages in the future. Any such future damages could be significant.
 
    
    Increasing consolidation in the telecommunications and financial industries could
adversely affect our revenues and profitability.The majority of our largest customers are
in the telecommunications and financial industries. These industries are undergoing
significant consolidation as a result of merger and acquisition activity. This activity
could result in a decrease in the number of customers purchasing our products and/or in
delayed purchases of our products by customers that are reviewing their strategic
alternatives in light of a pending merger or acquisition. If these results occur, our
revenues and profitability could decline or our loss could increase.
 
    
    Our products are complex, and software defects could reduce our revenues and expose us
to litigation.The software products we offer are complex and may contain errors or
defects, even after extensive testing and quality control, particularly in early versions.
Furthermore, because our products increasingly are designed around an open standards based
architecture incorporating elements developed by third parties, such errors or defects may
be outside of our direct ability to control or correct. Any defects or errors could
potentially result in loss of revenues, product returns or order cancellations, and could
potentially hinder market acceptance of our products and harm our reputation. Accordingly,
any defects or errors could have a material adverse effect on our business, results of
operations and financial condition. Our customer license agreements typically contain
provisions to limit our product warranty obligations and exposure to potential liability
claims.
 
    
    We have grown, and may continue to grow, through acquisitions, which could dilute our
existing shareholders and could involve substantial acquisition risks.As part of our
business strategy, we have in the past acquired, and expect to continue to acquire or make
investments in, other businesses and technologies. We may issue equity securities for
future acquisitions, which would dilute our existing shareholders, and we may incur debt in
connection with future acquisitions, which may include covenants or other restrictions that
hinder our ability to operate our business. Furthermore, our prior acquisitions required
substantial integration and management efforts. Acquisitions can involve a number of risks,
including:
 
    
    difficulty in transitioning and integrating the operations, facilities and
personnel of the acquired businesses, including different and complex order
processing, support and accounting and financial reporting systems;
    
    loss of key management, sales, research and development and other key employees
of the acquired company;
    
    difficulty in integrating acquired products into our product portfolio,
including engineering, sales and marketing integration;
    
    impairment of relationships with partners, suppliers and customers;
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##### Table of Contents




    
    difficulty in implementing and standardizing company-wide financial, accounting,
billing, information and other systems and the internal controls surrounding those
systems and processes;
    
    disruption of our ongoing operations and distraction of management and other
employees;
    
    difficulty in incorporating acquired technology and rights into our products and
technology;
    
    unanticipated expenses and delays in completing acquired development projects
and technology integration;
    
    difficulty in management of geographically remote operations in the United
States and internationally;
    
    delay of sales to customers pending resolution of product integration between
our existing and our newly acquired products; and
    
    difficulty entering new markets or businesses in which we have limited
experience.
 As a result of these and other risks, we may not realize anticipated benefits from our
acquisitions. Any failure to achieve these benefits or failure to successfully integrate
acquired businesses and technologies could result in a material adverse affect on our
business, results of operations and financial condition.
 
    
    Our stock price has been and may continue to be subject to wide fluctuations.Our stock
price historically has been volatile and may continue to be volatile in the future. Various
factors contribute to the volatility of our stock price, including business developments
(such as new product introductions and acquisitions or dispositions), litigation
developments, quarterly variations in our financial results, our ability to meet investors
expectations, and general economic and market conditions. In addition, third-party
announcements by our partners and competitors may contribute to our stock price volatility.
Certain types of investors may choose not to invest in stocks with this level of stock
price volatility. Fluctuations in our stock price could cause increased risk of shareholder
litigation, which could result in substantial costs and divert managements attention and
resources.
 
    
    We are exposed to risks related to our channel program that could decrease our revenues
and hurt our business.A significant amount of our sales are made through intermediaries
such as distributors, system integrators and other strategic channel partners. We endeavor
to increase the percentage of sales through intermediaries as we continue to focus our
sales efforts through the channel and other partners. We anticipate future revenue growth
to depend in large part on our success in expanding relationships, and establishing new
relationships, with intermediaries. These intermediaries may sell their own products or
other vendors products that compete with our products, and may compete with our own direct
sales force in certain sales opportunities. While we have instituted programs designed to
increase sales of our products through intermediaries, certain intermediaries may give
greater priority to products of other suppliers, including competitors. Our ability to grow
sales through intermediaries depends on our investment in appropriate financial incentives,
support and sales tools for intermediaries, while effectively alleviating conflict with our
own sales force. Failure to effect this strategy appropriately may result in certain
intermediaries choosing to cease or reduce the sales of our products, resulting in a
material adverse change in our business, results of operations and financial condition.
 
    
    Unanticipated changes in our effective tax rates or exposure to additional income tax
liabilities could affect our profitability or increase our loss. We are a U.S.-based
multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. We are
generally required to account for taxes in each jurisdiction in which we operate, including
making assumptions, interpretations and judgments with respect to the applicable tax
requirements. Our provision for income taxes is calculated based on a mix of earnings,
statutory rates, and enacted tax rules by jurisdiction, including transfer pricing.
Significant judgment is required in determining our provision for income taxes and in
evaluating our tax positions on a worldwide basis. It is possible that these positions may
be challenged which may have a significant impact on our effective tax rate, which could
affect our results of operations and financial condition.
 
    
    Failure to maintain effective internal controls could have a material adverse effect on
our business, results of operations, financial condition, and our stock price.A failure
to maintain adequate internal control procedures as required by Section 404 of the
Sarbanes-Oxley Act of 2002 may preclude our managements ability to conclude that we have
effective internal controls over our financial reporting. These internal controls are also
required for us to produce management financial information, make determinations on revenue
recognition and other material accounting issues, and prevent financial
 27




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##### Table of Contents




    
    We have sustained operating losses in the past, and may incur additional losses in the
future which may require us to raise additional capital on unfavorable terms.We cannot be
certain that our revenue will grow or that we will achieve or maintain profitable
operations in the future. If we are unable to return to and maintain profitability, the
market price for our stock may decline, perhaps substantially. If we have significant
operating losses, we may be required to raise additional capital to maintain or grow our
operations. Such additional capital may only be available at unfavorable terms that could
be dilutive to existing shareholders, have a high interest rate, contain restrictive
covenants, or contain other unfavorable terms.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Total Number of
    
    
    Maximum NumberShares Purchased as
    
    
    of Shares that MayPart of Publicly
    
    
    Yet Be PurchasedTotal Number of
    
    
    Average Price
    
    
    Announced Plans or
    
    
    Under the Plans or2007
    
    Shares Purchased
    
    
    Paid Per Share
    
    
    Programs
    
    
    ProgramsJune
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    July
    
    
    71,813
    
    
    $
    7.94
    
    
    
    71,813
    
    
    
    1,928,187August
    
    
    328,187
    
    
    $
    7.92
    
    
    
    328,187
    
    
    
    1,600,000Total
    
    
    400,000
    
    
    $
    7.92
    
    
    
    400,000
    
    
    
    1,600,000
 
 Item 4. Submission of Matters to a Vote of Security Holders
    28




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##### Table of Contents



Item 6. Exhibits
  3.1
    
    Articles of Incorporation, as amended, of Registrant. (1)3.2
    
    Amendment to Articles of Incorporation of Registrant. (2)3.3
    
    Amendment to Articles of Incorporation of Registrant. (3)3.4
    
    Third Restated Bylaws of Registrant. (4)4.1
    
    Third Amended and Restated Rights Agreement dated as of May 1, 2001
between the Registrant and Computershare Investor Services, LLC, as
Rights Agent. (5)4.2
    
    Registration Rights Agreement, dated as of May 29, 2002, between the
Registrant and each of the Buyers under the Securities Purchase
Agreement. (6)4.3
    
    First Amendment to Third Amended and Restated Rights Agreement dated
as of May 29, 2002, between Registrant and Computershare Investor
Services, LLC, as Rights Agent. (6)10.1
    
    General Release Agreement between Registrant and George T. Platt
effective July 27, 2007. (7)10.2
    
    First Amendment to Employment Agreement between Registrant and
Michael J. Polcyn effective July 16, 2007. (8)31.1
    
    Certification of Chief Executive Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a). (9)31.2
    
    Certification of Chief Financial Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a). (9)32.1
    
    Certification of Chief Executive Officer of Periodic Report Pursuant
to Rule 13a-14(b) and 18 U.S.C. Section 1350. (9)*32.2
    
    Certification of Chief Financial Officer of Periodic Report Pursuant
to Rule 13a-14(b) and 18 U.S.C. Section 1350. (9)*
 
 (1)
    
    Incorporated by reference to exhibits to the Companys 1995 Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, filed with the SEC on May 30, 1995.(2)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 1999, filed with the SEC on October 14, 1999.(3)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
quarter ended August 31, 2002, filed with the SEC on October 15, 2002.(4)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2004, filed with the SEC on October 12, 2004.(5)
    
    Incorporated by reference to exhibits to Form 8-A/A (Amendment 3) filed with the SEC on May
9, 2001.(6)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on May 30, 2002.(7)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on August 1, 2007.(8)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on August 21, 2007.(9)
    
    Filed herewith.*
    
    The certifications attached as Exhibit 32.1 and 32.2 accompany the Quarterly Report on Form 10-Q
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 29




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##### Table of Contents



SIGNATURES
  INTERVOICE, INC.Date:  October 5, 2007
    By:
    /s/ CRAIG E. HOLMESCraig E. HolmesExecutive Vice President and
Chief Financial Officer 30




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##### Table of Contents



Index to Exhibits
 ExhibitNo.
    
    Description3.1
    
    Articles of Incorporation, as amended, of Registrant. (1)3.2
    
    Amendment to Articles of Incorporation of Registrant. (2)3.3
    
    Amendment to Articles of Incorporation of Registrant. (3)3.4
    
    Third Restated Bylaws of Registrant. (4)4.1
    
    Third Amended and Restated Rights Agreement dated as of May 1,
2001 between the Registrant and Computershare Investor
Services, LLC, as Rights Agent. (5)4.2
    
    Registration Rights Agreement, dated as of May 29, 2002,
between the Registrant and each of the Buyers under the
Securities Purchase Agreement. (6)4.3
    
    First Amendment to Third Amended and Restated Rights Agreement
dated as of May 29, 2002, between Registrant and Computershare
Investor Services, LLC, as Rights Agent. (6)10.1
    
    General Release Agreement between Registrant and George T.
Platt effective July 27, 2007. (7)10.2
    
    First Amendment to Employment Agreement between Registrant and
Michael J. Polcyn effective July 16, 2007. (8)31.1
    
    Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (9)31.2
    
    Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (9)32.1
    
    Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. (9)*32.2
    
    Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. (9)*
 
 (1)
    
    Incorporated by reference to exhibits to the Companys 1995 Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, filed with the SEC on May 30, 1995.(2)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 1999, filed with the SEC on October 14, 1999.(3)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
quarter ended August 31, 2002, filed with the SEC on October 15, 2002.(4)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2004, filed with the SEC on October 12, 2004.(5)
    
    Incorporated by reference to exhibits to Form 8-A/A (Amendment 3) filed with the SEC on May
9, 2001.(6)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on May 30, 2002.(7)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on August 1, 2007.(8)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on August 21, 2007.(9)
    
    Filed herewith.*
    
    The certifications attached as Exhibit 32.1 and 32.2 accompany the Quarterly Report on Form 10-Q
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 31