##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

For the quarterly period ended June 30, 2002

OR

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

For the transition period from________________________ to

Commission File Number: 0-18323

SYNTELLECT INC.

(Exact name of registrant as specified in its charter)


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

16610 N. Black Canyon Highway, Suite 100, Phoenix, Arizona 85053

(Address of principal executive offices)
(Zip Code)


(602) 789-2800

(Registrants telephone number, including area code)


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

YES  (XBOX) NO  (BOX)

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

11,369,152 shares of common stock, $.01 par value per share, were
outstanding on August 14, 2002.





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TABLE OF CONTENTS



|                               |                                                                                               |                                                                        |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                               | PART I. FINANCIAL INFORMATION                                                               
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | Condensed Consolidated Balance Sheets                                 
|                               |                                                                                               | Condensed Consolidated Statements of Operations and Comprehensive Loss
|                               |                                                                                               | NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS              
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                            
|PART II -OTHER INFORMATION   
|                               | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                               | ITEM 5. OTHER INFORMATION                                                                    
|                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                    
|EX-3(ii)(a)                   
|EX-10(x)                      
|EX-10(x)(a)                   
|EX-10(xi)                     
|EX-99(a)                      
|EX-99(b)                      



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES
INDEX

|           |  |                                                                                                                                            |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                                                            |  | Page
|           |  |                                                                                                                                            |  |     
|PART I.    |  | FINANCIAL INFORMATION                                                                                                                      |  |     
|          
|          
|          
|          
|           |  |                                                                                                                                            |  |     
|          
|          
|          
|          
|Item 1.    |  | Financial Statements                                                                                                                       |  |     
|          
|          
|          
|          
|           |  |                                                                                                                                            |  |     
|          
|          
|          
|          
|           |  | Condensed Consolidated Balance Sheets  As of June 30, 2002 and December 31, 2001                                                          |  | 3   
|          
|          
|          
|          
|           |  |                                                                                                                                            |  |     
|          
|          
|          
|          
|           |  | Condensed Consolidated Statements of Operations
and Comprehensive Loss  Three Months and
Six Months Ended June 30, 2002 and June 30, 2001 |  | 4   
|          
|          
|          
|          
|           |  |                                                                                                                                            |  |     
|          
|          
|          
|          
|           |  | Condensed Consolidated Statements of Cash Flows  Six Months Ended
June 30, 2002 and June 30, 2001                                         |  | 5   
|          
|          
|          
|          
|           |  |                                                                                                                                            |  |     
|          
|          
|          
|          
|           |  | Notes to Condensed Consolidated Financial Statements                                                                                       |  | 6   
|          
|          
|          
|          
|           |  |                                                                                                                                            |  |     
|          
|          
|          
|          
|Item 2.    |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                                                      |  | 10  
|          
|          
|          
|          
|           |  |                                                                                                                                            |  |     
|          
|          
|          
|          
|Item 3.    |  | Quantitative and Qualitative Disclosure about Market Risk                                                                                  |  | 16  
|          
|          
|          
|          
|           |  |                                                                                                                                            |  |     
|          
|          
|          
|          
|PART
II.   |  | OTHER INFORMATION                                                                                                                          |  |     
|          
|          
|          
|          
|           |  |                                                                                                                                            |  |     
|          
|          
|          
|          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                                        |  | 17  
|          
|          
|          
|          
|           |  |                                                                                                                                            |  |     
|          
|          
|          
|          
|Item 5.    |  | Other Information                                                                                                                          |  | 17  
|          
|          
|          
|          
|           |  |                                                                                                                                            |  |     
|          
|          
|          
|          
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                                           |  | 17  
|          
|          
|          
|          
|           |  |                                                                                                                                            |  |     
|          
|          
|          
|          
|SIGNATURES |  | 18                                                                                                                                        

2



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##### Table of Contents









PART I. FINANCIAL INFORMATION




Item 1. Financial Statements




SYNTELLECT INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)

|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |              |   |        |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------------------------------------ | - | ----------- | ------ | ------------ | - | ------ |  | 
|                                                |                                                                                                                       |  |                                            |                                      |   | June 30,    |        | December 31,
|                                                |                                                                                                                       |  |                                            |                                      |   | 2002        |        | 2001        
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             
|                                                |                                                                                                                       |  |                                            |                                      |   | (unaudited) |        |              |   |       
|                                                |                                                                                                                       |  |                                            | Assets                               |   |             |        |              |   |        |  | 
|                                               
|                                               
|                                               
|                                               
|Current assets:                                 |                                                                                                                       |  |                                            |                                      |   |             |        |             
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                                                                                             |  | $                                          | 2,143                                |   |             | $      | 3,997        |  
|                                               
|                                               
|                                               
|                                               
|                                                | Trade receivables, net of allowance for doubtful accounts of $249 and $416, respectively                              |  |                                            | 6,576                                |   |             |        | 7,617        |  
|                                               
|                                               
|                                               
|                                               
|                                                | Note receivable                                                                                                       |  |                                            | 72                                   |   |             |        | 84           |  
|                                               
|                                               
|                                               
|                                               
|                                                | Other receivables                                                                                                     |  |                                            | 16                                   |   |             |        | 5            |  
|                                               
|                                               
|                                               
|                                               
|                                                | Inventories, net                                                                                                      |  |                                            | 557                                  |   |             |        | 634          |  
|                                               
|                                               
|                                               
|                                               
|                                                | Prepaid expenses                                                                                                      |  |                                            | 1,330                                |   |             |        | 1,072        |  
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             
|                                                |                                                                                                                       |  | Total current assets                       |                                      |   | 10,694      |        |              |   | 13,409 | 
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             
|Property and equipment, net                     |                                                                                                                       |  | 3,233                                      |                                      |   |             | 3,772  |             
|                                               
|                                               
|                                               
|                                               
|Note receivable, non-current portion            |                                                                                                                       |  | 159                                        |                                      |   |             | 202    |             
|                                               
|                                               
|                                               
|                                               
|Other assets                                    |                                                                                                                       |  | 662                                        |                                      |   |             | 816    |             
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             
|                                                |                                                                                                                       |  | Total assets                               |                                      | $ | 14,748      |        |              | $ | 18,199 | 
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             
|                                                |                                                                                                                       |  |                                            | Liabilities and Shareholders Equity |   |             |        |              |   |        |  | 
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                            |                                                                                                                       |  |                                            |                                      |   |             |        |             
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts payable                                                                                                      |  | $                                          | 3,358                                |   |             | $      | 2,145        |  
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued liabilities                                                                                                   |  |                                            | 1,443                                |   |             |        | 1,923        |  
|                                               
|                                               
|                                               
|                                               
|                                                | Customer deposits                                                                                                     |  |                                            | 199                                  |   |             |        | 232          |  
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred revenue                                                                                                      |  |                                            | 7,328                                |   |             |        | 8,129        |  
|                                               
|                                               
|                                               
|                                               
|                                                | Note payable                                                                                                          |  |                                            | 1,306                                |   |             |        | 1,449        |  
|                                               
|                                               
|                                               
|                                               
|                                                | Capital lease obligations  current portion                                                                           |  |                                            | 212                                  |   |             |        | 249          |  
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             
|                                                |                                                                                                                       |  | Total current liabilities                  |                                      |   | 13,846      |        |              |   | 14,127 | 
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             
|Deferred revenue  non-current portion          |                                                                                                                       |  | 309                                        |                                      |   |             |       |             
|                                               
|                                               
|                                               
|                                               
|Capital lease obligations  non-current portion |                                                                                                                       |  | 456                                        |                                      |   |             | 537    |             
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             
|                                                |                                                                                                                       |  | Total liabilities                          |                                      |   | 14,611      |        |              |   | 14,664 | 
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             
|Shareholders equity:                           |                                                                                                                       |  |                                            |                                      |   |             |        |             
|                                               
|                                               
|                                               
|                                               
|                                                | Preferred
stock, $.01 par value per share. Authorized 2,500,000 shares; no shares issued or outstanding               |  |                                            |                                     |   |             |        |             |  
|                                               
|                                               
|                                               
|                                               
|                                                | Common stock, $.01 par value per share. Authorized 25,000,000
shares; issued, 14,691,584 and 14,660,485, respectively |  |                                            | 147                                  |   |             |        | 147          |  
|                                               
|                                               
|                                               
|                                               
|                                                | Additional paid-in capital                                                                                            |  |                                            | 62,677                               |   |             |        | 62,628       |  
|                                               
|                                               
|                                               
|                                               
|                                                | Accumulated deficit                                                                                                   |  |                                            | (51,039                              | ) |             |        | (47,621      | )
|                                               
|                                               
|                                               
|                                               
|                                                | Accumulated other comprehensive loss                                                                                  |  |                                            | (234                                 | ) |             |        | (205         | )
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             
|                                                |                                                                                                                       |  | 11,551                                     |                                      |   |             | 14,949 |             
|                                               
|                                               
|                                               
|                                               
|                                                | Treasury stock, at cost, 3,322,432 shares                                                                             |  |                                            | (11,414                              | ) |             |        | (11,414      | )
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             
|                                                |                                                                                                                       |  | Total shareholders equity                 |                                      |   | 137         |        |              |   | 3,535  | 
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             
|                                                |                                                                                                                       |  | Total liabilities and shareholders equity |                                      | $ | 14,748      |        |              | $ | 18,199 | 
|                                                |                                                                                                                       |  |                                            |                                      |   |             |        |             

See accompanying notes to the condensed consolidated financial statements.

3



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##### Table of Contents






SYNTELLECT INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share amounts)
(unaudited)

|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |        |        |   | 
|---------------------------------------------- | --------------------------------------- | --------------------------------------- | ------ | ----- | ------------------ | - | ---------------- | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ------ | ------ | - | 
|                                               |                                         |                                         |        |       | Three Months Ended |   | Six Months Ended
|                                               |                                         |                                         |        |       | June 30,           |   | June 30,        
|                                               |                                         |                                         |        |       | 2002               |   | 2001             |       | 2002   |   | 2001  
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |       
|Net revenue:                                   |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Licenses                                |                                         | $      | 1,662 |                    |   | $                | 2,261 |        |   | $      | 5,273 |        |   | $      | 5,886  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Services                                |                                         |        | 4,711 |                    |   |                  | 4,948 |        |   |        | 9,174 |        |   |        | 10,583 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Hosted Services                         |                                         |        | 947   |                    |   |                  | 1,280 |        |   |        | 1,937 |        |   |        | 2,366  |       
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                               |                                         | Total net revenue                       |        |       | 7,320              |   |                  |       | 8,489  |   |        |       | 16,384 |   |        |        | 18,835 |  
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|Cost of revenue:                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Licenses                                |                                         |        | 339   |                    |   |                  | 590   |        |   |        | 1,362 |        |   |        | 1,517  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Services                                |                                         |        | 2,451 |                    |   |                  | 2,742 |        |   |        | 4,931 |        |   |        | 6,056  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Hosted Services                         |                                         |        | 962   |                    |   |                  | 1,080 |        |   |        | 1,831 |        |   |        | 2,151  |       
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                               |                                         | Total cost of revenue                   |        |       | 3,752              |   |                  |       | 4,412  |   |        |       | 8,124  |   |        |        | 9,724  |  
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|Gross margin                                   |                                         |                                         | 3,568  |       |                    |   | 4,077            |       |        |   | 8,260  |       |        |   | 9,111  |       
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|Operating expenses:                            |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Selling, marketing and administrative   |                                         |        | 4,582 |                    |   |                  | 5,507 |        |   |        | 9,069 |        |   |        | 11,530 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Research and development                |                                         |        | 1,356 |                    |   |                  | 1,051 |        |   |        | 2,519 |        |   |        | 2,299  |       
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                               |                                         | Total operating expenses                |        |       | 5,938              |   |                  |       | 6,558  |   |        |       | 11,588 |   |        |        | 13,829 |  
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                               |                                         | Operating loss                          |        |       | (2,370             | ) |                  |       | (2,481 | ) |        |       | (3,328 | ) |        |        | (4,718 | )
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|Other income (expense), net:                   |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Interest income (expense), net          |                                         |        | (23   | )                  |   |                  | 24    |        |   |        | (78   | )      |   |        | 56     |       
|                                              
|                                              
|                                              
|                                              
|                                               | Gain (loss) of disposal of assets       |                                         |        | 4     |                    |   |                  |      |        |   |        | (2    | )      |   |        |       |       
|                                              
|                                              
|                                              
|                                              
|                                               | Other expense                           |                                         |        | (7    | )                  |   |                  | (24   | )      |   |        | (10   | )      |   |        | (28    | )     
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                               |                                         | Total other income (expense), net       |        |       | (26                | ) |                  |       |       |   |        |       | (90    | ) |        |        | 28     |  
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                               |                                         | Loss before income taxes                |        |       | (2,396             | ) |                  |       | (2,481 | ) |        |       | (3,418 | ) |        |        | (4,690 | )
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                               |                                         | Net loss                                |        | $     | (2,396             | ) |                  | $     | (2,481 | ) |        | $     | (3,418 | ) |        | $      | (4,690 | )
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|Loss per common share  basic                  |                                         | $                                       | (0.21  | )     |                    | $ | (0.22            | )     |        | $ | (0.30  | )     |        | $ | (0.42  | )     
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|Loss per common share  diluted                |                                         | $                                       | (0.21  | )     |                    | $ | (0.22            | )     |        | $ | (0.30  | )     |        | $ | (0.42  | )     
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|Weighted average common share  basic          |                                         |                                         | 11,341 |       |                    |   | 11,220           |       |        |   | 11,340 |       |        |   | 11,207 |       
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|Weighted average common share  diluted        |                                         |                                         | 11,341 |       |                    |   | 11,220           |       |        |   | 11,340 |       |        |   | 11,207 |       
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                              
|                                               |                                         | Net loss                                |        | $     | (2,396             | ) |                  | $     | (2,481 | ) |        | $     | (3,418 | ) |        | $      | (4,690 | )
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|Other comprehensive income (loss), net of tax: |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Foreign currency translation adjustment |                                         |        | (25   | )                  |   |                  | 10    |        |   |        | (29   | )      |   |        | (40    | )     
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                               |                                         | Total other comprehensive income
(loss) |        |       | (25                | ) |                  |       | 10     |   |        |       | (29    | ) |        |        | (40    | )
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       
|                                               |                                         | Comprehensive loss                      |        | $     | (2,421             | ) |                  | $     | (2,471 | ) |        | $     | (3,447 | ) |        | $      | (4,730 | )
|                                               |                                         |                                         |        |       |                    |   |                  |       |        |   |        |       |        |   |        |       

See accompanying notes to the condensed consolidated financial statements.

4



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##### Table of Contents



SYNTELLECT INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

|                                                     |  |                                                                             |                                                     |   |                  |        |        |   |        |        |  
|---------------------------------------------------- |  | --------------------------------------------------------------------------- | --------------------------------------------------- | - | ---------------- | ------ | ------ | - | ------ | ------ | -
|                                                     |  |                                                                             |                                                     |   | Six Months Ended
|                                                     |  |                                                                             |                                                     |   | June 30,        
|                                                     |  |                                                                             |                                                     |   | 2002             |        | 2001  
|                                                     |  |                                                                             |                                                     |   |                  |        |       
|Cash flows from operating activities:                |  |                                                                             |                                                     |   |                  |        |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Net loss                                                                    |                                                     | $ | (3,418           | )      |        | $ | (4,690 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Adjustments to reconcile net loss to net cash used in operating activities: |                                                     |   |                  |        |        |   |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Depreciation and amortization                       |   |                  | 807    |        |   |        | 866    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Loss on disposal of property, plant, and equipment  |   |                  | 2      |        |   |        |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Provision for doubtful accounts                     |   |                  | 256    |        |   |        | 148    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Stock option compensation expense                   |   |                  | 6      |        |   |        |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Decrease in accounts receivable                     |   |                  | 785    |        |   |        | 4,217  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Decrease in inventories                             |   |                  | 77     |        |   |        | 403    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Increase in accounts payable                        |   |                  | 1,213  |        |   |        | 336    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Decrease in accrued liabilities                     |   |                  | (480   | )      |   |        | (1,426 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Decrease in deferred revenue                        |   |                  | (492   | )      |   |        | (141   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Decrease in customer deposits                       |   |                  | (33    | )      |   |        | (2,128 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Change in other assets and liabilities              |   |                  | (115   | )      |   |        | (562   | )
|                                                     |  |                                                                             |                                                     |   |                  |        |        |  
|                                                     |  |                                                                             | Net cash used in operating activities               |   |                  | (1,392 | )      |   |        | (2,977 | )
|                                                     |  |                                                                             |                                                     |   |                  |        |        |  
|Cash flows from investing activities:                |  |                                                                             |                                                     |   |                  |        |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Proceeds from short-term investment                                         |                                                     |   |                 |        |        |   | 75     |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Proceeds from note receivable                                               |                                                     |   | 55               |        |        |   |       |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Purchase of property and equipment                                          |                                                     |   | (245             | )      |        |   | (932   | )     
|                                                     |  |                                                                             |                                                     |   |                  |        |        |  
|                                                     |  |                                                                             | Net cash used in investing activities               |   |                  | (190   | )      |   |        | (857   | )
|                                                     |  |                                                                             |                                                     |   |                  |        |        |  
|Cash flows from financing activities:                |  |                                                                             |                                                     |   |                  |        |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Borrowings on line of credit                                                |                                                     |   | 2,435            |        |        |   | 1,059  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Repayments on line of credit                                                |                                                     |   | (2,578           | )      |        |   |       |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Proceeds from issuance of common stock                                      |                                                     |   | 19               |        |        |   | 244    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Payments on capital lease obligations                                       |                                                     |   | (119             | )      |        |   | (78    | )     
|                                                     |  |                                                                             |                                                     |   |                  |        |        |  
|                                                     |  |                                                                             | Net cash provided by (used in) financing activities |   |                  | (243   | )      |   |        | 1,225  |  
|                                                     |  |                                                                             |                                                     |   |                  |        |        |  
|Effect of exchange rates on cash                     |  |                                                                             | (29                                                 | ) |                  |        | (39    | )
|                                                     |  |                                                                             |                                                     |   |                  |        |        |  
|Net decrease in cash and cash equivalents            |  |                                                                             | (1,854                                              | ) |                  |        | (2,648 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of year       |  |                                                                             | 3,997                                               |   |                  |        | 7,334  |  
|                                                     |  |                                                                             |                                                     |   |                  |        |        |  
|Cash and cash equivalents at end of six month period |  | $                                                                           | 2,143                                               |   |                  | $      | 4,686  |  
|                                                     |  |                                                                             |                                                     |   |                  |        |        |  
|Supplemental disclosure of cash flow information:    |  |                                                                             |                                                     |   |                  |        |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Cash paid for interest                                                      |                                                     | $ | 58               |        |        | $ | 29     |       
|                                                     |  |                                                                             |                                                     |   |                  |        |        |  
|Significant non-cash transactions                    |  |                                                                             |                                                     |   |                  |        |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Warrants issued under credit facility                                       |                                                     | $ | 27               |        |        | $ |       |       
|                                                     |  |                                                                             |                                                     |   |                  |        |        |  

See accompanying notes to the condensed consolidated financial statements.

5



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##### Table of Contents



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

(1) Basis of Presentation

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

The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). In
our opinion, the financial statements include all adjustments of a normal
recurring nature, which are necessary for a fair presentation of the results
for the interim periods presented. Certain information and footnote
disclosures normally included in financial statements have been condensed or
omitted pursuant to such rules and regulations. Although we believe that the
disclosures are adequate to make the information presented not misleading, we
suggest that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in our
December 31, 2001 Annual Report on Form 10-K. The results of operations for
the three and six months ended June 30, 2002 are not necessarily indicative of
the results to be expected for the full year.

Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.

(2) Revenue Recognition

Our revenue is derived from three business segments: Licenses, Services
and Hosted Services. Revenue derived from Licenses and from Services is
recognized pursuant to Statement of Position 97-2, Software Revenue
Recognition(SOP 97-2); Statement of Position 98-9, Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions (SOP
98-9); and Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements(SAB No. 101). Revenue derived from Hosted Services is
recognized pursuant to the provisions of SAB No. 101. We strictly adhere to
the revenue recognition criteria under the guidance mentioned above and, based
on the nature of the Licenses and Services transactions, there are no
significant estimates or judgments necessary to apply the revenue recognition
policy. See Item 8  Financial Statements and Supplementary Data, Notes to
Consolidated Financial Statements in our December 31, 2001 Annual Report on
Form 10-K for a detailed description of our revenue recognition policy.

(3) Inventories

Inventories consist of the following:

|                                             |  |                |     |              |  |   |     |  | 
|-------------------------------------------- |  | -------------- | --- | ------------ |  | - | --- |  | 
|                                             |  | (in thousands)
|                                             |  | June 30,       |     | December 31,
|                                             |  | 2002           |     | 2001        
|                                             |  |                |     |             
|Finished Goods                               |  | $              | 132 |              |  | $ | 168 | 
|                                            
|                                            
|                                            
|                                            
|Purchased Components                         |  |                | 189 |              |  |   | 236 | 
|                                            
|                                            
|                                            
|                                            
|Repair, warranty, and maintenance components |  |                | 236 |              |  |   | 230 | 
|                                             |  |                |     |              |  |   |     | 
|                                             |  | $              | 557 |              |  | $ | 634 | 
|                                             |  |                |     |              |  |   |     | 

6



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##### Table of Contents






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

(4) Earnings (Loss) Per Share Computation

|                                                         |  |                                          |        |                  |  |               |        |               |  |   |        |   |  |   |        |  
|-------------------------------------------------------- |  | ---------------------------------------- | ------ | ---------------- |  | ------------- | ------ | ------------- |  | - | ------ | - |  | - | ------ | -
|                                                         |  | (in thousands, except per share amounts)
|                                                         |  | Three Months Ended                       |        | Six Months Ended
|                                                         |  |                                          |        |                 
|                                                         |  | June 30, 2002                            |        | June 30, 2001    |  | June 30, 2002 |        | June 30, 2001
|                                                         |  |                                          |        |                  |  |               |        |              
|Net loss                                                 |  | $                                        | (2,396 | )                |  | $             | (2,481 | )             |  | $ | (3,418 | ) |  | $ | (4,690 | )
|                                                         |  |                                          |        |                  |  |               |        |               |  |   |        |   |  |   |        |  
|Weighted average share outstanding  basic               |  |                                          | 11,341 |                  |  |               | 11,220 |               |  |   | 11,340 |   |  |   | 11,207 |  
|                                                         |  |                                          |        |                  |  |               |        |               |  |   |        |   |  |   |        |  
|Loss per share  basic                                   |  | $                                        | (0.21  | )                |  | $             | (0.22  | )             |  | $ | (0.30  | ) |  | $ | (0.42  | )
|                                                         |  |                                          |        |                  |  |               |        |               |  |   |        |   |  |   |        |  
|Weighted average shares outstanding  diluted            |  |                                          | 11,341 |                  |  |               | 11,220 |               |  |   | 11,340 |   |  |   | 11,207 |  
|                                                         |  |                                          |        |                  |  |               |        |               |  |   |        |   |  |   |        |  
|Effect of dilutive securities  stock options            |  |                                          | 0      |                  |  |               | 0      |               |  |   | 0      |   |  |   | 0      |  
|                                                         |  |                                          |        |                  |  |               |        |               |  |   |        |   |  |   |        |  
|Weighted average shares outstanding  diluted            |  |                                          | 11,341 |                  |  |               | 11,220 |               |  |   | 11,340 |   |  |   | 11,207 |  
|                                                         |  |                                          |        |                  |  |               |        |               |  |   |        |   |  |   |        |  
|Loss per share  diluted                                 |  | $                                        | (0.21  | )                |  | $             | (0.22  | )             |  | $ | (0.30  | ) |  | $ | (0.42  | )
|                                                         |  |                                          |        |                  |  |               |        |               |  |   |        |   |  |   |        |  
|Dilutive securities excluded from
diluted loss per share |  |                                          | 292    |                  |  |               | 312    |               |  |   | 348    |   |  |   | 474    |  
|                                                         |  |                                          |        |                  |  |               |        |               |  |   |        |   |  |   |        |  

The computation of diluted loss per share for the three-month periods
ended June 30, 2002 and 2001 and for the six-month periods ended June 30, 2002
and 2001 excluded the effect of certain incremental common shares attributable
to the assumed exercise of common stock options because their effect would be
anti-dilutive.

(5) Credit Facilities

On April 30, 2002, we elected an early termination of our $2.5 million,
asset-based, operating line of credit with a commercial lending institution.
The credit instrument accrued interest at prime plus 8.5% per annum with a
$7,500 minimum monthly finance charge. We could borrow according to a formula
on 65% of eligible domestic accounts receivable less than 90 days old,
excluding maintenance receivables. In place of that line of credit, on May 14,
2002, we executed an Accounts Receivable Financing Agreement (the Agreement)
for a one-year, $3.0 million, asset-based, operating line of credit with a
commercial banking institution. Any outstanding balance on this line of credit
incurs interest at a rate of prime plus 3.25% per annum plus a collateral
handling fee of .25% with a minimum monthly finance charge of $5,000 per month.
The maximum cash available under the terms of this Agreement is 80% of the
$3.0 million loan value, or $2.4 million. At June 30, 2002, the prime rate was
4.75% so that the interest rate would have been calculated at 8% per annum. We
may borrow according to a formula based on 80% of eligible accounts receivable
less than 90 days old, including certain maintenance receivables, selected
foreign receivables, and excluding customer deposits. The commercial banking
institution has a perfected first priority security interest in all company
assets. In addition, all current depository accounts are being relocated to
the new commercial bank.

At June 30, 2002, our outstanding balance on this credit facility was $1.3
million. Also at June 30, 2002, there was an additional $1.1 million available
to borrow.

7



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##### Table of Contents



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

(5)  Credit Facilities, continued

Furthermore, we issued fully vested warrants to purchase 30,000 shares of
our common stock to this commercial banking institution. These warrants expire
on May 14, 2007. The exercise price is $1.17 per share, which approximated the
market price of the underlying common stock on the date of grant. The value of
the warrants issued in connection with this Agreement was determined using the
Black-Scholes calculation to be $27,000 and has been capitalized on the balance
sheet. The deferred asset will be amortized as interest expense over the life
of the Agreement.

At June 30, 2002, we were in violation of the minimum EBITDA and adjusted
quick ratio covenants in the Agreement. On July 22 2002, we entered into a
Loan Modification and Forbearance Agreement (the Modification) to the
Agreement in which the bank agrees to abstain from calling the Agreement into
default due to violation of the covenants through October 30, 2002. The Modification also increased the
loan amount to $3.75 million, extended the expiration date to July 14, 2003,
and increased the collateral handling fee to 0.75% during a time of
non-compliance with the covenants of the Agreement. The maximum cash available
under the terms of the Modification is 80% of the $3.75 million loan value, or
$3.0 million. We were required to pay $10,000 in bank fees in order to execute
the Modification.

(6) Business Segments

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

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

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

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

8



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##### Table of Contents



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

(6) 
Business Segments, continued

|                                          |  |          |        |          |  |                 |       |       |  |   |       |   |  |   |        |  
|----------------------------------------- |  | -------- | ------ | -------- |  | --------------- | ----- | ----- |  | - | ----- | - |  | - | ------ | -
|                                          |  |          |        |          |  | (in thousands)  |       |       |  |  
|                                          |  | Licenses |        | Services |  | Hosted Services |       | Total
|                                          |  |          |        |          |  |                 |       |      
|Three-months ended June 30, 2002          |  |          |        |          |  |                 |       |       |  |   |       |   |  |   |        |  
|                                          |  |          |        |          |  |                 |       |       |  |   |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Revenue from customers                    |  | $        | 1,662  |          |  | $               | 4,711 |       |  | $ | 947   |   |  | $ | 7,320  |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 153    |          |  |                 | 76    |       |  |   | 180   |   |  |   | 409    |  
|                                         
|                                         
|                                         
|                                         
|Segment income (loss) before income taxes |  |          | (2,404 | )        |  |                 | 219   |       |  |   | (211  | ) |  |   | (2,396 | )
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |          | 58     |          |  |                 | 57    |       |  |   | 65    |   |  |   | 180    |  
|                                         
|                                         
|                                         
|                                         
|                                          |  |          |        |          |  |                 |       |       |  |   |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Three-months ended June 30, 2001          |  |          |        |          |  |                 |       |       |  |   |       |   |  |   |        |  
|                                          |  |          |        |          |  |                 |       |       |  |   |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Revenue from customers                    |  | $        | 2,261  |          |  | $               | 4,948 |       |  | $ | 1,280 |   |  | $ | 8,489  |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 192    |          |  |                 | 94    |       |  |   | 165   |   |  |   | 451    |  
|                                         
|                                         
|                                         
|                                         
|Segment loss before income taxes          |  |          | (1,909 | )        |  |                 | (530  | )     |  |   | (42   | ) |  |   | (2,481 | )
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |          | 347    |          |  |                 | 171   |       |  |   | 26    |   |  |   | 544    |  

|                                          |  |          |        |          |  |                 |        |       |  |   |       |   |  |   |        |  
|----------------------------------------- |  | -------- | ------ | -------- |  | --------------- | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                                          |  |          |        |          |  | (in thousands)  |        |       |  |  
|                                          |  | Licenses |        | Services |  | Hosted Services |        | Total
|                                          |  |          |        |          |  |                 |        |      
|Six-months ended June 30, 2002            |  |          |        |          |  |                 |        |       |  |   |       |   |  |   |        |  
|                                          |  |          |        |          |  |                 |        |       |  |   |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Revenue from customers                    |  | $        | 5,273  |          |  | $               | 9,174  |       |  | $ | 1,937 |   |  | $ | 16,384 |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 301    |          |  |                 | 149    |       |  |   | 357   |   |  |   | 807    |  
|                                         
|                                         
|                                         
|                                         
|Segment income (loss) before income taxes |  |          | (3,452 | )        |  |                 | 124    |       |  |   | (90   | ) |  |   | (3,418 | )
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |          | 106    |          |  |                 | 74     |       |  |   | 65    |   |  |   | 245    |  
|                                         
|                                         
|                                         
|                                         
|                                          |  |          |        |          |  |                 |        |       |  |   |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Six-months ended June 30, 2001            |  |          |        |          |  |                 |        |       |  |   |       |   |  |   |        |  
|                                          |  |          |        |          |  |                 |        |       |  |   |       |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Revenue from customers                    |  | $        | 5,886  |          |  | $               | 10,583 |       |  | $ | 2,366 |   |  | $ | 18,835 |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 360    |          |  |                 | 176    |       |  |   | 330   |   |  |   | 866    |  
|                                         
|                                         
|                                         
|                                         
|Segment loss before income taxes          |  |          | (3,170 | )        |  |                 | (1,170 | )     |  |   | (350  | ) |  |   | (4,690 | )
|                                         
|                                         
|                                         
|                                         
|Expenditures for segment assets           |  |          | 521    |          |  |                 | 257    |       |  |   | 154   |   |  |   | 932    |  

9



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##### Table of Contents






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

SUMMARY OF OPERATIONS

As the U.S. economy continued to weaken, particularly in the
telecommunication technology sector, many of our existing and potential
customers delayed capital investments. Additionally, recent corporate
announcements of financial misstatements and misrepresentations have affected
how companies evaluate potential new capital equipment and service providers,
further elongating the sales cycle. Due to the decline in revenue and order
bookings during the second quarter of 2002, we determined it necessary to
further reduce our operating expenses to a level commensurate with our revenue.
As a result, we took steps to decrease our estimated quarterly sales breakeven
level to approximately $8.0 million for the third quarter of 2002 by decreasing
salaries and reducing staff, which actions also reduced expenses associated
with payroll taxes, benefits, and travel.

CRITICAL ACCOUNTING POLICIES

For a complete discussion of our critical accounting policies, see Item 2
 Managements Discussion and Analysis of Financial Condition and Results of
Operations in our December 31, 2001 Annual Report of Form 10-K.

RESULTS OF OPERATIONS

Net Revenue

The following table summarizes our net revenue performance (in thousands)
for the three and six-month periods ended June 30, 2002 and 2001.

|                          |                         |      |                   |         |   |          |    |            |   |                    |       |            |   |          |    |            |   |          |        |                  |   |        |    |    |   |     |        |       |   |        |    |    |   |     |   | 
|------------------------- | ----------------------- | ---- | ----------------- | ------- | - | -------- | -- | ---------- | - | ------------------ | ----- | ---------- | - | -------- | -- | ---------- | - | -------- | ------ | ---------------- | - | ------ | -- | -- | - | --- | ------ | ----- | - | ------ | -- | -- | - | --- | - | 
|                          |                         |      |                   |         |   |          |    |            |   | Three-months ended |       |            |   |          |    |            |   |          |        | Six-months ended |   |        |    |   
|                          |                         |      |                   |         |   |          |    |           
|                          |                         |      |                   |         |   | June 30, |    | % of total |   | June 30,           |       | % of total |   | June 30, |    | % of total |   | June 30, |        | % of total      
|Current results           |                         | 2002 |                   | revenue |   | 2001     |    | revenue    |   | 2002               |       | revenue    |   | 2001     |    | revenue   
|                          |                         |      |                   |         |   |          |    |            |   |                    |       |            |   |          |    |           
|Licenses                  |                         | $    | 1,662             |         |   |          | 23 | %          |   | $                  | 2,261 |            |   |          | 27 | %          |   | $        | 5,273  |                  |   |        | 32 | %  |   | $   | 5,886  |       |   |        | 31 | % 
|                         
|                         
|                         
|                         
|Services                  |                         |      |                   |         |   |          |    |            |   |                    |       |            |   |          |    |            |   |          |        |                  |   |        |    |    |   |     |        |       |   |        |    |   
|                         
|                         
|                         
|                         
|                          | Application development |      |                   | 1,506   |   |          |    | 21         | % |                    |       | 1,213      |   |          |    | 14         | % |          |        | 2,622            |   |        |    | 16 | % |     |        | 3,236 |   |        |    | 17 | %
|                         
|                         
|                         
|                         
|                          | Project management      |      |                   | 248     |   |          |    | 3          | % |                    |       | 334        |   |          |    | 4          | % |          |        | 473              |   |        |    | 3  | % |     |        | 730   |   |        |    | 4  | %
|                         
|                         
|                         
|                         
|                          | Maintenance             |      |                   | 2,347   |   |          |    | 32         | % |                    |       | 2,537      |   |          |    | 30         | % |          |        | 4,740            |   |        |    | 29 | % |     |        | 4,800 |   |        |    | 25 | %
|                         
|                         
|                         
|                         
|                          | Installation            |      |                   | 107     |   |          |    | 1          | % |                    |       | 225        |   |          |    | 3          | % |          |        | 335              |   |        |    | 2  | % |     |        | 558   |   |        |    | 3  | %
|                         
|                         
|                         
|                         
|                          | Other services          |      |                   | 503     |   |          |    | 7          | % |                    |       | 639        |   |          |    | 7          | % |          |        | 1,004            |   |        |    | 6  | % |     |        | 1,259 |   |        |    | 7  | %
|                          |                         |      |                   |         |   |          |    |            |   |                    |       |            |   |          |    |            |   |          |        |                  |   |        |    |    |   |     |        |       |   |        |    |   
|Total services            |                         |      | 4,711             |         |   |          | 64 | %          |   |                    | 4,948 |            |   |          | 58 | %          |   |          | 9,174  |                  |   |        | 56 | %  |   |     | 10,583 |       |   |        | 56 | % 
|                         
|                         
|                         
|                         
|Hosted Services           |                         |      | 947               |         |   |          | 13 | %          |   |                    | 1,280 |            |   |          | 15 | %          |   |          | 1,937  |                  |   |        | 12 | %  |   |     | 2,366  |       |   |        | 13 | % 
|                          |                         |      |                   |         |   |          |    |            |   |                    |       |            |   |          |    |            |   |          |        |                  |   |        |    |    |   |     |        |       |   |        |    |   
|
|                          |                         |      | Total net revenue |         | $ | 7,320    |    |            |   | 100                | %     |            | $ | 8,489    |    |            |   | 100      | %      |                  | $ | 16,384 |    |    |   | 100 | %      |       | $ | 18,835 |    |    |   | 100 | %
|                          |                         |      |                   |         |   |          |    |            |   |                    |       |            |   |          |    |            |   |          |        |                  |   |        |    |    |   |     |        |       |   |        |    |   
|Domestic                  |                         | $    | 5,894             |         |   |          | 81 | %          |   | $                  | 5,889 |            |   |          | 69 | %          |   | $        | 13,402 |                  |   |        | 82 | %  |   | $   | 13,989 |       |   |        | 74 | % 
|                         
|                         
|                         
|                         
|International             |                         |      | 1,426             |         |   |          | 19 | %          |   |                    | 2,600 |            |   |          | 31 | %          |   |          | 2,982  |                  |   |        | 18 | %  |   |     | 4,846  |       |   |        | 26 | % 
|                          |                         |      |                   |         |   |          |    |            |   |                    |       |            |   |          |    |            |   |          |        |                  |   |        |    |    |   |     |        |       |   |        |    |   
|
|                          |                         |      | Total net revenue |         | $ | 7,320    |    |            |   | 100                | %     |            | $ | 8,489    |    |            |   | 100      | %      |                  | $ | 16,384 |    |    |   | 100 | %      |       | $ | 18,835 |    |    |   | 100 | %
|                          |                         |      |                   |         |   |          |    |            |   |                    |       |            |   |          |    |            |   |          |        |                  |   |        |    |    |   |     |        |       |   |        |    |   
|Direct licenses revenue   |                         | $    | 1,452             |         |   |          | 87 | %          |   | $                  | 1,679 |            |   |          | 74 | %          |   | $        | 4,954  |                  |   |        | 94 | %  |   | $   | 5,299  |       |   |        | 90 | % 
|                         
|                         
|                         
|                         
|Indirect licenses revenue |                         |      | 210               |         |   |          | 13 | %          |   |                    | 582   |            |   |          | 26 | %          |   |          | 319    |                  |   |        | 6  | %  |   |     | 587    |       |   |        | 10 | % 
|                          |                         |      |                   |         |   |          |    |            |   |                    |       |            |   |          |    |            |   |          |        |                  |   |        |    |    |   |     |        |       |   |        |    |   
|                          |                         |      | Total net revenue |         | $ | 1,662    |    |            |   | 100                | %     |            | $ | 2,261    |    |            |   | 100      | %      |                  | $ | 5,273  |    |    |   | 100 | %      |       | $ | 5,886  |    |    |   | 100 | %
|                          |                         |      |                   |         |   |          |    |            |   |                    |       |            |   |          |    |            |   |          |        |                  |   |        |    |    |   |     |        |       |   |        |    |   

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Net revenue for the quarter ended June 30, 2002 was $7.3 million, a
decrease of $1.2 million, or 14%, from the $8.5 million reported for the second
quarter of 2001. Net revenue for the six-month period ended June 30, 2002 and
2001 was $16.4 million and $18.8 million, a decrease of $2.4 million, or 13%.
Net revenue consists of Licenses, Services, and Hosted Services, which
represented 23%, 64%, and 13% of net revenue, respectively, for the quarter
ended June 30, 2002, and 27%, 58% and 15% of net revenue, respectively, for the
comparable prior year period. Domestic and international revenue for the
quarter ended June 30, 2002 was $5.9 million, or 81%, and $1.4 million, or 19%,
of total revenue, respectively, compared to $5.9 million, or 69%, and $2.6
million, or 31%, of total revenue, respectively, for the same period in 2001.
Domestic and international revenue for the six months ended June 30, 2002 was
$5.0 million, or 94%, and $0.3 million, or 6%, of total revenue, respectively,
compared to $5.3 million, or 90%, and $0.6 million, or 10%, of total revenue,
respectively, for the same period in 2001.

Licenses revenue for the quarter ended June 30, 2002 was $1.7 million, a
decrease of $0.6 million, or 26%, from the $2.3 million reported for the
quarter ended June 30, 2001. Licenses revenue for the six months ended June
30, 2002 was $5.3 million, a decrease of $0.6 million, or 10%, when compared to
the six months ended June 30, 2001. These decreases were primarily due to our
inability to book sufficient orders caused by our existing and potential
customers capital purchase delays intensified by economic conditions.
Speech-enabled licenses represented $0.3 million, or 18%, of the Licenses
revenue for the quarter ended June 30, 2002 compared to 0% in the prior year
and $1.1 million, or 31%, in the prior quarter. The amount of speech-enabled
licenses sold is an important operating measure to us because natural speech
technology is the biggest driver of growth in the IVR industry.

Services revenue for the quarter ended June 30, 2002 decreased $0.2
million, or 5%, to $4.7 million when compared to the $4.9 million reported in
the same period in 2001. Services revenue for the six months ended June 30,
2002 was $9.2 million, a decrease of $1.4 million, or 13%, when compared to the
same prior year period. The change in Services revenue for the second quarter
of 2002 compared to the second quarter of 2001 consists of application
services, $0.3 million increase; project management, $0.1 million decrease;
maintenance, $0.2 million decrease; installation, $0.1 million decrease; and
other services, $0.1 million decrease. Services revenue from application
services, installations, and project management generally is recognized within
six months following the quarter in which an order has been booked. During that
time period, the Services revenue is reported as backlog.

Hosted Services revenue for the quarter ended June 30, 2002 was $0.9
million compared to $1.3 million for the same period in 2001, a decrease of
$0.4 million, or 26%. Hosted Services revenue was $1.9 million for the six
months ended June 30, 2002, a decrease of $0.4 million, or 18%, when compared
to the same prior year period. Hosted Services consists of Home Ticket, voice
services, Vista IMR hosted services, and other hosted services. Voice services
provide media voice files for all of our application services, hosted and
on-site systems. Vista IMR hosted services may include Lead Capture, Speech
Enabled Directory, Site Locator, disaster mitigation, disaster recovery,
electronic payment processing, broadcast faxing, and call center processing.
The primary reason for the decrease in Hosted Services revenue is the declining
demand for analog, pay-per-view services that our Home Ticket product offers.

Gross Margin

The following table summarizes our gross margin performance (in thousands)
for the three and six-month periods ended June 30, 2002 and 2001.

|                   |                 |      |                    |          |                  |      |          |          |              |      |          |          |              |      |          |          |              |   |       |       |  |  |    |    |   |   |       |       |  |  |    |    |  
|------------------ | --------------- | ---- | ------------------ | -------- | ---------------- | ---- | -------- | -------- | ------------ | ---- | -------- | -------- | ------------ | ---- | -------- | -------- | ------------ | - | ----- | ----- |  |  | -- | -- | - | - | ----- | ----- |  |  | -- | -- | -
|                   |                 |      | Three-months ended |          | Six-months ended
|                   |                 |      |                    |          |                 
|                   |                 |      | June 30,           |          | % of revenue     |      | June 30, |          | % of revenue |      | June 30, |          | % of revenue |      | June 30, |          | % of revenue
|Current results    |                 | 2002 |                    | category |                  | 2001 |          | category |              | 2002 |          | category |              | 2001 |          | category
|                   |                 |      |                    |          |                  |      |          |          |              |      |          |          |              |      |          |         
|                   | Licenses        |      | $                  | 1,323    |                  |      |          | 80       | %            |      | $        | 1,671    |              |      |          | 74       | %            |   | $     | 3,911 |  |  |    | 74 | % |   | $     | 4,369 |  |  |    | 74 | %
|                  
|                  
|                  
|                  
|                   | Services        |      |                    | 2,260    |                  |      |          | 48       | %            |      |          | 2,206    |              |      |          | 45       | %            |   |       | 4,243 |  |  |    | 46 | % |   |       | 4,527 |  |  |    | 43 | %
|                  
|                  
|                  
|                  
|                   | Hosted Services |      |                    | (15      | )                |      |          | -2       | %            |      |          | 200      |              |      |          | 16       | %            |   |       | 106   |  |  |    | 5  | % |   |       | 215   |  |  |    | 9  | %
|                   |                 |      |                    |          |                  |      |          |          |              |      |          |          |              |      |          |          |              |   |       |       |  |  |    |    |   |   |       |       |  |  |    |   
|Total gross margin |                 | $    | 3,568              |          |                  |      | 49       | %        |              | $    | 4,077    |          |              |      | 48       | %        |              | $ | 8,260 |       |  |  | 50 | %  |   | $ | 9,111 |       |  |  | 48 | % 
|                   |                 |      |                    |          |                  |      |          |          |              |      |          |          |              |      |          |          |              |   |       |       |  |  |    |    |   |   |       |       |  |  |    |   

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The gross margin percentage for the quarter ended June 30, 2002 was 49% of
net revenue, an increase of 1% when compared to the 48% achieved in the second
quarter of the prior year. The gross margin percentage for the six-month
periods ended June 30, 2002 and 2001 were 50% and 48% of net revenue,
respectively. In dollar terms, the gross margin for the quarter and six months
ended June 30, 2002 decreased $0.5 million, or 12%, and $0.9 million, or 9%,
respectively, which can be accounted for by evaluating product mix, volume, and
change in gross margin percentage. The decrease in net revenue for the quarter
and six-month period ended June 30, 2002 accounts for decreases of $0.6 million
and $1.2 million, respectively, in the gross margin. Those decreases are
offset by the improved gross margin percentages of 1% and 2%, respectively,
which is a positive effect of $52,000 and $0.3 million, respectively.

Gross margin for Licenses increased to 80% of Licenses revenue in the
second quarter of 2002 from 74% in the second quarter of 2001 due to a reduced
amount of the speech-enabled and other third-party licenses sold. Natural
speech content declined to $0.3 million, or 18%, of Licenses revenue in the
second quarter of 2002 compared to $1.1 million, or 31%, in the first quarter
of 2002. The gross margin realized is approximately 57% for speech-enabled
licenses, 68% for other third-party licenses, and 80% for Vista licenses.
Consequently, the product mix directly affects the gross margin realized for
Licenses.

Gross margin for Services increased to 48% for the quarter ended June 30,
2002 from 45% for the quarter ended June 30, 2001, an improvement of 3%. Gross
margin for Services was 46% for the six-month period ended June 30, 2002, an
increase of 3% over the 43% reported for the same period in 2001. In the first
half of 2001, we initiated programs to improve the long-term Services margin.
The improvement in the gross margin percentage resulted from continued cost
controls, including the reduced use of third party professional services. In
addition, our natural speech and consulting services allow for an increased
utilization of our current resources at higher billing rates.

Hosted Services produced a gross margin of -2% for the quarter ended June
30, 2002, which is an 18-percentage point decrease from the 16% gross margin
percentage for the quarter ended June 30, 2001. Gross margin for Hosted
Services was 5% for the six-month period ended June 30, 2002, a decrease of 4%
from the 9% gross margin percentage recorded in the same period in 2001.
Because our current Hosted Services center operates at significantly less than
full capacity and Hosted Services overhead is fixed by nature, any decrease in
Hosted Services revenue will significantly decrease the gross margin percentage
as was evidenced during the quarter ended June 30, 2002. We have restated the
gross margin for Hosted Services to reflect the effect of $83,000 and $0.2
million in depreciation for the three and six months ended June 30, 2001,
respectively, which has been reclassified from selling, marketing, and
administrative expenses.

The mix of direct versus indirect Licenses revenue and domestic versus
international net revenue affects the gross margin. Direct and indirect
Licenses revenue for the quarter ended June 30, 2002 was $1.5 million and $0.2
million, or 87% and 13%, respectively. Direct and indirect Licenses revenue
for the quarter ended June 30, 2001 was $1.7 million and $0.6 million, or 74%
and 26%, respectively. We experience an approximate 86% gross margin on
indirect sales and an approximate 70% on direct sales. The gross margin on
direct sales is lower because these orders tend to be much larger and therefore
carry larger discounts. Domestic and international net revenue for the quarter
ended June 30, 2002 was $5.9 million and $1.4 million, or 81% and 19%,
respectively. Domestic and international net revenue for the quarter ended
June 30, 2001 was $5.9 million and $2.6 million, or 69% and 31%, respectively.
Domestic gross margin on net revenue was 55% compared to international gross
margin on net revenue of 60% for the quarter ended June 30, 2002. Domestic
Licenses and Services gross margins was 88% and 44%, respectively, compared to
international Licenses and Services gross margins of 57% and 73%, respectively,
for the quarter ended June 30, 2002. Accordingly, changes in the product mix
among Licenses versus Services, domestic versus international, and direct
versus indirect can and do have a dramatic impact on our reported gross margin.

Our gross margin will fluctuate on a period-to-period basis as a result of
changes in competitive pressures, sales volume, product mix, period cost
policy, variations in the ratio of domestic versus international sales, or
changes in the mix of direct and indirect sales activity. Accordingly, the
gross margins we report for 2002 and 2001 are not necessarily indicative of the
results you should expect for future periods.

Operating Expenses

The following table summarizes our operating expense experience (in
thousands) for the three and six-month periods ended June 30, 2002 and 2001.

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|                                       |                          |   |                    |       |            |  |          |    |                  |   |          |       |            |  |          |    |            |   |       |        |  |  |    |    |   |   |        |        |  |  |    |    |  
|-------------------------------------- | ------------------------ | - | ------------------ | ----- | ---------- |  | -------- | -- | ---------------- | - | -------- | ----- | ---------- |  | -------- | -- | ---------- | - | ----- | ------ |  |  | -- | -- | - | - | ------ | ------ |  |  | -- | -- | -
|                                       |                          |   | Three-months ended |       |            |  |          |    | Six-months ended |   |          |       |           
|                                       |                          |   |                    |       |           
|                                       |                          |   | June 30,           |       | % of total |  | June 30, |    | % of total       |   | June 30, |       | % of total |  | June 30, |    | % of total
|                                       |                          |   | 2002               |       | revenue    |  | 2001     |    | revenue          |   | 2002     |       | revenue    |  | 2001     |    | revenue   
|Current Results                        |                          |   |                    |       |            |  |          |    |                  |   |          |       |            |  |          |   
|Selling, marketing, and administrative |                          | $ | 4,582              |       |            |  | 63       | %  |                  | $ | 5,507    |       |            |  | 65       | %  |            | $ | 9,069 |        |  |  | 55 | %  |   | $ | 11,530 |        |  |  | 61 | % 
|                                      
|                                      
|                                      
|                                      
|Research and development               |                          |   | 1,356              |       |            |  | 19       | %  |                  |   | 1,051    |       |            |  | 12       | %  |            |   | 2,519 |        |  |  | 15 | %  |   |   | 2,299  |        |  |  | 12 | % 
|                                       |                          |   |                    |       |            |  |          |    |                  |   |          |       |            |  |          |    |            |   |       |        |  |  |    |    |   |   |        |        |  |  |    |   
|                                       | Total operating expenses |   | $                  | 5,938 |            |  |          | 81 | %                |   | $        | 6,558 |            |  |          | 77 | %          |   | $     | 11,588 |  |  |    | 71 | % |   | $      | 13,829 |  |  |    | 73 | %
|                                       |                          |   |                    |       |            |  |          |    |                  |   |          |       |            |  |          |    |            |   |       |        |  |  |    |    |   |   |        |        |  |  |    |   

Operating expenses for the second quarter of 2002 were $5.9 million, a
decrease of $0.6 million, or 9%, from the second quarter of 2001 of $6.5
million. Operating expenses for the six months ended June 30, 2002 were $11.6
million, a decrease of $2.2 million, or 16%, when compared to the $13.8 million
recorded in the same period in 2001. In an overall cost cutting strategy, all
areas of costs were evaluated and excess spending eliminated. Selling,
marketing and administrative expenses for the quarter and six months ended June
30, 2002 decreased $0.9 million, or 17%, and $2.5 million, or 21%, when
compared to the prior year period. The reduced employee costs, including
travel, relocation, and recruiting, accounted for approximately $0.6 million
and $1.1 million of the decrease for the quarter and six-month period ended
June 30, 2002, respectively. During the same periods, we experienced
additional decreases of $0.5 million and $0.8 million in other general
administrative expenses such as marketing, professional fees, telephone,
depreciation, shareholder costs, and insurance. The effects of the costs
savings experienced in employee related and general administrative expenses
were offset by a $0.2 million increase in bad debt and occupancy costs in the
second quarter of 2002. In the first quarter of 2001, we incurred a $0.6
million charge for a corporate restructuring and a $0.2 million marketing
charge to enhance our corporate image. Research and development expenses for
the quarter ended June 30, 2002 experienced an increase of $0.3 million, or
29%, primarily due to fees associated with certain partner alliances and a
non-recurring, employee-related expense.

During the quarter ended June 30, 2002, we eliminated 14 positions in
sales, marketing, and administration and 1 position in research and
development. Subsequent to the end of the quarter, we eliminated an additional
15 positions in sales, marketing, and administration and 8 positions in
research and development. Those 38 positions approximated 30% of total sales,
marketing, administration, and research and development positions. During and
subsequent to the second quarter of 2002, we eliminated 21 other positions for
a total of 59 positions eliminated company-wide. Additionally, on July 15,
2002, we announced a 10% salary cut for all employees. These measures to
reduce our overhead will allow us to breakeven at approximately $8.0 million in
revenue during the third quarter of 2002.

Backlog

Our backlog represents the amounts of non-cancelable, unfilled orders
received. We expect to recognize as revenue approximately half of the June 30,
2002 backlog during the third quarter of 2002. The following table summarizes
our revenue backlog by business segment at June 30, 2002 and June 30, 2001.

|                        |  |          |       |            |  |          |    |            |  |   |       |  |  |  |    |  
|----------------------- |  | -------- | ----- | ---------- |  | -------- | -- | ---------- |  | - | ----- |  |  |  | -- | -
|                        |  | June 30, |       | % of total |  | June 30, |    | % of total
|Current backlog         |  | 2002     |       | backlog    |  | 2001     |    | backlog   
|                        |  |          |       |            |  |          |    |           
|Licenses backlog        |  | $        | 129   |            |  |          | 3  | %          |  | $ | 483   |  |  |  | 10 | %
|                       
|                       
|                       
|                       
|Services backlog        |  |          | 4,218 |            |  |          | 94 | %          |  |   | 4,163 |  |  |  | 90 | %
|                       
|                       
|                       
|                       
|Hosted Services backlog |  |          | 128   |            |  |          | 3  | %          |  |   |      |  |  |  | 0  | %
|                        |  |          |       |            |  |          |    |            |  |   |       |  |  |  |    |  
|                        |  | $        | 4,475 |            |  |          |    |            |  | $ | 4,646 |  |  |  |    |  
|                        |  |          |       |            |  |          |    |            |  |   |       |  |  |  |    |  

Our backlog was $4.5 million at June 30, 2002 and $4.6 million at June 30,
2001, a decline of $0.1 million, or 4%. We generate revenue by two general
means: orders booked and backlog completion. We experienced a decline in
orders booked during the second quarter of 2002 when compared with both
the second quarter of 2001 and first quarter of 2002. Our orders booked during
the second quarter of 2002 totaled $4.2 million compared to $5.8 million for
the second quarter of 2001, a $1.6 million, or 28%, decline year over year. Our
orders booked for the first quarter of 2002 totaled $4.5 million, a decline of
$0.3 million, or 7%, compared to the current quarter.

Our backlog of Licenses during the quarters ended June 30, 2002 and March
31, 2002 remained steady at $0.1 million. The Licenses backlog at the quarters
ended June 30, 2002 and 2001 was $0.1 million and $0.5 million,

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respectively, a
decrease of $0.4 million, or 73%. Licenses usually are delivered within a few
days after receipt of an order. Occasionally, due to contractual obligations,
we are unable to recognize the revenue or immediately ship the licenses. The
revenue associated with those licenses remains in the backlog for future
recognition. As a result, the Licenses backlog should be a relatively small
amount.

Our Services backlog decreased $0.2 million during the second quarter of
2002 when compared to the first quarter of 2002. The backlog decreases as we
complete orders and recognize revenue on those orders. Currently, our Services
backlog equates to an amount approximating two quarters of Services revenue at
current capacity and is sufficient for us to attain our planned Services
revenue for the remainder of 2002. Our Services backlog was $4.2 million and
$4.1 million at the quarters ended June 30, 2002 and 2001, respectively, an
increase of $55,000, or 1%.

Revenue generated from Hosted Services is generally transaction based.
Although most of our contracts provide for guaranteed monthly transaction
amounts, we do not include those guaranteed amounts in the backlog figure for
Hosted Services. The $0.1 million noted in the above table is related to the
application development and set-up fees for our Service Bureau IMR services,
which is included in other hosted services, as well as the backlog of voice
services associated with the application development of our Vista IMR systems.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents at June 30, 2002 were $2.1 million and at
December 31, 2001 were $4.0 million, a decrease of $1.9 million. Our working
capital deficit increased from $0.7 million at December 31, 2001 to a deficit
of $3.2 million at June 30, 2002. Our net loss of $3.4 million was the
dominant factor affecting our cash position and negative change in working
capital. However, because our deferred revenue is comprised mainly of prepaid,
deferred maintenance revenue, our adjusted quick ratio (as used as a
measurement of liquidity in the software industry), calculated by dividing the
sum of cash and accounts receivable by current liabilities less deferred
revenue, is 1.34 as of June 30, 2002. At December 31, 2001, our adjusted quick
ratio was 1.94. We believe our liquidity position is sufficient to meet our
short-term cash obligations of accounts payable, accrued liabilities, note
payable, and capital lease obligations for the third quarter of 2002.

For the first six months of 2002, we used cash in operating activities of
$1.4 million compared to $3.0 million for the prior year, a positive change of
$1.6 million. The primary factors affecting the difference between net loss
and cash used in operating activities for the six months ended June 30, 2002
was the positive effect of the decrease in accounts receivable of $0.8 million,
the increase in accounts payable of $1.2 million, and the non-cash expenses,
such as depreciation and provision for doubtful accounts, in the amount of $1.1
million. These positive effects were offset by a decrease in accrued
liabilities of $0.5 million and a decrease in deferred revenue of $0.5 million.
The decrease in accounts receivable stemmed from increased collection efforts
and decreased revenue. The increase in accounts payable resulted from
extending certain vendor payments. The decrease in accrued liabilities is
evidence of our decreased spending. The decrease in deferred revenue was
caused by the decrease in revenue and order bookings.

Cash used in investing activities, namely the purchase of property and
equipment, was $0.2 million during the six-month period ended June 30, 2002 as
compared to $0.9 million during the six-month period ended June 30, 2001.
During the first six months of 2002, we purchased capital assets in the amount
of $245,000 and collected $55,000 due on the note receivable. For the first
six months of 2001, we purchased capital assets in the amount of $0.9 million
and cashed-in a short-term investment in the amount of $75,000.

Cash used in financing activities was $0.2 million during the six-month
period ended June 30, 2002 as compared to $1.2 million provided by financing
activities during the six-month period ended June 30, 2001. During the first
six months of 2002, the net activity on our line of credit facility resulted in
a repayment of $0.1 million. In addition, we made payments on our capital
lease obligations in the amount of $0.1 million. For the first six months of
2001, we
issued common stock in the amount of $0.2 million and borrowed from our
line of credit in the amount of $1.1 million. During that same time period, we
made payments on our capital lease obligations in the amount of $0.1 million.

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

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Internal Sources of Liquidity

During the year ended December 31, 2001, we began several initiatives to
address our sales efforts, our cost structures, our cash management and our
Services delivery efficiencies in light of the changing economic environment.
In the second quarter of 2002, we continue to see favorable results from these
efforts as demonstrated by our lower cost of revenue and selling, marketing,
and administrative expenses. Due to the recent decline in revenue and order
bookings, it was necessary to further reduce the operating expenses to a level
that can be supported by our companys revenue. We have decreased the
estimated quarterly sales breakeven level to approximately $8.0 million for the
third quarter of 2002 through salary decreases and staff reductions, including
the expenses associated with payroll taxes, benefits, and travel.

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

We believe the continued benefits of these measures will allow us to
generate sufficient operating funds from internal sources to successfully run
our business in the year ahead. We expect our current cash and cash
equivalents, combined with future cash flows from operating activities, to be
sufficient to support our operations for the remainder of 2002. We will
utilize our credit facility, when and only if necessary, to supplant
operational cash needs.

External Sources of Liquidity

On April 30, 2002, we elected an early termination to our $2.5 million
asset-based operating line of credit with a commercial lending institution. In
place of that line of credit, on May 14, 2002, we executed an Accounts
Receivable Financing Agreement (the Agreement) for a one-year, $3.0 million,
asset-based, operating line of credit with a commercial banking institution.
The maximum cash available under the terms of this Agreement is 80% of the $3.0
million loan value, or $2.4 million. The new line of credit has lower interest
rates, lower minimum monthly interest payments, lower facility fee, less
stringent covenants, and an increased borrowing base. We will utilize the
line, when necessary, for operational cash needs. At June 30, 2002, we were in
violation of the minimum EBITDA and adjusted quick ratio covenants in the
Agreement. On July 22, 2002, we entered into a Forbearance Modification to the
Agreement in which the bank agrees to abstain from calling the Agreement into
default due to violation of the covenants through October 30, 2002. The modification also increased the
loan amount to $3.75 million, extended the expiration date to July 14, 2003,
and increased the collateral handling fee to 0.75% during a time of
non-compliance with the covenants of the Agreement. The maximum cash available
under the terms of this Modification is 80% of the $3.75 million loan value, or
$3.0 million.

At June 30, 2002, our outstanding balance on this credit facility was $1.3
million. Also at June 30, 2002, there was an additional $1.1 million available
to borrow.

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK

Our exposure to market risk in connection with interest rate changes
relates to our cash investment portfolio. Our general policy is to limit the
risk of principal loss and to ensure the safety of invested funds by limiting
market and interest rate risk. We place our investments in instruments with
highly rated issuers. We classify all liquid investments with a maturity date
of three months or less as cash equivalents. As of June 30, 2002, our earned
interest rate on our cash equivalents was 0.31% compared to 1.61% at December
31, 2001. We do not expect any material loss with respect to our cash
investment portfolio.

Our asset-based operating line of credit bears interest at prime plus
3.25%. During the first two quarters of 2002, the prime rate has held steady
at 4.75%. At August 14, 2002, we had an outstanding balance of $1.8 million
under this line of credit. The full amount was classified as current and will
be paid from receipts of customer receivables. Due to the current nature of
the debt, the requirement to make payments on the outstanding balance as
receivables are collected, and the currently low prime rate, we do not believe
that market risk related to this line of credit is significant. We anticipate
no material exposure to market risk in connection with interest rate changes,
as they relate to our current liabilities.

Our only long-term liabilities are capital lease obligations, which bear
interest 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 position and operating results of that subsidiary into U.S.
dollars in the course of consolidating our financial statements. At this time,
we do not use instruments to hedge our foreign exchange exposure in the U.K.
because the effects of foreign exchange rate fluctuations do not materially
affect us.

ADDITIONAL CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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##### Table of Contents






PART II -OTHER INFORMATION




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



| | (a) |  | We held our Annual Meeting of Stockholders on May 20, 2002 at
our corporate headquarters located in Phoenix, AZ.                                                                                                                                                                                       
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | At the Annual Meeting of Stockholders, Camille Jayne and Kent
C. Mueller were elected to three-year terms on the Board of
Directors. The terms of Anthony V. Carollo, Jr., Michael R. Bruce,
Dr. Roy A. Herberger, Jr., and Michael D. Kaufman as directors of
our company continued after the meeting.
|
| | (c) |  | The following table sets forth the tabulation of votes for
the election of directors at the Annual Meeting of Stockholders:                                                                                                                                                                            

|                      |  |           |           |                |  |  |        | 
|--------------------- |  | --------- | --------- | -------------- |  |  | ------ | 
|Name                  |  | Voted For |           | Votes Withheld
|                      |  |           |           |               
|Camille Jayne         |  |           | 4,232,504 |                |  |  | 13,100 | 
|                     
|                     
|                     
|                     
|Kent C. Mueller       |  |           | 4,100,645 |                |  |  | 26,332 | 
|                     
|                     
|                     
|                     
|William P. Conlin (1) |  |           | 4,100,645 |                |  |  | 26,332 | 



---

|(1) |  | Mr. Conlin chose not to stand for re-election at the meeting.
|--- |  | -------------------------------------------------------------



| |  |  | At the Annual Meeting of Stockholders, the stockholders approved the
ratification of KPMG LLP as our independent auditors for the 2002
fiscal year. There were 8,247,092 votes cast for the ratification,
33,698 votes cast against the ratification, and 91,791 abstentions.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




ITEM 5. OTHER INFORMATION

On August 12, 2002, our companys common stock was de-listed from the
Nasdaq National Market because of our inability to meet the minimum, continued
listing qualifications. Our common stock will continue to trade on the Nasdaq
OTC Bulletin Board.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

| |  |     |  |                                                                                |  |                                                                                                                       
| |  | --- |  | ------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------
| |  | (a) |  | Exhibits                                                                       |  |                                                                                                                       
|
|
|
|
| |  |     |  |                                                                                |  |                                                                                                                       
|
|
|
|
| |  |     |  | 3(ii)(a)                                                                       |  | By-laws of Syntellect Inc. as Amended and Restated through August 6, 2002                                             
|
|
|
|
| |  |     |  |                                                                                |  |                                                                                                                       
|
|
|
|
| |  |     |  | 10(x)                                                                          |  | Accounts Receivable Financing Agreement                                                                               
|
|
|
|
| |  |     |  |                                                                                |  |                                                                                                                       
|
|
|
|
| |  |     |  | 10(x)(a)                                                                       |  | Loan Modification and Forbearance Agreement                                                                           
|
|
|
|
| |  |     |  |                                                                                |  |                                                                                                                       
|
|
|
|
| |  |     |  | 10(xi)                                                                         |  | Warrant to Purchase Stock                                                                                             
|
|
|
|
| |  |     |  |                                                                                |  |                                                                                                                       
|
|
|
|
| |  |     |  | 99(a)                                                                          |  | Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
| |  |     |  |                                                                                |  |                                                                                                                       
|
|
|
|
| |  |     |  | 99(b)                                                                          |  | Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
| |  |     |  |                                                                                |  |                                                                                                                       
|
|
|
|
| |  | (b) |  | Reports on Form 8-K                                                           
|
|
|
|
| |  |     |  |                                                                                |  |                                                                                                                       
|
|
|
|
| |  |     |  | No reports on Form 8-K have been filed during the quarter ended June 30, 2002.

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SIGNATURES

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

|      |  |                 |  |                 |  |                                                                                                                                                                
|----- |  | --------------- |  | --------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date: |  | August 14, 2002 |  | 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)

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##### Table of Contents



Exhibit Index

|              |  |                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                           
|             
|             
|             
|             
|              |  |                                                                                                                       
|             
|             
|             
|             
|3(ii)(a)      |  | By-laws of Syntellect Inc. as Amended and Restated through August 6, 2002                                             
|             
|             
|             
|             
|              |  |                                                                                                                       
|             
|             
|             
|             
|10(x)         |  | Accounts Receivable Financing Agreement                                                                               
|             
|             
|             
|             
|              |  |                                                                                                                       
|             
|             
|             
|             
|10(x)(a)      |  | Loan Modification and Forbearance Agreement                                                                           
|             
|             
|             
|             
|              |  |                                                                                                                       
|             
|             
|             
|             
|10(xi)        |  | Warrant to Purchase Stock                                                                                             
|             
|             
|             
|             
|              |  |                                                                                                                       
|             
|             
|             
|             
|99(a)         |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|             
|             
|             
|             
|              |  |                                                                                                                       
|             
|             
|             
|             
|99(b)         |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

19