##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED
August 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 1-15045
 INTERVOICE, INC.
 (Exact name of registrant as specified in its charter)
 TEXAS
    
    75-1927578(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 17811 WATERVIEW PARKWAY, DALLAS, TX 75252
(Address of principal executive offices)
 972-454-8000
(Registrants telephone number, including area code)
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [Ö] No[ ]
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer
[Ö] Non-Accelerated Filer [ ]
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes [ ] No [Ö]
 The Registrant had 38,580,006 shares of common stock, no par value per share, outstanding as of
September 25, 2006.




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2 Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 4 Controls and ProceduresPART II. OTHER INFORMATIONItem 1 Legal ProceedingsItem 1A Risk FactorsItem 4 Submission of Matters to a Vote of Security HoldersItem 6 ExhibitsSIGNATURESIndex to ExhibitsSan Tomas Business Park Office LeaseAmended and Restated Employment AgreementCertification of CEO Pursuant to  Rule 13a-14(a)Certification of CFO Pursuant to  Rule 13a-14(a)Certification of CEO Pursuant to  Rule 13a-14(b)Certification of CFO Pursuant to  Rule 13a-14(b)    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 (In Thousands, Except Share and Per Share Data)ASSETS
    
    August 31, 2006
    
    
    February 28, 2006(Unaudited)Current AssetsCash and cash equivalents
    
    $
    31,963
    
    
    $
    42,076Trade accounts receivable, net of allowance for
doubtful accounts of $1,882 in fiscal 2007 and
$1,701 in fiscal 2006
    
    
    31,889
    
    
    
    25,745Inventory
    
    
    12,257
    
    
    
    9,439Prepaid expenses and other current assets
    
    
    6,383
    
    
    
    4,406Deferred income taxes
    
    
    3,182
    
    
    
    3,04785,674
    
    
    
    84,713Property and Equipment, net of accumulated depreciation of
$63,343 in fiscal 2007 and $59,002 in fiscal 2006
    
    
    33,636
    
    
    
    28,893Other AssetsIntangible assets, net of accumulated amortization of $18,589
in fiscal 2007 and $17,343 in fiscal 2006
    
    
    9,038
    
    
    
    10,284Goodwill
    
    
    32,461
    
    
    
    32,461Long term deferred income taxes
    
    
    2,108
    
    
    
    1,330Other assets
    
    
    496
    
    
    
    454$
    163,413
    
    
    $
    158,135LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    14,477
    
    
    $
    10,154Accrued expenses
    
    
    12,181
    
    
    
    15,176Customer deposits
    
    
    5,449
    
    
    
    6,157Deferred income
    
    
    31,133
    
    
    
    32,172Income taxes payable
    
    
    1,135
    
    
    
    484Deferred income taxes
    
    
    
    
    
    
    27064,375
    
    
    
    64,413Stockholders EquityPreferred stock, $100 par value2,000,000
shares authorized: none issuedCommon stock, no par value, at nominal
assigned value62,000,000 shares
authorized: 38,578,339 issued and
outstanding in fiscal 2007 and 38,470,087 issued
and outstanding in fiscal 2006
    
    
    19
    
    
    
    19Additional capital
    
    
    95,057
    
    
    
    92,050Retained earnings
    
    
    4,749
    
    
    
    3,558Accumulated other comprehensive loss
    
    
    (787
    )
    
    
    (1,905
    )Stockholders equity
    
    
    99,038
    
    
    
    93,722$
    163,413
    
    
    $
    158,135
  2




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(In Thousands, Except Per Share Data)Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2006
    
    
    2005SalesSolutions
    
    $
    24,245
    
    
    $
    22,022
    
    
    $
    43,714
    
    
    $
    43,392Recurring services
    
    
    26,235
    
    
    
    21,268
    
    
    
    52,434
    
    
    
    43,16150,480
    
    
    
    43,290
    
    
    
    96,148
    
    
    
    86,553Cost of goods soldSolutions
    
    
    15,286
    
    
    
    13,050
    
    
    
    27,590
    
    
    
    25,854Recurring services
    
    
    7,192
    
    
    
    6,273
    
    
    
    14,666
    
    
    
    12,38522,478
    
    
    
    19,323
    
    
    
    42,256
    
    
    
    38,239Gross marginSolutions
    
    
    8,959
    
    
    
    8,972
    
    
    
    16,124
    
    
    
    17,538Recurring services
    
    
    19,043
    
    
    
    14,995
    
    
    
    37,768
    
    
    
    30,77628,002
    
    
    
    23,967
    
    
    
    53,892
    
    
    
    48,314Research and development expenses
    
    
    5,239
    
    
    
    3,884
    
    
    
    11,021
    
    
    
    8,079Selling, general and administrative expenses
    
    
    20,208
    
    
    
    15,367
    
    
    
    41,008
    
    
    
    30,800Amortization of acquisition related intangible assets
    
    
    582
    
    
    
    252
    
    
    
    1,163
    
    
    
    504Income from operations
    
    
    1,973
    
    
    
    4,464
    
    
    
    700
    
    
    
    8,931Interest income
    
    
    448
    
    
    
    599
    
    
    
    947
    
    
    
    1,096Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )Other income (expense)
    
    
    (125
    )
    
    
    36
    
    
    
    82
    
    
    
    162Income before taxes
    
    
    2,296
    
    
    
    5,099
    
    
    
    1,729
    
    
    
    10,164Income taxes
    
    
    700
    
    
    
    498
    
    
    
    538
    
    
    
    1,644Net income
    
    $
    1,596
    
    
    $
    4,601
    
    
    $
    1,191
    
    
    $
    8,520Net income per share  basic
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.23Shares used in basic per share computation
    
    
    38,552
    
    
    
    38,130
    
    
    
    38,528
    
    
    
    37,831Net income per share  diluted
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.22Shares used in diluted per share computation
    
    
    39,114
    
    
    
    38,997
    
    
    
    39,143
    
    
    
    39,043
  3




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(In Thousands)Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating activitiesNet income
    
    $
    1,596
    
    
    $
    4,601
    
    
    $
    1,191
    
    
    $
    8,520Adjustments to reconcile net income
to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    2,573
    
    
    
    1,870
    
    
    
    5,251
    
    
    
    3,592Non-cash compensation expense
    
    
    1,368
    
    
    
    
    
    
    
    2,749
    
    
    
    Change in accounts receivable
    
    
    (6,062
    )
    
    
    3,942
    
    
    
    (6,003
    )
    
    
    4,930Other changes in operating activities
    
    
    (4,756
    )
    
    
    1,045
    
    
    
    (4,442
    )
    
    
    (2,612
    )Net cash provided by (used in) operating activities
    
    
    (5,281
    )
    
    
    11,458
    
    
    
    (1,254
    )
    
    
    14,430Investing activitiesPurchases of property and equipment
    
    
    (4,207
    )
    
    
    (3,912
    )
    
    
    (8,614
    )
    
    
    (7,044
    )Purchase of Edify Corporation
    
    
    (90
    )
    
    
    
    
    
    
    (926
    )
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (300
    )Net cash used in investing activities
    
    
    (4,297
    )
    
    
    (3,912
    )
    
    
    (9,540
    )
    
    
    (7,344
    )Financing activitiesPaydown of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,733
    )Exercise of stock options
    
    
    109
    
    
    
    585
    
    
    
    258
    
    
    
    2,078Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500Net cash provided by financing activities
    
    
    109
    
    
    
    585
    
    
    
    258
    
    
    
    2,845Effect of exchange rates on cash
    
    
    (30
    )
    
    
    (155
    )
    
    
    423
    
    
    
    (781
    )Increase (decrease) in cash and cash equivalents
    
    
    (9,499
    )
    
    
    7,976
    
    
    
    (10,113
    )
    
    
    9,150Cash and cash equivalents, beginning of period
    
    
    41,462
    
    
    
    61,416
    
    
    
    42,076
    
    
    
    60,242Cash and cash equivalents, end of period
    
    $
    31,963
    
    
    $
    69,392
    
    
    $
    31,963
    
    
    $
    69,392
  4




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Accumulated OtherCommon Stock
    
    
    Additional
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    TotalBalance at February 28, 2006
    
    
    38,470,087
    
    
    $
    19
    
    
    $
    92,050
    
    
    $
    3,558
    
    
    $
    (1,905
    )
    
    $
    93,722Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,191
    
    
    
    
    
    
    
    1,191Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,118
    
    
    
    1,118Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,309Exercise of stock options
    
    
    108,252
    
    
    
    
    
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    258Non-cash compensation
    
    
    
    
    
    
    
    
    
    
    2,749
    
    
    
    
    
    
    
    
    
    
    
    2,749Balance at August 31, 2006
    
    
    38,578,339
    
    
    $
    19
    
    
    $
    95,057
    
    
    $
    4,749
    
    
    $
    (787
    )
    
    $
    99,038
  5




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED AUGUST 31, 2006
 Note A  Basis of Presentation
   Note B  Acquisition of Edify Corporation
   Three Months Ended
    
    
    Six Months EndedAugust 31, 2005
    
    
    August 31, 2005(unaudited)
    
    
    (unaudited)Sales
    
    $
    51,308
    
    
    $
    102,087Income before income taxes
    
    
    5,242
    
    
    
    9,930Net income
    
    
    4,788
    
    
    
    8,422Net income per share:
    
    
    0.12
    
    
    
    0.22
 6




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Note C  Inventory
  August 31, 2006
    
    
    February 28, 2006Purchased parts
    
    $
    4,857
    
    
    $
    3,908Work in progress
    
    
    7,400
    
    
    
    5,531$
    12,257
    
    
    $
    9,439
 Note D  Property and Equipment
  August 31, 2006
    
    
    February 28, 2006Land and buildings
    
    $
    17,434
    
    
    $
    16,932Computer equipment and software
    
    
    50,423
    
    
    
    42,817Furniture and fixtures
    
    
    3,352
    
    
    
    3,165Hosted solutions equipment
    
    
    17,181
    
    
    
    16,331Maintenance services equipment
    
    
    8,589
    
    
    
    8,65096,979
    
    
    
    87,895Less allowance for accumulated depreciation
    
    
    63,343
    
    
    
    59,002Property and equipment, net
    
    $
    33,636
    
    
    $
    28,893
  Note E  Stock-based Compensation
 Accounting for Stock Issued to Employees
 Share-Based Payments
 7




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Three Months Ended
    
    
    Six Months EndedAugust 31, 2006
    
    
    August 31, 2006Cost of Goods Sold
    
    $
    261
    
    
    $
    524R&D
    
    
    131
    
    
    
    281SG&A
    
    
    931
    
    
    
    1,857Decrease in operating income
    
    $
    1,323
    
    
    $
    2,662Related deferred income tax benefit
    
    
    389
    
    
    
    778Decrease in net income
    
    $
    934
    
    
    $
    1,884Decrease in earnings per share  basic
    
    $
    0.02
    
    
    $
    0.05Decrease in earnings per share  diluted
    
    $
    0.02
    
    
    $
    0.05
 Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123
 Three Months Ended
    
    
    Six Months EndedAugust 31, 2005
    
    
    August 31, 2005Net income, as reported
    
    $
    4,601
    
    
    $
    8,520Less: Total stock-based compensation
expense determined under fair
value based methods for all awards
    
    
    (2,005
    )
    
    
    (3,238
    )Pro forma net income
    
    
    2,596
    
    
    
    5,282Net income per share:Basic  as reported
    
    $
    0.12
    
    
    $
    0.23Basic  pro forma
    
    $
    0.07
    
    
    $
    0.14Diluted  as reported
    
    $
    0.12
    
    
    $
    0.22Diluted  pro forma
    
    $
    0.06
    
    
    $
    0.13
 Note F  Special Charges
  Accrued Balance
    
    
    
    
    
    
    Accrued BalanceFebruary 28, 2006
    
    
    Payments
    
    
    August 31, 2006Severance payments and related benefits
    
    $
    1,748
    
    
    $
    828
    
    
    $
    920
  Note G  Income Taxes
  8




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Note H  Earnings Per Share
 Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,(in thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income
    
    $
    1,596
    
    
    $
    4,601
    
    
    $
    1,191
    
    
    $
    8,520Denominator:Denominator for basic
earnings per share
    
    
    38,552
    
    
    
    38,130
    
    
    
    38,528
    
    
    
    37,831Dilutive potential common shares
Employee stock options
    
    
    562
    
    
    
    867
    
    
    
    615
    
    
    
    1,105Outstanding warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107Denominator for diluted
earnings per share
    
    
    39,114
    
    
    
    38,997
    
    
    
    39,143
    
    
    
    39,043Net income per share:Basic
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.23Diluted
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.22
  Note I  Operating Segment Information and Major Customers
  9




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Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Voice automation/IVR solution sales
    
    $
    19,254
    
    
    $
    13,741
    
    
    $
    32,998
    
    
    $
    27,933Messaging solution sales
    
    
    3,569
    
    
    
    6,018
    
    
    
    7,287
    
    
    
    10,866Payment solution sales
    
    
    1,422
    
    
    
    2,263
    
    
    
    3,429
    
    
    
    4,593Total solution sales
    
    
    24,245
    
    
    
    22,022
    
    
    
    43,714
    
    
    
    43,392Maintenance and related
service revenues
    
    
    20,666
    
    
    
    14,940
    
    
    
    40,851
    
    
    
    30,375Hosted solutions revenues
    
    
    5,569
    
    
    
    6,328
    
    
    
    11,583
    
    
    
    12,786Total recurring services revenues
    
    
    26,235
    
    
    
    21,268
    
    
    
    52,434
    
    
    
    43,161Total sales
    
    $
    50,480
    
    
    $
    43,290
    
    
    $
    96,148
    
    
    $
    86,553
 Geographic Operations
  Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2006
    
    
    2005North America
    
    $
    32,206
    
    
    $
    22,323
    
    
    $
    59,247
    
    
    $
    45,403Europe
    
    
    6,647
    
    
    
    10,825
    
    
    
    15,383
    
    
    
    21,705Middle East and Africa
    
    
    4,482
    
    
    
    4,890
    
    
    
    7,559
    
    
    
    11,945Central and South America
    
    
    4,718
    
    
    
    4,025
    
    
    
    9,444
    
    
    
    5,376Pacific Rim
    
    
    2,427
    
    
    
    1,227
    
    
    
    4,515
    
    
    
    2,124Total
    
    $
    50,480
    
    
    $
    43,290
    
    
    $
    96,148
    
    
    $
    86,553
 Concentration of Revenue
  Note J  Contingencies
 Intellectual Property Matters
  10




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Ronald A. Katz Technology Licensing, L.P. v. Citibank, et al. Ronald A. Katz Technology Licensing LP v. American International
Group., et al.
  11




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Pending Litigation
 David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v.
InterVoice-Brite, Inc., et al.
    Daniel Wardiman, derivatively on behalf of Nominal Defendant, Intervoice-Brite, Inc. v. Daniel
D. Hammond et.al.
 Barrie
  Audit Committee Investigation
  12




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Other Matters
    13




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14




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Barrie Barrie
 Note K  Acquisition of Assets of Nuasis
  15




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Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Critical Accounting Policies.
 Stock-Based Compensation
   Sales.
 Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    
    
    
    
    August 31,
    
    
    August 31,
    
    
    
    
    
    
    August 31,2006
    
    
    % Change
    
    
    2005
    
    
    2006
    
    
    % Change
    
    
    2005Voice automation/IVR solution sales
    
    $
    19,254
    
    
    
    40.1
    %
    
    $
    13,741
    
    
    $
    32,998
    
    
    
    18.1
    %
    
    $
    27,933Messaging solution sales
    
    
    3,569
    
    
    
    (40.7
    )%
    
    
    6,018
    
    
    
    7,287
    
    
    
    (32.9
    )%
    
    
    10,866Payment solution sales
    
    
    1,422
    
    
    
    (37.2
    )%
    
    
    2,263
    
    
    
    3,429
    
    
    
    (25.3
    )%
    
    
    4,593Total solution sales
    
    
    24,245
    
    
    
    10.1
    %
    
    
    22,022
    
    
    
    43,714
    
    
    
    0.7
    %
    
    
    43,392Maintenance and related services revenues
    
    
    20,666
    
    
    
    38.3
    %
    
    
    14,940
    
    
    
    40,851
    
    
    
    34.5
    %
    
    
    30,375Hosted solutions revenues
    
    
    5,569
    
    
    
    (12.0
    )%
    
    
    6,328
    
    
    
    11,583
    
    
    
    (9.4
    )%
    
    
    12,786Total recurring services revenues
    
    
    26,235
    
    
    
    23.4
    %
    
    
    21,268
    
    
    
    52,434
    
    
    
    21.5
    %
    
    
    43,161Total sales
    
    $
    50,480
    
    
    
    16.6
    %
    
    $
    43,290
    
    
    $
    96,148
    
    
    
    11.1
    %
    
    $
    86,553
  16




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    
    
    
    
    August 31,
    
    
    August 31,
    
    
    
    
    
    
    August 31,2006
    
    
    % Change
    
    
    2005
    
    
    2006
    
    
    % Change
    
    
    2005North America
    
    $
    32,206
    
    
    
    44.3
    %
    
    $
    22,323
    
    
    $
    59,247
    
    
    
    30.5
    %
    
    $
    45,403Europe
    
    
    6,647
    
    
    
    (38.6
    )%
    
    
    10,825
    
    
    
    15,383
    
    
    
    (29.1
    )%
    
    
    21,705Middle East and Africa
    
    
    4,482
    
    
    
    (8.3
    )%
    
    
    4,890
    
    
    
    7,559
    
    
    
    (36.7
    )%
    
    
    11,945Central and South America
    
    
    4,718
    
    
    
    17.2
    %
    
    
    4,025
    
    
    
    9,444
    
    
    
    75.7
    %
    
    
    5,376Pacific Rim
    
    
    2,427
    
    
    
    97.8
    %
    
    
    1,227
    
    
    
    4,515
    
    
    
    112.6
    %
    
    
    2,124Total
    
    $
    50,480
    
    
    
    16.6
    %
    
    $
    43,290
    
    
    $
    96,148
    
    
    
    11.1
    %
    
    $
    86,553
       17




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##### Table of Contents



Three Months Ended August 312006
    
    
    2005Sales from recurring services and
support contracts, including contracts
for hosted solutions
    
    
    52
    %
    
    
    49
    %Sales from beginning solutions backlog
    
    
    21
    %
    
    
    31
    %Sales from the quarters pipeline
    
    
    27
    %
    
    
    20
    %100
    %
    
    
    100
    %
   Quarter Ended
    
    BacklogAugust 31, 2006
    
    $
    41,639May 31, 2006
    
    $
    41,221February 28, 2006
    
    $
    33,867November 30, 2005
    
    $
    29,915August 31, 2005
    
    $
    30,265
   Cost of Goods Sold.
 Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Solutions COGS
    
    $
    15,286
    
    
    $
    13,050
    
    
    $
    27,590
    
    
    $
    25,854As percentage of solutions sales
    
    
    63.0
    %
    
    
    59.3
    %
    
    
    63.1
    %
    
    
    59.6
    %Services COGS
    
    $
    7,192
    
    
    $
    6,273
    
    
    $
    14,666
    
    
    $
    12,385As percentage of services sales
    
    
    27.4
    %
    
    
    29.5
    %
    
    
    28.0
    %
    
    
    28.7
    %Total COGS
    
    $
    22,478
    
    
    $
    19,323
    
    
    $
    42,256
    
    
    $
    38,239As percentage of total sales
    
    
    44.5
    %
    
    
    44.6
    %
    
    
    43.9
    %
    
    
    44.2
    %
 18




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##### Table of Contents



Research and Development Expenses.
 Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Research and development expenses
    
    $
    5,239
    
    
    $
    3,884
    
    
    $
    11,021
    
    
    $
    8,079(in thousands)As percentage of total sales
    
    
    10.4
    %
    
    
    9.0
    %
    
    
    11.5
    %
    
    
    9.3
    %
  ®
  Selling, General and Administrative Expenses.
 Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Selling, general and administrative
expenses (in thousands)
    
    $
    20,208
    
    
    $
    15,367
    
    
    $
    41,008
    
    
    $
    30,800As percentage of total sales
    
    
    40.0
    %
    
    
    35.5
    %
    
    
    42.7
    %
    
    
    35.6
    %
 19




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##### Table of Contents



Amortization of Acquired Intangible Assets.
 Income Taxes.
     Income from Operations and Net Income.
 Liquidity and Capital Resources.
   20




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##### Table of Contents



Adequacy of Cash Reserves.
 Impact of Inflation.
 
 Item 4 Controls and Procedures
 Evaluation of disclosure controls and procedures.
  Changes in internal control.
 21




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1 Legal Proceedings
  
 Item 1A Risk Factors
  
    
    We are prone to quarterly sales fluctuations.The sales value of an individual order
for our solutions and services can range from a few thousand dollars to several million
dollars depending on the complexity of our customers business need and the size of its
operations. The quantity and size of large sales (sales valued at approximately $2.0
million or more) during any quarter can cause wide variations in our quarterly sales and
earnings, as such sales are often unevenly distributed throughout the fiscal year. In
addition, some of our sales transactions are completed in the same fiscal quarter as
ordered. Our accuracy in estimating future sales is largely dependent on our ability to
successfully qualify, estimate and close solution sales from our pipeline of sales
opportunities during a quarter. No matter how promising a pipeline opportunity may appear,
there is no assurance it will ever result in a sale. The accuracy of our estimate of future
sales is also dependent on our ability to accurately estimate the amount of revenue to be
contributed from beginning backlog and revenue from cash basis customers during any fiscal
quarter. This estimate can be affected by factors outside our control, including changes
in project timing requested by our customers. In addition, estimating the amount of
revenue which may be recognized on a percentage of completion project is complex and such
estimates are subject to revision based upon a variety of factors. Accordingly, our actual
sales for any fiscal reporting period may be significantly different than any estimate of
sales we make for such period. See the discussion entitled Sales in Item 2 of Part I for
a discussion of our system for estimating sales and tracking sales trends in our business.
    
    We are subject to potential and pending lawsuits and other claims.We are subject to
certain potential and pending lawsuits and other claims discussed in Note J in Item 1 of
Part I of this quarterly report on Form 10-Q. Furthermore, we may become subject to claims,
including claims by the government, or other adverse consequences arising from the findings
of the Audit Committee investigation and related SEC inquiries discussed in Note J. We, and
certain of our current and former officers and non-officer employees are currently
responding to or have responded to SEC subpoenas to produce documents and provide testimony
about the transactions that were the subject of the investigation. Any adverse judgment,
penalty or settlement related to any lawsuit or other such claim could have consequences
that would be material to our financial position or results of operations. We may be
required to indemnify certain of our current and former directors and officers under
existing arrangements in connection with the indemnification we are currently providing to
certain individuals in connection with the class action lawsuit and the SEC investigation.
Our insurance policies provide coverage for losses and expenses incurred by us and our
current and former directors and officers in connection with claims made under the federal
securities laws. These policies, however, exclude losses and expenses related to the
Barrie class action lawsuit discussed in Note J or to other litigation based on
claims that are substantially the same as the claims in the Barrie class action and
contain other customary provisions to limit or exclude coverage for certain losses and
expenses.
    
    We may not be successful in integrating the operations and products and retaining the
customers of Edify, and this could negatively impact our business.We believe we will be
able to achieve certain
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##### Table of Contents



cost savings and other synergies as a result of combining Intervoice and Edify, but there
can be no assurance that such synergies will be realized. Our future success will depend in
part upon our ability to integrate and operate Edify successfully with our business. Any
inability to integrate the products of Intervoice and Edify while maintaining or increasing
the market share that such products had prior to the merger could decrease the revenues
historically generated from these products. Customers of Intervoice and Edify may delay
their purchase of products or services from one or both companies to consider any potential
implications the acquisition may have for products and services offered by either company.
In addition, the integration process will require the dedication of management resources,
which may temporarily distract attention from our day-to-day business. Our future success
will also depend in part on our ability to retain and assimilate certain key employees of
Edify. There can be no assurance that we will be able to efficiently integrate and operate
Edify and its products with our business, maintain business relationships with Edifys
customers and retain and assimilate key employees of Edify. Failure to do so could have a
material adverse effect on our results of operations or our financial condition. Further,
Edify provides products and services which are similar to our products and services and,
accordingly, our Edify operations are generally subject to most of the other risk factors
discussed in this Item 1A.
    
    We may not be successful in integrating the operations and products and retaining the
customers of Nuasis, and this could negatively impact our business.While our acquisition
of the assets of Nuasis is a much smaller acquisition than the acquisition of Edify, our
future success will depend in part upon our ability to integrate and operate Nuasis
successfully with our business. Even though Nuasis products and services will initially
account for a small amount of our aggregate revenues, our long term business plans are
dependent on these products and services contributing more significant revenues in future
fiscal years. Unlike the products of Edify which are similar to those of Intervoice, the
products of Nuasis are complementary to, but substantially different from, Intervoices
current products. For this reason, our integration of Nuasis products will not be subject
to the challenges of integrating similar Intervoice and Edify products while maintaining
and or increasing the market share such products had prior to the acquisition of Edify.
With this exception, our Nuasis operations are generally subject to most of the risk
factors associated with our Edify acquisition and the other risk factors discussed in this
Item 1A.
    
    We face intense competition based on product capabilities, and we experience ever
increasing demands from our actual and prospective customers for our products to be
compatible with a variety of rapidly proliferating computing, telephony and computer
networking technologies and standards.Our success is dependent, to a large degree, on our
effectiveness in allocating resources to developing and improving products compatible with
those technologies, standards and functionalities that ultimately become widely accepted by
our current and prospective customers. Our success is also dependent, to a large degree, on
our ability to implement arrangements with vendors of complementary product offerings so
that we can provide our current and prospective customers greater functionality. Our
principal competitors include Genesys, Avaya, Nortel, Nuance Communications, Comverse
Technology, Unisys and Lucent Technologies. Many of our competitors have greater financial,
technological and marketing resources than we have, as well as greater name recognition.
Although we have committed substantial resources to enhance our existing products and to
develop and market new products, there is no assurance we will be successful. In addition,
it is possible that new entrants to the market and strategic acquisitions and partnerships
between existing companies could increase the competition in the markets in which we
participate. An increase in such competition could materially adversely affect our ability
to sell our products thereby adversely affecting our business, operating results and
financial condition.
    
    We may not be successful in transitioning our products and services to an open,
standards-based business model.Intervoice has historically provided complete, bundled
hardware and software solutions using internally developed components to address our
customers total business needs. Increasingly, the markets for our products are requiring a
shift to the development of products and services based on an open, standards-based
architecture such as the J2EE and Microsoftsâ.NET environments utilizing VoiceXML
and/or SALT standards. Such an open, standards-based approach allows customers to
independently purchase and combine hardware components, standardized software modules, and
customization, installation and integration services from individual vendors deemed to
offer the best value in the particular class of product or service. In such an environment,
we believe we may sell less hardware and fewer bundled systems and may become increasingly
dependent on our development and sale of software application packages, customized software
and consulting and integration services. This shift will place new challenges on us to
transition our products
 23




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##### Table of Contents



and to hire and retain the mix of personnel necessary to respond to this business
environment, to adapt to the changing expense structure that the new environment may tend to
foster, and to increase sales of services, customized software and application packages to
offset reduced sales of hardware and bundled solutions. Failure to develop, enhance, acquire
and introduce new products and services to respond to changing market conditions or customer
requirements, or lack of customer acceptance of our products will materially adversely
affect our business, results of operations and financial condition.
    
    We may not be able to retain our customer base, and, in particular, our more significant
customers.Our success is heavily dependent on our ability to retain our significant
customers, including those of Edify and Nuasis. The loss of one of our significant
customers could negatively impact our operating results. Our installed base of customers
generally is not contractually obligated to place further solutions orders with us or to
extend their services contracts with us at the expiration of their current contracts.
    
    We will be harmed if we lose key business and technical personnel.We rely upon the
services of a relatively small number of key technical, project management and senior
management personnel, most of whom do not have employment contracts. If we were to lose
any of our key personnel, replacing them could be difficult and costly. If we were unable
to successfully and promptly replace such personnel, our business could be materially
harmed.
    
    Our reliance on significant vendor relationships could result in significant expense or
an inability to serve our customers if we lose these relationships.Although we generally
use standard parts and components in our products, some of our components, including
semi-conductors and, in particular, digital signal processors manufactured by Texas
Instruments, are available only from a small number of vendors. Likewise, we license speech
recognition technology from a small number of vendors. Two of these vendors, ScanSoft, Inc.
and Nuance Communications, Inc., recently completed a merger of their organizations and now
the combined company has a dominant market position. As we continue to migrate to open,
standards-based systems, we will become increasingly dependent on our component suppliers
and software vendors. To date, we have been able to obtain adequate supplies of needed
components and licenses in a timely manner, and we expect to continue to be able to do so.
Nevertheless, if our significant vendors are unable to supply components or licenses at
current levels, we may not be able to obtain these items from another source or at
historical prices. In such instances, we would be unable to provide products and services
to our customers or generate historical operating margins, and our business and operating
results would suffer.
    
    If third parties assert claims that our products or services infringe on their
technology and related intellectual property rights, whether the claims are made directly
against us or against our customers, we could incur substantial costs in connection with
these claims.We believe software and technology companies, including Intervoice and others
in our industry, increasingly may become subject to infringement claims. Such claims may
require us to enter into costly license agreements or result in even more costly
litigation. To the extent a licensing arrangement is required, the arrangement may not be
available at all, or, if available, may be very expensive or even prohibitively expensive.
As with any legal proceeding, there is no guarantee we will prevail in any litigation
instituted against us asserting infringement of intellectual property rights. To the extent
we suffer an adverse judgment, we might have to pay substantial damages, discontinue the
use and sale of infringing products, repurchase infringing products from our customers in
accordance with indemnity obligations, expend significant resources to acquire
non-infringing alternatives, and/or obtain licenses to the intellectual property that has
been infringed upon. As with licensing arrangements, non-infringing substitute technologies
may not be available and, if available, may be very expensive, or even prohibitively
expensive, to implement. Accordingly, for all of the foregoing reasons, a claim of
infringement could ultimately have a material adverse effect on our business, financial
condition and results of operations.
    
    We are exposed to risks related to our international operations that could increase our
costs and hurt our business.Our products are currently sold in more than 75 countries.
Our international sales were 36% and 48% of total sales for the fiscal quarter ended August
31, 2006 and 2005, respectively. International sales, personnel and property are subject
to certain risks, including:
 
    
    terrorism;
    
    fluctuations in currency exchange rates;
    
    the difficulty and expense of maintaining foreign offices and distribution channels;
    
    tariffs and other barriers to trade;
 24




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##### Table of Contents




    
    greater difficulty in protecting and enforcing intellectual property rights;
    
    general economic and political conditions in each country;
    
    loss of revenue, property and equipment from expropriation;
    
    import and export licensing requirements; and
    
    additional expenses and risks inherent in conducting operations in
geographically distant locations, including risks arising from differences in
language and cultural approaches to the conduct of business.
 
    
    Our inability to meet contracted performance targets could subject us to significant
penalties.Many of our contracts, particularly for hosted solutions, foreign contracts and
contracts with telecommunication companies, include provisions for the assessment of
damages for delayed project completion and/or for our failure to achieve certain minimum
service levels. We have had to pay damages in the past and may have to pay additional
damages in the future. Any such future damages could be significant.
    
    Increasing consolidation in the telecommunications and financial industries could
adversely affect our revenues and profitability.The majority of our largest customers are
in the telecommunications and financial industries. These industries are undergoing
significant consolidation as a result of merger and acquisition activity. This activity
could result in a decrease in the number of customers purchasing our products and/or in
delayed purchases of our products by customers that are reviewing their strategic
alternatives in light of a pending merger or acquisition. If these results occur, our
revenues and profitability could decline.
    
    Our products are complex, and software defects could reduce our revenues and expose us
to litigation.The software products we offer are complex and may contain errors or
defects, even after extensive testing and quality control, particularly in early versions.
Furthermore, because our products increasingly are designed around an open standards based
architecture incorporating elements developed by third parties, such errors or defects may
be outside of our direct ability to control or correct. Our recently introduced Media
Exchange offering is an example of a complex product which includes third party elements
that has and may continue to experience certain software errors in its initial customer
deployments. Any defects or errors could potentially result in loss of revenues, product
returns or order cancellations, and could potentially hinder market acceptance of our
products and harm our reputation. Accordingly, any defects or errors could have a material
adverse effect on our business, results of operations and financial condition. Our
customer license agreements typically contain provisions to limit our product warranty
obligations and exposure to potential liability claims.
    
    We are implementing a new company-wide ERP system during fiscal 2007.During fiscal
2007, we expect to complete the implementation of a new, company-wide ERP system. Our new
system will affect all facets of our business including our ability to quote, receive and
process orders, track inventory and work in process, ship and bill completed orders,
process and apply cash receipts from our customers and summarize and report the results of
our operations. If we encounter problems in the implementation of our new system, our
ability to conduct our daily operations in an efficient, effective and properly controlled
manner could be compromised, and our operating results could suffer. In addition, any such
implementation problems could cause us to expend significant time and other resources in an
effort to resolve such problems, and this diversion of management and staff time could
further adversely affect our ability to serve our customers and sustain our normal
operations.
 
 Item 4 Submission of Matters to a Vote of Security Holders
   25




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##### Table of Contents



Item 6 Exhibits
  3.1
    
    Articles of Incorporation, as amended, of Registrant. (1)3.2
    
    Amendment to Articles of Incorporation of Registrant. (2)3.3
    
    Amendment to Articles of Incorporation of Registrant. (3)3.4
    
    Third Restated Bylaws of Registrant. (6)4.1
    
    Third Amended and Restated Rights Agreement dated as of May 1, 2001
between the Registrant and Computershare Investor Services, LLC, as
Rights Agent. (4)4.2
    
    Securities Purchase Agreement, dated as of May 20, 2002, between the
Registrant and the Buyers named therein (the Securities Purchase
Agreement). (5)4.3
    
    Form of Warrant, dated as of May 20, 2002, between the Registrant and
each of the Buyers under the Securities Purchase Agreement. (5)4.4
    
    Registration Rights Agreement, dated as of May 29, 2002, between the
Registrant and each of the Buyers under the Securities Purchase
Agreement. (5)4.5
    
    First Amendment to Third Amended and Restated Rights Agreement dated
as of May 29, 2002, between Registrant and Computershare Investor
Services, LLC, as Rights Agent. (5)10.1
    
    San Tomas Business Park Office
Lease dated June 7, 2006. (7)10.2
    
    Amended and Restated Employment
Agreement dated October 9, 2006 with Marie A. Jackson. (7)31.1
    
    Certification of Chief Executive Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a). (7)31.2
    
    Certification of Chief Financial Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a). (7)32.1
    
    Certification of Chief Executive Officer of Periodic Report Pursuant
to Rule 13a-14(b) and 18 U.S.C. Section 1350. (7)*32.2
    
    Certification of Chief Financial Officer of Periodic Report Pursuant
to Rule 13a-14(b) and 18 U.S.C. Section 1350. (7)*
 
 (1)
    
    Incorporated by reference to exhibits to the Companys 1995 Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, filed with the SEC on May 30, 1995.(2)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1999, filed with the SEC on October 14, 1999.(3)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
quarter ended August 31, 2002, filed with the SEC on October 15, 2002.(4)
    
    Incorporated by reference to exhibits to Form 8-A/A (Amendment 3) filed with the SEC on May
9, 2001.(5)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on May 30, 2002.(6)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2004, filed with the SEC on October 12, 2004.(7)
    
    Filed herewith.*
    
    The certifications attached as Exhibit 32.1 and 32.2 accompany the Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 26




---



##### Table of Contents



SIGNATURES
  INTERVOICE, INC.Date: October 10, 2006
    
    By:
    
    /s/ CRAIG E. HOLMESCraig E. HolmesExecutive Vice President andChief Financial Officer
 27




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##### Table of Contents



Index to Exhibits
 Exhibit No.
    
    Description3.1
    
    Articles of Incorporation, as amended, of Registrant. (1)3.2
    
    Amendment to Articles of Incorporation of Registrant. (2)3.3
    
    Amendment to Articles of Incorporation of Registrant. (3)3.4
    
    Third Restated Bylaws of Registrant. (6)4.1
    
    Third Amended and Restated Rights Agreement dated as of May 1,
2001 between the Registrant and Computershare Investor
Services, LLC, as Rights Agent. (4)4.2
    
    Securities Purchase Agreement, dated as of May 20, 2002,
between the Registrant and the Buyers named therein (the
Securities Purchase Agreement). (5)4.3
    
    Form of Warrant, dated as of May 20, 2002, between the
Registrant and each of the Buyers under the Securities
Purchase Agreement. (5)4.4
    
    Registration Rights Agreement, dated as of May 29, 2002,
between the Registrant and each of the Buyers under the
Securities Purchase Agreement. (5)4.5
    
    First Amendment to Third Amended and Restated Rights Agreement
dated as of May 29, 2002, between Registrant and Computershare
Investor Services, LLC, as Rights Agent. (5)10.1
    
    San Tomas Business Park Office
Lease dated June 7, 2006. (7)10.2
    
    Amended and Restated Employment
Agreement dated October 9, 2006 with Marie A. Jackson. (7)31.1
    
    Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (7)31.2
    
    Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (7)32.1
    
    Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. (7)*32.2
    
    Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. (7)*
 
 (1)
    
    Incorporated by reference to exhibits to the Companys 1995 Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, filed with the SEC on May 30, 1995.(2)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1999, filed with the SEC on October 14, 1999.(3)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
quarter ended August 31, 2002, filed with the SEC on October 15, 2002.(4)
    
    Incorporated by reference to exhibits to Form 8-A/A (Amendment 3) filed with the SEC on May
9, 2001.(5)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on May 30, 2002.(6)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2004, filed with the SEC on October 12, 2004.(7)
    
    Filed herewith.*
    
    The certifications attached as Exhibit 32.1 and 32.2 accompany the Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 28