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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
AUGUST 31, 2004 OR [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM  TO
 COMMISSION FILE NUMBER: 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, WITH ZIP CODE) 972-454-8000
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [  ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE ACT). YES [X] NO [  ] THE REGISTRANT HAD 36,016,661 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE,
OUTSTANDING AS OF SEPTEMBER 30, 2004.




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1 Financial StatementsCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF CASH FLOWSCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITYNOTES TO CONSOLIDATED FINANCIAL STATEMENTSItem 2 Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3 Quantitative and Qualitative Disclosures About Market RiskItem 4 Controls and ProceduresPART II. OTHER INFORMATIONItem 1 Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersItem 6 ExhibitsSIGNATURESINDEX TO EXHIBITSThird Restated BylawsFirst Amendment to Credit AgreementFiscal Year 2005 Transition Year Incentive Plan Plan Summary2003 Stock Option PlanCertification of Chief Executive OfficerCertification of Chief Finanical OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer    Table of Contents  
 PART I. FINANCIAL
INFORMATION 
 Item 1 Financial
Statements INTERVOICE, INC. 
 CONSOLIDATED BALANCE SHEETS
 (In Thousands, Except Share and Per Share Data)August 31, 2004
    
    February 29, 2004(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    48,955
    
    
    $
    40,859Trade accounts receivable, net of allowance for
doubtful accounts of $970 in fiscal 2005 and
$947 in fiscal 2004
    
    
    25,855
    
    
    
    23,719Inventory
    
    
    8,328
    
    
    
    8,415Prepaid expenses and other current assets
    
    
    5,588
    
    
    
    5,08788,726
    
    
    
    78,080Property and EquipmentLand and buildings
    
    
    16,912
    
    
    
    16,857Computer equipment and software
    
    
    42,084
    
    
    
    39,073Furniture, fixtures and other
    
    
    3,152
    
    
    
    3,190Service equipment
    
    
    8,961
    
    
    
    9,42171,109
    
    
    
    68,541Less allowance for depreciation
    
    
    50,483
    
    
    
    48,32520,626
    
    
    
    20,216Other AssetsIntangible assets, net of accumulated amortization
of $15,258 in fiscal 2005 and $34,443 in fiscal 2004
    
    
    5,289
    
    
    
    6,363Goodwill
    
    
    3,401
    
    
    
    3,401Other assets
    
    
    731
    
    
    
    3,491$
    118,773
    
    
    $
    111,551LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    11,128
    
    
    $
    10,746Accrued expenses
    
    
    11,732
    
    
    
    11,919Customer deposits
    
    
    5,569
    
    
    
    6,625Deferred income
    
    
    23,429
    
    
    
    22,257Current portion of long-term borrowings
    
    
    400
    
    
    
    Income taxes payable
    
    
    6,774
    
    
    
    7,37959,032
    
    
    
    58,926Long-Term Borrowings
    
    
    11,135
    
    
    
    13,101Other Long-Term Liabilities
    
    
    12
    
    
    
    271Stockholders 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: 36,004,683 issued and
outstanding in fiscal 2005 and 35,691,389
issued and outstanding in fiscal 2004
    
    
    18
    
    
    
    18Additional capital
    
    
    76,979
    
    
    
    75,276Accumulated deficit
    
    
    (27,182
    )
    
    
    (35,441
    )Accumulated other comprehensive loss
    
    
    (1,221
    )
    
    
    (600
    )Stockholders equity
    
    
    48,594
    
    
    
    39,253$
    118,773
    
    
    $
    111,551
 See notes to consolidated financial statements.




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INTERVOICE, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (In Thousands, Except Per Share Data)Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,
    
    August 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003SalesSolutions
    
    $
    25,244
    
    
    $
    20,625
    
    
    $
    46,389
    
    
    $
    38,655Recurring services
    
    
    19,015
    
    
    
    20,982
    
    
    
    39,786
    
    
    
    41,35344,259
    
    
    
    41,607
    
    
    
    86,175
    
    
    
    80,008Cost of goods soldSolutions
    
    
    13,276
    
    
    
    11,271
    
    
    
    25,256
    
    
    
    22,484Recurring services
    
    
    6,894
    
    
    
    7,472
    
    
    
    13,975
    
    
    
    14,20220,170
    
    
    
    18,743
    
    
    
    39,231
    
    
    
    36,686Gross marginSolutions
    
    
    11,968
    
    
    
    9,354
    
    
    
    21,133
    
    
    
    16,171Recurring services
    
    
    12,121
    
    
    
    13,510
    
    
    
    25,811
    
    
    
    27,15124,089
    
    
    
    22,864
    
    
    
    46,944
    
    
    
    43,322Research and development expenses
    
    
    3,419
    
    
    
    3,703
    
    
    
    7,162
    
    
    
    7,574Selling, general and administrative expenses
    
    
    13,936
    
    
    
    13,091
    
    
    
    28,088
    
    
    
    26,562Amortization of acquisition
related intangible assets
    
    
    252
    
    
    
    705
    
    
    
    957
    
    
    
    1,410Income from operations
    
    
    6,482
    
    
    
    5,365
    
    
    
    10,737
    
    
    
    7,776Other income (expense)
    
    
    97
    
    
    
    139
    
    
    
    464
    
    
    
    (47
    )Interest expense
    
    
    (110
    )
    
    
    (536
    )
    
    
    (384
    )
    
    
    (1,081
    )Income before taxes
    
    
    6,469
    
    
    
    4,968
    
    
    
    10,817
    
    
    
    6,648Income taxes
    
    
    1,387
    
    
    
    1,372
    
    
    
    2,558
    
    
    
    2,116Net income
    
    $
    5,082
    
    
    $
    3,596
    
    
    $
    8,259
    
    
    $
    4,532Net income per share  basic
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.23
    
    
    $
    0.13Shares used in basic per share computation
    
    
    35,988
    
    
    
    34,195
    
    
    
    35,918
    
    
    
    34,153Net income per share  diluted
    
    $
    0.13
    
    
    $
    0.10
    
    
    $
    0.22
    
    
    $
    0.13Shares used in diluted per share computation
    
    
    37,963
    
    
    
    35,370
    
    
    
    38,299
    
    
    
    34,814
 See notes to consolidated financial statements.




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INTERVOICE, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (In Thousands)Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,
    
    August 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003Operating activitiesNet income
    
    $
    5,082
    
    
    $
    3,596
    
    
    $
    8,259
    
    
    $
    4,532Adjustments to reconcile net income
to net cash provided by operating activities:Depreciation and amortization
    
    
    1,783
    
    
    
    2,418
    
    
    
    4,067
    
    
    
    4,800Other changes in operating activities
    
    
    (2,819
    )
    
    
    5,738
    
    
    
    (3,655
    )
    
    
    6,022Net cash provided by operating activities
    
    
    4,046
    
    
    
    11,752
    
    
    
    8,671
    
    
    
    15,354Investing activitiesPurchases of property and equipment
    
    
    (2,531
    )
    
    
    (1,210
    )
    
    
    (3,464
    )
    
    
    (2,473
    )Proceeds from sale of assets
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    14Net cash used in investing activities
    
    
    (2,531
    )
    
    
    (1,196
    )
    
    
    (3,464
    )
    
    
    (2,459
    )Financing activitiesPaydown of debt
    
    

    (9,066
    )
    
    
    (1,833
    )
    
    
    (9,566
    )
    
    
    (2,667
    )Borrowings
    
    
    8,000
    
    
    
    
    
    
    
    8,000
    
    
    
    Premium on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    Release of restricted cash
    
    
    2,750
    
    
    
    
    
    
    
    2,750
    
    
    
    Exercise of stock options
    
    
    120
    
    
    
    907
    
    
    
    1,703
    
    
    
    907Net cash provided by (used in) financing activities
    
    
    1,804
    
    
    
    (926
    )
    
    
    2,882
    
    
    
    (1,760
    )Effect of exchange rates on cash
    
    
    148
    
    
    
    (420
    )
    
    
    7
    
    
    
    (332
    )Increase in cash and cash equivalents
    
    
    3,467
    
    
    
    9,210
    
    
    
    8,096
    
    
    
    10,803Cash and cash equivalents, beginning of period
    
    
    45,488
    
    
    
    27,804
    
    
    
    40,859
    
    
    
    26,211Cash and cash equivalents, end of period
    
    $
    48,955
    
    
    $
    37,014
    
    
    $
    48,955
    
    
    $
    37,014
 See notes to consolidated financial statements.




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INTERVOICE, INC. 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 (Unaudited)
 (In Thousands, Except Share Data) Common Stock
    
    
    
    
    
    
    
    
    
    Accumulated OtherAdditional
    
    Accumulated
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Deficit
    
    Loss
    
    TotalBalance at February 29, 2004
    
    
    35,691,389
    
    
    $
    18
    
    
    $
    75,276
    
    
    $
    (35,441
    )
    
    $
    (600
    )
    
    $
    39,253Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,259
    
    
    
    
    
    
    
    8,259Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (621
    )
    
    
    (621
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,638Exercise of stock options
    
    
    313,294
    
    
    
    
    
    
    
    1,703
    
    
    
    
    
    
    
    
    
    
    
    1,703Balance at August 31, 2004
    
    
    36,004,683
    
    
    $
    18
    
    
    $
    76,979
    
    
    $
    (27,182
    )
    
    $
    (1,221
    )
    
    $
    48,594
 See notes to consolidated financial statements.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED AUGUST 31, 2004 Note A  Basis of Presentation The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. The consolidated balance sheet at February 29, 2004 has been
derived from audited financial statements at that date. Certain prior year
balances have been reclassified to conform to the current year presentation. In
the opinion of management, all adjustments considered necessary for a fair
presentation of the unaudited August 31, 2004 and 2003 consolidated financial
statements have been included. Such adjustments are of a normal recurring
nature. These financial statements should be read in conjunction with the
audited financial statements and related notes included in the Companys Fiscal
2004 Annual Report on Form 10-K. Operating results for the three and six month
periods ended August 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending February 28, 2005 as they may be
affected by a number of factors including the timing and ultimate receipt of
orders from significant customers which continue to constitute a large portion
of the Companys sales, the sales channel mix of products sold, and changes in
general economic conditions, any of which could have an adverse effect on
operations. In accordance with Statement of Financial Accounting Standards No. 130,
the following comprehensive income disclosures are provided. Total
comprehensive income for the second quarters of fiscal 2005 and 2004 was $4.8
million and $3.4 million, respectively. For the six month periods ended August
31, 2004 and 2003, total comprehensive income was $7.6 million and $4.5
million, respectively. Total comprehensive income is comprised of net income
and foreign currency translation adjustments. Financial statements of the Companys foreign subsidiaries have been
translated into U.S. dollars at current and average exchange rates. Resulting
translation adjustments are recorded as a separate component of stockholders
equity. Any transaction gains or losses are included in the accompanying
consolidated statements of operations. Note B  Inventories Inventories consist of the following (in thousands): August 31, 2004
    
    February 29, 2004Purchased parts
    
    $
    3,436
    
    
    $
    4,138Work in progress
    
    
    4,892
    
    
    
    4,277$
    8,328
    
    
    $
    8,415




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Note C  Long-Term Borrowings At August 31, 2004 and February 29, 2004 the Companys long-term debt was
comprised of the following (in thousands): August 31, 2004
    
    February 29, 2004Line of credit, bearing interest payable
monthly accruing at a rate equal to the
prime rate plus 0.25% or the London
Inter-Bank Offering Rate plus 1.75%;
(3.5% at August 31, 2004)
    
    $
    4,601
    
    
    $
    4,601Term loan, bearing interest payable monthly,
accruing at a rate equal to the prime rate
plus 0.50% or the London Inter-Bank Offering
Rate plus 2.25% (3.875% at August 31, 2004);
principal due in monthly installments of $33
with a balloon payment of approximately
$5,000 due June 30, 2009
    
    
    6,934
    
    
    
    Mortgage loan, bearing interest payable
monthly at the greater of 10.5% or the
prime rate plus 2.0%; refinanced during
June, 2004
    
    
    
    
    
    
    8,500Total debt outstanding
    
    
    11,535
    
    
    
    13,101Less: current portion
    
    
    400
    
    
    
    Long-term debt, net of current portion
    
    $
    11,135
    
    
    $
    13,101
 On June 3, 2004, the Company entered into an amended and restated credit
agreement with its lender that added an $8.0 million term loan to its existing
line of credit. The Company used the proceeds of the new term loan to repay
all amounts outstanding under its mortgage loan. The term loan may be repaid
in whole or in part without any penalty. The Company made discretionary
payments totaling $1.0 million during the second quarter of fiscal 2005 in
addition to the required monthly installments. Subsequent to August 31, 2004,
the Company made additional discretionary payments totaling $1.0 million on the
term loan. The Companys credit agreement provides for a revolving line of credit
equal to the lesser of $5.5 million or a defined borrowing base comprised of
eligible U.S. accounts receivable ($6.3 million at August 31, 2004). The
agreement was amended August 17, 2004, to release the Company from an
obligation to maintain a minimum balance of $2.8 million in a cash collateral
account as partial security for the line of credit and to remove such
collateral account from the borrowing base definition. The Company may borrow,
partially or wholly repay its outstanding borrowings without penalty, and
reborrow under the agreement so long as the total outstanding borrowings do not
exceed the available borrowing base. The revolving line of credit agreement
expires on January 31, 2007. The credit agreement contains terms, conditions and representations that
are generally customary for asset-based credit facilities including
requirements that the Company comply with certain financial and operating
covenants. In particular, the Company is required to maintain income after
taxes of not less than $1.00 for any fiscal year and for any two consecutive
fiscal quarters. The Company is also required to maintain a Fixed Charges
Ratio (EBITDA divided by Fixed Charges, as such terms are defined in the
agreement) for each prior four quarter period of at least 1.5 to 1.0, and a
total Funded Debt (as such term is defined in the agreement) to EBITDA ratio of
not greater than 1.5 to 1.0 as of each fiscal year end. In addition, the
Company is prohibited from making capital expenditures in excess of $8.0
million in any fiscal year, from incurring more than $3.0 million in new
purchase money and bank indebtedness and from incurring operating lease expense
(other than for building rents) in excess of $3.0 million for any fiscal year,
all without prior lender approval.




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Borrowings under the credit agreement are secured by first liens on the
Companys accounts receivable, general intangibles, equipment and inventory and
by a first lien on the real property and fixtures comprising the Companys
Dallas headquarters building and fixtures. As of August 31, 2004 the Company
was in compliance with all financial and operating covenants. Note D  Special Charges The Company incurred no special charges during the three and six month
periods ended August 31, 2004. During the quarter ended May 31, 2003, the
Company reduced its workforce by 56 positions. In doing so, the Company
incurred severance charges of approximately $1.4 million, with approximately
$0.6 million, $0.2 million, and $0.6 million impacting cost of goods sold,
research and development, and selling, general and administrative expenses,
respectively. During the quarter ended August 31, 2003, the Companys chief
financial officer resigned to pursue other opportunities. The Company incurred
cash and non-cash charges totaling approximately $0.5 million and $0.3 million,
respectively, during the quarter under the terms of a separation agreement
executed in connection with the officers resignation. Such charges were
included in selling, general and administrative expenses for the quarter. All
amounts related to these fiscal 2004 special charges have been paid. The
Company had a liability of $0.5 million at August 31, 2004, related to the
early termination of a facility lease recorded as a special charge in fiscal
2002. The Company will pay approximately $0.2 million per quarter to settle
this liability. Note E  Income Taxes Income taxes for the six months ended August 31, 2004 and 2003 were
provided based on an estimated annual rate. The estimated rate for fiscal 2005
is 24%. This rate differs from the 35% U.S. federal statutory rate primarily
because of expected benefits to be realized in the United States from the use
of previously reserved net operating losses and from the effect of non-U.S. tax
rates. For the six months ended August 31, 2003, the Company recognized
current income tax expense on the pretax income of certain foreign
subsidiaries. During the same period, the Company incurred domestic pretax
losses. The Company did not recognize current income tax benefits as a result
of such losses, however, because the existence of recent domestic losses
prevented it from concluding that it was more likely than not that such
benefits would be realized. Note F  Earnings Per Share and Stock Compensation (in thousands except per share data) Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,
    
    August 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003Numerator:Net income
    
    $
    5,082
    
    
    $
    3,596
    
    
    $
    8,259
    
    
    $
    4,532Denominator:Denominator for basic
earnings per share
    
    
    35,988
    
    
    
    34,195
    
    
    
    35,918
    
    
    
    34,153Dilutive potential common sharesEmployee stock options
    
    
    1,598
    
    
    
    554
    
    
    
    1,964
    
    
    
    661Outstanding warrants
    
    
    377
    
    
    
    621
    
    
    
    417
    
    
    
    Denominator for diluted
earnings per share
    
    
    37,963
    
    
    
    35,370
    
    
    
    38,299
    
    
    
    34,814Net income per share:Basic
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.23
    
    
    $
    0.13Diluted
    
    $
    0.13
    
    
    $
    0.10
    
    
    $
    0.22
    
    
    $
    0.13




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Options to purchase 937,292 and 771,500 shares of common stock at an
average exercise price of $14.19 and $14.76 were outstanding during the three
and six month periods ended August 31, 2004, respectively, but were not
included in the computation of diluted earnings per share for these periods as
the effect would have been antidilutive because the options exercise prices
were greater than the average price of the Companys common shares during such
periods. Options to purchase 5,112,334 and 6,227,644 shares of common stock at an
average exercise price of $9.21 and $8.44 were outstanding during the three and
six month periods ended August 31, 2003, respectively, but were not included in
the computation of diluted earnings per share for these periods as the effect
would have been antidilutive because the options exercise prices were greater
than the average price of the Companys common shares during such periods.
Warrants to purchase 621,304 shares at an exercise price of $4.0238 per share
were not included in the calculation for the six months ended August 31, 2003
because they would have been antidilutive for the same reason. The Company accounts for its stock-based compensation plans using the
intrinsic value method as defined in Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations. Under this approach, no compensation expense is recognized for
stock option grants if the exercise price of the Companys stock option grants
is at or above the fair market value of the underlying stock on the date of
grant. The Company has adopted the pro forma disclosure features of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), as amended by Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure. The following table illustrates the effect on net income and net
income per share amounts if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation (in thousands,
except per share amounts): Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,
    
    August 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    5,082
    
    
    $
    3,596
    
    
    $
    8,259
    
    
    $
    4,532Add stock compensation expense included
in net income
    
    
    
    
    
    
    279
    
    
    
    
    
    
    
    279Less: Total stock-based employee
compensation expense determined under
fair value based methods for all
awards, net of tax
    
    
    (1,516
    )
    
    
    (911
    )
    
    
    (2,488
    )
    
    
    (910
    )Pro forma net income
    
    $
    3,566
    
    
    $
    2,964
    
    
    $
    5,771
    
    
    $
    3,901Net income per share:Basic  as reported
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.23
    
    
    $
    0.13Basic  pro forma
    
    $
    0.10
    
    
    $
    0.09
    
    
    $
    0.16
    
    
    $
    0.11Diluted  as reported
    
    $
    0.13
    
    
    $
    0.10
    
    
    $
    0.22
    
    
    $
    0.13Diluted  pro forma
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    0.15
    
    
    $
    0.11




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The pro forma stock-based compensation expense and related per share data
shown above are estimated using a Black-Scholes option pricing model. The
Black-Scholes model was developed for use in estimating the fair value of
publicly traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Companys employee stock options have characteristics significantly
different from those of publicly traded options, and because changes in the
subjective input assumptions can materially affect the estimate of the fair
value of stock-based compensation, in managements opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of such
compensation. Note G  Operating Segment Information and Major Customers The Company operates as a single, integrated business unit. The Companys
chief operating decision maker assesses performance and allocates resources on
an enterprise wide basis. The Companys product line includes IVR/portal
solutions, messaging solutions, payment solutions, maintenance and related
services, and managed services provided for customers on an outsourced or
managed service provider basis. The Company believes that product line
distinction provides the most meaningful breakdown of quarterly and annual
sales activity. The Companys net sales by product line for the three and six
month periods ended August 31, 2004 and 2003 were as follows (in thousands): Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,
    
    August 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003IVR/portal solution sales
    
    $
    20,450
    
    
    $
    14,970
    
    
    $
    36,036
    
    
    $
    27,345Messaging solution sales
    
    
    2,224
    
    
    
    1,350
    
    
    
    4,630
    
    
    
    3,143Payment solution sales
    
    
    2,570
    
    
    
    4,305
    
    
    
    5,723
    
    
    
    8,167Total solution sales
    
    
    25,244
    
    
    
    20,625
    
    
    
    46,389
    
    
    
    38,655Maintenance and related services sales
    
    
    13,778
    
    
    
    14,285
    
    
    
    28,993
    
    
    
    27,870Managed service sales
    
    
    5,237
    
    
    
    6,697
    
    
    
    10,793
    
    
    
    13,483Total recurring services sales
    
    
    19,015
    
    
    
    20,982
    
    
    
    39,786
    
    
    
    41,353Total sales
    
    $
    44,259
    
    
    $
    41,607
    
    
    $
    86,175
    
    
    $
    80,008
 Geographic Operations Revenues are attributed to geographic locations based on locations of
customers. The Companys net sales by geographic area for the three and six
month periods ended August 31, 2004 and 2003 were as follows (in thousands): Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,
    
    August 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003North America
    
    $
    28,033
    
    
    $
    24,773
    
    
    $
    53,370
    
    
    $
    49,018Europe, Middle East and Africa
    
    
    13,705
    
    
    
    13,975
    
    
    
    28,341
    
    
    
    27,169Pacific Rim
    
    
    1,262
    
    
    
    765
    
    
    
    2,101
    
    
    
    1,160Central and South America
    
    
    1,259
    
    
    
    2,094
    
    
    
    2,363
    
    
    
    2,661Total
    
    $
    44,259
    
    
    $
    41,607
    
    
    $
    86,175
    
    
    $
    80,008
 Concentration of Revenue Sales to a major telecommunication company in the United States accounted
for approximately 11% of the Companys total sales during the quarter ended
August 31, 2004. Sales to another customer, O2, accounted for approximately
10% of the Companys total sales during such quarter. There were no customers
accounting for 10% or more of the Companys total sales during the quarter
ended August 31,




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##### Table of Contents



2003. There were no customers accounting for 10% or more of the Companys
total sales during the six month period ending August 31, 2004. Sales to O2
accounted for approximately 10% of the Companys total sales during the six
month period ending August 31, 2003. There were no other customers accounting
for 10% or more of the Companys sales during the three or six month periods
ended August 31, 2004 and August 31, 2003. Note H  Contingencies Intellectual Property Matters The Company provides its customers a qualified indemnity against the
infringement of third party intellectual property rights. From time to time
various owners of patents and copyrighted works send the Company or its
customers letters alleging that the Companys products do or might infringe
upon the owners intellectual property rights, and/or suggesting that the
Company or its customers should negotiate a license or cross-license agreement
with the owner. The Companys policy is to never knowingly infringe upon any
third partys intellectual property rights. Accordingly, the Company forwards
any such allegation or licensing request to its outside legal counsel for their
review and opinion. The Company generally attempts to resolve any such matter
by informing the owner of its position concerning non-infringement or
invalidity, and/or, if appropriate, negotiating a license or cross-license
agreement. Even though the Company attempts to resolve these matters without
litigation, it is always possible that the owner of the patent or copyrighted
works will institute litigation. Owners of patent(s) and/or copyrighted work(s)
have previously instituted litigation against the Company alleging infringement
of their intellectual property rights, although no such litigation is currently
pending against the Company. The Company currently has a portfolio of
70 patents, and it has applied for and will continue to apply for and receive a
number of additional patents to reflect its technological innovations. The
Company believes that its patent portfolio could allow it to assert
counterclaims for infringement against certain owners of intellectual property
rights if those owners were to sue the Company for infringement. From time to time Ronald A. Katz Technology Licensing L.P. (RAKTL) has
sent letters to certain customers of the Company suggesting that the customer
should negotiate a license agreement to cover the practice of certain patents
owned by RAKTL. In the letters, RAKTL has alleged that certain of its patents
pertain to certain enhanced services offered by network providers, including
prepaid card and wireless services and postpaid card services. RAKTL has
further alleged that certain of its patents pertain to certain call processing
applications, including applications for call centers that route calls using a
called partys DNIS identification number. As a result of the correspondence,
an increasing number of the Companys customers have had discussions, or are in
discussions, with RAKTL. Certain products offered by the Company can be
programmed and configured to provide enhanced services to network providers and
call processing applications for call centers. The Companys contracts with
customers usually include a qualified obligation to indemnify and defend
customers against claims that products as delivered by the Company infringe a
third partys patent. None of the Companys customers have notified the Company that RAKTL has
claimed that any product provided by the Company infringes any claims of any
RAKTL patent. Accordingly, the Company has not been required to defend any
customers against a claim of infringement under a RAKTL patent. The Company
has, however, received letters from customers notifying the Company of the
efforts by RAKTL to license its patent portfolio and reminding the Company of
its potential obligations under the indemnification provisions of the
applicable agreements in the event that a claim is asserted. In response to
correspondence from RAKTL, a few customers have attempted to tender to the
Company the defense of its products under contractual indemnity provisions.
The Company has informed these customers that while it fully intends to honor
any contractual indemnity provisions, it does not believe it currently has any
obligation to provide such a defense because RAKTL does not appear to have made
a claim that a Company product infringes a patent. Some of these customers
have disagreed with the Company and believe that the correspondence from RAKTL
can be construed as claim(s) against the Companys products. One such customer
who had attempted to tender the defense of its products to the Company recently
informed the Company that the customer had entered into an agreement to license
certain rights under the RAKTL patents and demanded the Company indemnify the
customer for unspecified amounts,




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including attorneys fees, paid in connection with the license agreement.
The Company notified the customer that the Company believes it does not have
any indemnity obligation in connection with the license agreement. Even though RAKTL has not alleged that a product provided by the Company
infringes a RAKTL patent, it is always possible that RAKTL may do so. In the
event that a Company product becomes the subject of litigation, a customer
could attempt to invoke the Companys indemnity obligations under the
applicable agreement. As with most sales contracts with suppliers of
computerized equipment, the Companys contractual indemnity obligations are
generally limited to the products and services provided by the Company, and
generally require the customer to allow the Company to have control over any
litigation and settlement negotiations with the patent holder. The customers
who have received letters from RAKTL generally have multiple suppliers of the
types of products that might potentially be subject to claims by RAKTL. Even though no claims have been made that a specific product offered by
the Company infringes any claim under the RAKTL patent portfolio, the Company
has received opinions from its outside patent counsel that certain products and
applications offered by the Company do not infringe certain claims of the RAKTL
patents. The Company has also received opinions from its outside counsel that
certain claims under the RAKTL patent portfolio are invalid or unenforceable.
Furthermore, based on the reviews by outside counsel, the Company is not aware
of any valid and enforceable claims under the RAKTL portfolio that are
infringed by the Companys products. If the Company does become involved in
litigation in connection with the RAKTL patent portfolio, under a contractual
indemnity or any other legal theory, the Company intends to vigorously contest
the claims and to assert appropriate defenses. An increasing number of
companies, including some large, well-known companies and some customers of the
Company, have already licensed certain rights under the RAKTL patent portfolio.
RAKTL has previously announced license agreements with, among others, AT&T
Corp., Microsoft Corporation and International Business Machines Corporation. Pending Litigation David Barrie, et al., on Behalf of Themselves and All Others Similarly
Situated v. InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, pending in the
United States District Court, Northern District of Texas, Dallas Division: Several related class action lawsuits were filed in the United States
District Court for the Northern District of Texas on behalf of purchasers of
common stock of the Company during the period from October 12, 1999 through
June 6, 2000 (the Class Period). Plaintiffs have filed claims, which were
consolidated into one proceeding, under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Securities Exchange Act Rule 10b-5 against
the Company as well as certain named current and former officers and directors
of the Company on behalf of the alleged class members. In the complaint,
Plaintiffs claim that the Company and the named current and former officers and
directors issued false and misleading statements during the Class Period
concerning the financial condition of the Company, the results of the Companys
merger with Brite Voice Systems, Inc. and the alleged future business
projections of the Company. Plaintiffs have asserted that these alleged
statements resulted in artificially inflated stock prices. The Company believes that it and its officers and directors complied with
their obligations under the securities laws, and has vigorously defended the
lawsuit. The Company responded to this complaint by filing a motion to dismiss
the complaint in the consolidated proceeding. The Company asserted that the
complaint lacked the degree of specificity and factual support to meet the
pleading standards applicable to federal securities litigation. On this basis,
the Company requested that the United States District Court for the Northern
District of Texas dismiss the complaint in its entirety. On August 8, 2002, the
Court entered an order granting the Companys motion to dismiss the class
action lawsuit. In the order dismissing the lawsuit, the Court granted
plaintiffs an opportunity to reinstate the lawsuit by filing an amended
complaint.




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Plaintiffs filed an amended complaint on September 23, 2002. On September
15, 2003, the Court granted the Companys motion to dismiss the amended class
action complaint. Unlike the Courts prior order dismissing the original class
action complaint, the order dismissing the amended complaint did not grant
Plaintiffs an opportunity to reinstate the lawsuit by filing a new amended
complaint. On October 9, 2003, the Plaintiffs filed a notice of appeal to the
Fifth Circuit Court of Appeals from the trial courts order of dismissal
entered on September 15, 2003. The Plaintiffs filed their appellant brief on
February 20, 2004, and the Company filed its brief in opposition to the
Plaintiffs appeal on May 10, 2004. On June 7, 2004, Plaintiffs filed a
response to the Companys brief. The Company and the Plaintiffs made oral
arguments before the Fifth Circuit Court of Appeals on October 6, 2004. Audit Committee Investigation In
connection with its previously disclosed investigation, the Audit
Committee is continuing to
examine certain calendar year 2001 transactions accounted for as
purchases of licenses from a publicly held
supplier to the Company, particularly whether a $900,000 payment and other license purchases were consideration for an amendment to permit a cashless exercise of a warrant issued to the Company
by the supplier.  Such a payment would have rendered unavailable a nonexclusive registration exemption for the
previously disclosed $21.4 million sale of the shares underlying the warrant during the fourth quarter of fiscal 2001.
The Audit Committee also is reviewing the Company's role, if any, in the reportedly improper
recognition of revenue in calendar 2001 by the supplier.  In addition, the Audit
Committee is examining whether the Company improperly recognized revenue in two quarter-end barter transactions involving
approximately 0.4% and 1.9% of annual revenues for fiscal 2000 and fiscal 2002,
respectively, and whether it improperly accelerated the recognition of revenue in four quarter-end sales transactions
totaling approximately 0.4% and 0.3% of annual revenues in fiscal 2000 and fiscal 2002, respectively.  The Audit Committee is being
assisted by separate independent legal counsel and accountants.  The
Company has previously self-reported the investigation to the
Securities and Exchange Commission. At this time, the Company cannot
predict what losses, claims, accounting adjustments or other impacts
on the Companys financial statements, if any, might result from
the investigation.
At the
conclusion of the investigation, the Company will take such actions,
if any, as are necessary in light of the final investigation findings. Other Matters The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of all known lawsuits, including the matter described above, is
uncertain, and there can be no assurance that future costs related to such
matters would not be material to the Companys financial position or results of
operations. The Company is a party to many routine contracts in which it provides
general indemnities and warranties in the normal course of business to third
parties for various risks. These indemnities and warranties are discussed in
the following paragraphs. Except in specific circumstances where the Company

has determined that the likelihood of loss is probable and the amount of the
loss quantifiable, the Company has not recorded a liability for any of these
indemnities. In general, the Company is not able to estimate the potential
amount of any liability relating to these indemnities and warranties. Many of the Companys contracts, particularly for managed services,
foreign contracts and contracts with telecommunication companies, include
provisions for the assessment of liquidated damages for delayed project
completion and/or for the Companys failure to achieve certain minimum service
levels. The Company has had to pay liquidated damages in the past and may have
to pay additional liquidated damages in the future. Any such future liquidated
damages could be significant. The Companys contracts with its customers generally contain qualified
indemnifications against third party claims relating to the infringement of
intellectual property as described in Intellectual Property Matters above. The Companys contracts with its customers also generally contain
warranties and, in some cases, general indemnifications against other
unspecified third party and general liability claims. The Company has liability
insurance protecting it against certain obligations, primarily certain claims
related to property damage, that result from these indemnities.




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##### Table of Contents



As of August 31, 2004, the Company was obligated under a $0.5 million
letter of credit issued by a bank to guarantee the Companys performance under
a long-term international managed services contract. The letter of credit is
fully collateralized by a restricted certificate of deposit. During September
2004, this letter of credit was cancelled and replaced with a new letter of
credit issued under the Companys existing credit agreement. Upon cancellation
of the prior letter of credit, the restriction on the certificate of deposit
was removed. The new letter of credit expires in June 2005. The Company has employment agreements with three executive officers. Two
of these agreements require the Company to make termination payments to the
officer of two times the officers annual base compensation in the event the
officers services are terminated without cause or payments of up to 2.99 times
the officers annual compensation including bonuses in connection with a
termination of the officers services following a change in ownership of the
Company, as defined in the agreement, prior to the expiration of the agreement.
If both officers with such agreements were terminated for one of the preceding
reasons during fiscal 2005, the cost to the Company would range from $1.3
million to $1.9 million. The third employment agreement requires that in the
event the officers services are terminated without cause, the Company either
must make termination payments to the officer of one times the officers annual
base compensation and accelerate vesting on 33,333 shares of Company common
stock covered by a stock option or make termination payments to the officer of
two times the officers annual base compensation. If the officer covered by
this agreement were terminated during fiscal 2005, the Company would be
required to make payments ranging from $0.2 million to $0.5 million. The Company, under the terms of its Articles of Incorporation,
indemnifies its directors, officers, employees or agents or any other person
serving at the Companys request as a director, officer, employee or agent of
another corporation in connection with a derivative suit if he or she (1) is
successful on the merits or otherwise or (2) acted in good faith, and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, but the Company will not provide indemnification
for any claim as to which the person was adjudged liable for negligence or
misconduct unless the court determines that under the circumstances the person
is fairly and reasonably entitled to indemnification. The Company provides the
same category of persons with indemnification in a non-derivative suit only if
such person (1) is successful on the merits or otherwise or (2) acted in good
faith, and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reason to believe his or her conduct was
unlawful. The Company, under the terms of its Bylaws, also
indemnifies its current and former officers and directors to the
fullest extent permitted or required under Article 2.02-1 of the
Texas Business Corporation Act. In connection with certain lawsuits filed against the Company and certain
of its present and former officers and directors (see Pending Litigation
above), the Company has agreed to pay in advance any expenses, including
attorneys fees, incurred by such present and former officers and directors in
defending such litigation, in accordance with Article 2.02-1 of the Texas
Business Corporation Act and the Companys Articles of Incorporation and
Bylaws. Each of these parties has provided the Company with a written
undertaking to repay the Company the expenses advanced if the person is
ultimately not entitled to indemnification. Texas corporations are authorized to obtain insurance to protect officers
and directors from certain liabilities, including liabilities against which the
corporation cannot indemnify its officers and directors. The Company has
obtained liability insurance for its officers and directors as permitted by
Article 2.02-1 of the Texas Business Corporation Act.




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##### Table of Contents



Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations Cautionary Disclosures to Qualify Forward Looking Statements This report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-Q, including,
without limitation, statements contained in this Managements Discussion and
Analysis of Financial Condition and Results of Operations and Notes to
Consolidated Financial Statements located elsewhere herein regarding the
Companys financial position, business strategy, plans and objectives of
management of the Company for future operations, and industry conditions, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In addition to
important factors described elsewhere in this report, the Company cautions
current and potential investors that the following important risk factors,
among others, sometimes have affected, and in the future could affect, the
Companys actual results and could cause such results during fiscal 2005, and
beyond, to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company:  
    
    The Company is prone to quarterly sales fluctuations. Some of the
Companys transactions are completed in the same fiscal quarter as
ordered. The quantity and size of large sales (sales valued at
approximately $2.0 million or more) during any quarter can cause wide
variations in the Companys quarterly sales and earnings, as such sales
are unevenly distributed throughout the fiscal year. The Companys
accuracy in estimating future sales is largely dependent on its ability
to successfully qualify, estimate and close solution sales from its
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 any estimate of future
sales is also dependent on the Companys ability to accurately estimate
the amount of revenue to be contributed from beginning backlog during
any fiscal quarter. Accordingly, the Companys actual sales for any
fiscal reporting period may be significantly different from any
estimate of sales for such period. See the discussion entitled Sales
in this Item 2 for a discussion of the Companys system for estimating
sales and trends in its business.  
    
    The Companys financing agreement includes financial and operating
covenants and default provisions.In addition to obligations requiring
the monthly payment of principal and interest, the Companys amended
and restated credit agreement contains financial covenants, operating
covenants and default provisions. If the Company does not comply with
any of these covenants and default provisions, the Companys secured
lender can accelerate all indebtedness outstanding under the facility
and foreclose on a significant portion of the Companys assets.  
    
    The Company is subject to potential and pending lawsuits
and other claims. The Company is subject to certain
potential and pending lawsuits, other claims and an audit committee investigation discussed in Item 1 Legal Proceedings
of Part II of this quarterly report on Form 10-Q.  The Company believes the pending lawsuit to which it is subject is without merit and intends to defend
the matter vigorously.  The Company may not prevail in the pending litigation or other matters, and the Company may be subject to
claims based on future findings, if any, that are adverse to the Company in the audit committee investigation.  There can be no
assurance that expenses, including any potential settlement or judgment, related to any lawsuit or other such claim would not
be material to the Company's financial position or results of operations.  
    
    The Company faces intense competition based on product capabilities
and experiences ever increasing demands from its actual and prospective
customers for its products to be compatible with a variety of rapidly
proliferating computing, telephony and computer networking technologies
and standards. The ultimate success of the Companys products is
dependent, to a large degree, on the Company allocating its resources
to developing and improving products compatible with those
technologies, standards and functionalities that ultimately become
widely accepted by the Companys actual and prospective customers. The
Companys success is also dependent, to a




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large degree, on the Companys ability to implement arrangements with
other vendors with complementary product offerings to provide actual and
prospective customers greater functionality and to ensure that the
Companys products are compatible with the increased variety of
technologies and standards. The principal competitors for the Companys
systems include Alcatel, Avaya, IBM, Nortel, Aspect Communications,
Edify, Comverse Technology and Lucent Technologies. Many of the Companys
competitors have greater financial, technological and marketing resources
than the Company. Although the Company has committed substantial
resources to enhance its existing products and to develop and market new
products, it may not be successful.  
    
    The Company may not be successful in transitioning its products and
services to an open, standards-based business model.The Company has
historically provided complete, bundled hardware and software solutions
using internally developed components to address its customers total
business needs. Increasingly, the markets for the Companys 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s®.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, the
Company believes it may sell less hardware and fewer bundled systems
and may become increasingly dependent on its development and sale of
software application packages, customized software and consulting and
integration services. This shift will place new challenges on the
Companys management to transition its products 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. The shift to open standards will also challenge the
Company to accurately estimate the level of R&D expenditures that will
be necessary in future periods to comply with existing standards and,
potentially, to migrate to new open standards. If the Company is
unsuccessful in resolving one or more of these challenges, the
Companys revenues and profitability could decline.  
    
    The Company may not be able to retain its customer base, and, in
particular, its more significant customers.The Companys success
depends substantially on retaining its significant customers. The loss
of one of the Companys significant customers could negatively impact
the Companys results of operations. The Companys installed base of
customers generally is not contractually obligated to place further
solutions orders with the Company or to extend their services contracts
with the Company at the expiration of their current contracts.  
    
    The Company will be harmed if it loses key business and technical
personnel.The Company relies upon the services of a relatively small
number of key technical and senior management personnel, most of whom
do not have employment contracts. If the Company were to lose any of
its key technical, project management, or senior management personnel,
replacing them could be difficult and costly. If it were unable to
successfully and promptly replace such personnel, the business could be
materially harmed.  
    
    If requirements relating to the accounting treatment for employee
stock options are changed, the Company may be forced to change its
compensation practices.The Company currently accounts for the
issuance of stock options using the intrinsic value method as defined
in Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees. The Financial Accounting Standards Board
has issued an exposure draft that requires companies to include a
compensation expense in their statements of operations relating to the
issuance of employee stock options. The change in accounting for stock
options is presently anticipated to become effective for the Companys
fiscal year beginning March 1, 2005. If this change is adopted, the
Company will incur additional expense if it continues to use stock
options as part of its compensation strategy. Alternatively, the
Company could decide to decrease or eliminate the




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use of employee stock options as an element of its overall compensation
plan. Such an action, however, could affect the Companys ability to
retain existing employees and attract qualified candidates for open
positions, and/or it could increase the cash compensation the Company
would have to pay.  
    
    The Companys reliance on significant vendor relationships could
result in significant expense or an inability to serve its customers if
it loses these relationships.Although the Company generally uses
standard parts and components for its products, some of its components,
including semi-conductors and, in particular, digital signal processors
manufactured by Texas Instruments, are available only from a small
number of vendors. Likewise, the Company licenses speech recognition
technology from a small number of vendors. As the Company continues to
migrate to open, standards-based systems, it will become increasingly
dependent on its component suppliers and software vendors. To date, the
Company has been able to obtain adequate supplies of needed components
and licenses in a timely manner. If the Companys significant vendors
are unable or cease to supply components or licenses at current levels,
the Company may not be able to obtain these items from another source
or at historical prices. Consequently, the Company would be unable to
provide products and to service its customers or to generate historical
operating margins, which would negatively impact its business and
operating results.  
    
    If third parties assert claims that the Companys products or
services infringe on their technology and related intellectual property
rights, whether the claims are made directly against the Company or
against the Companys customers, the Company could incur substantial
costs to defend these claims.If any of these claims is ultimately
successful, a third party could require the Company to pay substantial
damages, discontinue the use and sale of infringing products, expend
significant resources to acquire non-infringing alternatives, and/or
obtain licenses to use the infringed intellectual property rights.
Moreover, where the claims are asserted with respect to the Companys
customers, additional expenses may be involved in indemnifying the
customer and/or designing and providing non-infringing products.  
    
    The Company is exposed to risks related to its international
operations that could increase its costs and hurt its business.The
Companys products are currently sold in more than 75 countries. The
Companys international sales, as a percentage of total Company sales,
were 37% and 40% for the fiscal quarters ending August 31, 2004 and
2003, respectively. International sales are subject to certain risks,
including:  
    
    fluctuations in currency exchange rates;
    
    the difficulty and expense of maintaining foreign offices and distribution channels;
    
    tariffs and other barriers to trade;
    
    greater difficulty in protecting and enforcing intellectual property rights;
    
    general economic and political conditions in each country;
    
    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 customers speaking different languages and having
different cultural approaches to the conduct of business.  
    
    The Companys inability to meet contracted performance targets
could subject it to significant penalties.Many of the Companys
contracts, particularly for managed services, foreign contracts and
contracts with telecommunication companies, include provisions for the
assessment of liquidated damages for delayed project completion and/or
for the Companys failure to achieve certain minimum service levels.
The Company has had to pay liquidated damages in the past and may have
to pay additional liquidated damages in the future. Any such future
liquidated damages could be significant.  
    
    The Company is exposed to general economic conditions that may harm
its business.Although the general level of business activity
rebounded during the Companys fiscal year ended February




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29, 2004, the Company has been affected by the general economic downturn
of the preceding several years, including, particularly, the downturn in
the telecommunications markets. If United States or global economic
conditions deteriorate again in the future, it is possible that capital
spending for advanced technology such as that offered by the Company will
again decline. If such unfavorable economic conditions were to occur in
the United States or internationally, such conditions could have a
material adverse impact on the Companys business, operating results and
financial condition.  
    
    Increasing consolidation in the telecommunications and financial
industries could affect the Companys revenues and profitability.The
majority of the Companys significant customers are in the
telecommunications and financial industries, which are undergoing
increasing consolidation as a result of merger and acquisition
activity. This activity involving the Companys significant customers
could decrease the number of customers purchasing the Companys
products and/or delay purchases of the Companys products by customers
that are in the process of reviewing their strategic alternatives in
light of a pending merger or acquisition. If the Company has fewer
customers or its customers delay purchases of the Companys products as
a result of merger and acquisition activity, the Companys revenues and
profitability could decline.  
    
    The occurrence of force majeure events could impact the Companys
results from operations.The occurrence of one or more of the
following events could potentially cause the Company to incur
significant losses: acts of God, war, riot, embargoes, acts of civil or
military authorities, acts of terrorism or sabotage, shortage of supply
or delay in delivery by the Companys vendors, the spread of SARS or
other diseases, fire, flood, explosion, earthquake, accident, strikes,
radiation, inability to secure transportation, failure of
communications, failure of utilities or similar events. Sales.The Companys total sales for the second quarter and first six months of
fiscal 2005 were $44.3 million and $86.2 million, respectively, an increase of
$2.7 million (6.4%) and $6.2 million (7.7%), respectively, as compared to the
same periods of fiscal 2004. Solutions sales of $25.2 million and $46.4
million for the second quarter and first six months of fiscal 2005 reflected
increases of 22.4% and 20.0%, respectively, over corresponding amounts for the
same periods of fiscal 2004. For the second quarter and first six months of
fiscal 2005, recurring services sales were $19.0 million and $39.8 million down
9.4% and 3.8%, respectively, from corresponding amounts for the same periods of
fiscal 2004. The Company operates as a single, integrated business unit. The Companys
chief operating decision maker assesses performance and allocates resources on
an enterprise wide basis. The Companys product line includes IVR/portal
systems, messaging systems, payment systems, maintenance and related services,
and managed services provided for customers on an outsourced or managed service
provider basis. The Company believes that product line distinction provides the
most meaningful breakdown of quarterly and annual sales activity. The Companys
net sales by product line for the three and six months ended August 31, 2004
and 2003 were as follows (in thousands): Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,
    
    August 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003IVR/portal solution sales
    
    $
    20,450
    
    
    $
    14,970
    
    
    $
    36,036
    
    
    $
    27,345Messaging solution sales
    
    
    2,224
    
    
    
    1,350
    
    
    
    4,630
    
    
    
    3,143Payment solution sales
    
    
    2,570
    
    
    
    4,305
    
    
    
    5,723
    
    
    
    8,167Total solution sales
    
    
    25,244
    
    
    
    20,625
    
    
    
    46,389
    
    
    
    38,655Maintenance and related services sales
    
    
    13,778
    
    
    
    14,285
    
    
    
    28,993
    
    
    
    27,870Managed service sales
    
    
    5,237
    
    
    
    6,697
    
    
    
    10,793
    
    
    
    13,483Total recurring services sales
    
    
    19,015
    
    
    
    20,982
    
    
    
    39,786
    
    
    
    41,353Total sales
    
    $
    44,259
    
    
    $
    41,607
    
    
    $
    86,175
    
    
    $
    80,008




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As identified in the preceding chart, the increase in solution sales from
fiscal 2004 levels is primarily attributable to growth in IVR/portal sales.
Such sales increased $5.5 million, or 36.6%, and $8.7 million, or 31.8% during
the second quarter and first six months of fiscal 2005 over corresponding
amounts for the same periods of fiscal 2004. IVR/portal sales for the quarter
included $4.8 million recognized as a result of work performed during the
second quarter on a $12.5 million sale for a major U.S. wireless
telecommunications provider that is being accounted for on a percentage of
completion basis. The Company expects to recognize an additional $6.7 million
under this contract during the third and fourth quarters of fiscal 2005. Recurring service sales decreased $2.0 million, or 9.4%, and $1.6 million,
or 3.8%, for the second quarter and first six months of fiscal 2005, when
compared to the second quarter and first six months of fiscal 2004.
Maintenance and related service sales decreased $0.5 million, or 3.5%, for the
second quarter of fiscal 2005 as compared to the second quarter of fiscal 2004
as contracts on certain systems which had reached end of life were not renewed.
Maintenance and related service sales increased $1.1 million, or 4.0%, for the
first six months of fiscal 2005 as compared to the first six months of fiscal
2004. Managed service sales decreased $1.5 million, or 21.8%, and $2.7
million, or 20%, for the quarter and six month periods ended August 31, 2004,
as compared to the corresponding periods of the prior year. These declines in
managed service sales result primarily from a reduction in revenues from an
international managed service customer for which the Company recognizes revenue
on a cash basis. Such revenues were $0.0 million and $0.4 million for the
second quarter and first six months of fiscal 2005 as compared to $2.1 million
and $4.0 million for the second quarter and first six months of fiscal 2004.
The timing and amount of any future revenues from this customer remain
uncertain. There were two customers each accounting for 10% or more of the Companys
total sales during the quarter ended August 31, 2004. The sale to a major
telecommunication company in the United States discussed above accounted for
approximately 11% of the Companys total sales during the period. Sales to
another customer, O2, accounted for approximately 10% of the Companys total
sales during such quarter. There were no customers accounting for 10% or more
of the Companys total sales during the quarter ended August 31, 2003. There
were no customers accounting for 10% or more of the Companys total sales
during the six month period ending August 31, 2004. Sales to O2 accounted for
approximately 10% of the Companys total sales during the six month period
ending August 31, 2003. There were no other customers accounting for 10% or
more of the Companys sales during the three or six month periods ended August
31, 2004 and August 31, 2003. Revenues are attributable to geographic locations based on locations of
customers. The Companys net sales by geographic area for the three and six
month periods ended August 31, 2004 and 2003 were as follows (in thousands): Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,
    
    August 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003North America
    
    $
    28,033
    
    
    $
    24,773
    
    
    $
    53,370
    
    
    $
    49,018Europe, Middle East and Africa
    
    
    13,705
    
    
    
    13,975
    
    
    
    28,341
    
    
    
    27,169Pacific Rim
    
    
    1,262
    
    
    
    765
    
    
    
    2,101
    
    
    
    1,160Central and South America
    
    
    1,259
    
    
    
    2,094
    
    
    
    2,363
    
    
    
    2,661Total
    
    $
    44,259
    
    
    $
    41,607
    
    
    $
    86,175
    
    
    $
    80,008
 International sales comprised 37% of the Companys total sales during the
second quarter of fiscal 2005, down slightly from 40% during the second quarter
of fiscal 2004. For the first six months of fiscal 2005, international sales
comprised 38% of the Companys total sales, down from 39% during the same
period of fiscal 2004. The Company uses a system combining estimated sales from its service and
support contracts, its backlog of committed solutions orders and its pipeline
of solutions sales opportunities to project future




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sales and trends in its business. For the quarters ended August 31, 2004 and
2003, sales were sourced as follows: Three Months Ended August 312004
    
    2003Sales from recurring services contracts
    
    
    43
    %
    
    
    50
    %Sales from beginning solutions backlog
    
    
    43
    %
    
    
    35
    %Sales from the quarters pipeline
    
    
    14
    %
    
    
    15
    %100
    %
    
    
    100
    %
 The Companys recurring service contracts range in original duration from
one month to five years, with most managed service contracts having initial
terms of two to three years and most maintenance and related contracts having
initial terms of one year. Because many of the longer duration contracts give
customers early cancellation privileges, the Company does not consider its book
of services contracts to be reportable backlog, and a portion of the potential
revenue reflected in the contract values may never be realized. Nevertheless,
it is easier for the Company to estimate service and support sales than to
estimate solutions sales for the next quarter because the service and support
contracts generally span multiple quarters and revenues recognized under each
contract are generally similar from one quarter to the next. The Companys solutions backlog is made up of customer orders for systems
for which it has received complete purchase orders and which the Company
expects to ship within twelve months. Solutions backlog as of the end of the
Companys last five quarters was as follows (in thousands): Quarter Ended
    
    Solutions BacklogAugust 31, 2004
    
    $
    40,214May 31, 2004
    
    $
    43,174February 29, 2004
    
    $
    31,707November 30, 2003
    
    $
    34,003August 31, 2003
    
    $
    30,072
 The 36% increase in solutions backlog from February 29, 2004 to May 31,
2004 reflects the booking by the Company of an order totaling approximately
$12.5 million from a major U.S. wireless telecommunications provider and an
order totaling approximately $4.2 million from a large European network
provider. Approximately $6.1 million of such contracts was recognized as
solutions revenue in the quarter ended August 31, 2004. The accuracy of any
estimate of future sales is dependent, in part, on the Companys ability to
project the amount of revenue to be contributed from beginning solutions
backlog during any fiscal quarter. This estimate, in turn, is dependent on the
Companys ability to successfully predict the amount and timing of work to be
performed on projects, the timing of customer acceptance of certain projects
and the amount and timing of cash to be received on projects accounted for on a
cash basis. The Companys pipeline of opportunities for future solutions sales is the
aggregation of its sales opportunities, with each opportunity evaluated for the
date the potential customer will make a purchase decision, competitive risks,
and the potential amount of any resulting sale. No matter how promising a
pipeline opportunity may appear, there is no assurance it will ever result in a
sale. While this pipeline may provide the Company some sales guidelines in its
business planning and budgeting, pipeline estimates are necessarily speculative
and may not consistently correlate to revenues in a particular quarter or over
a longer period of time. Special Charges.The Company incurred no special charges during the three and
six month periods ended August 31, 2004. During the quarter ended May 31,
2003, the Company reduced its workforce by 56 positions. In doing so, the
Company incurred severance charges of approximately $1.4 million, with
approximately $0.6 million, $0.2 million, and $0.6 million impacting cost of
goods sold, research and development, and selling, general and administrative
expenses, respectively. During the quarter ended August 31, 2003, the
Companys chief financial officer resigned to pursue other opportunities. The




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Company incurred cash and non-cash charges totaling approximately $0.5 million
and $0.3 million, respectively, during the quarter under the terms of a
separation agreement executed in connection with the officers resignation.
Such charges were included in selling, general and administrative expenses for
the quarter. All amounts related to these fiscal 2004 special charges have
been paid. Cost of Goods Sold.Cost of goods sold for the second quarter and first six
months of fiscal 2005 was approximately $20.2 million or 45.6% of sales and
$39.2 million or 45.5% of sales, respectively. This compares to $18.7 million
or 45.0% of sales and $36.7 million or 45.9% of sales for the second quarter
and first six months of fiscal 2004. As described above, the Company incurred
special charges to cost of goods sold during the first six months of fiscal
2004 totaling $0.6 million or 0.8% of sales. Cost of goods sold on solution
sales was $13.3 million (52.6%) and $25.3 million (54.4%) for the second
quarter and first six months of fiscal 2005, respectively, as compared to $11.3
million (54.6%) and $22.5 million (58.2%) for the same periods of fiscal 2004.
A significant portion of the Companys cost of goods sold is comprised of labor
costs that are fixed over the near term as opposed to direct material and
license/royalty costs that vary directly with sales volume. Cost of goods sold
on recurring service sales was $6.9 million (36.3%) and $14.0 million (35.1%)
for the second quarter and first six months of fiscal 2005, respectively, as
compared to $7.5 million (35.6%) and $14.2 million (34.3%) for the same periods
of fiscal 2004. The small increases in these percentages reflect the effect on
the calculation of the cash basis managed services revenue recognized during
the second quarter and first six months of fiscal 2004, offset in part by
slight reductions in direct labor costs associated with these services. Research and Development Expenses. Research and development expenses during
the second quarter and first six months of fiscal 2005 were approximately $3.4
million, or 7.7% of total Company sales, and $7.2 million, or 8.3% of sales,
respectively. During the second quarter and first six months of the previous
fiscal year, research and development expenses were $3.7 million, or 8.9% and
$7.6 million or 9.5%, respectively, of the Companys total sales. The Company
incurred R&D charges described above in Special Charges of $0.2 million
(0.3%) during the first six months of fiscal 2004. R&D expenses in the quarter
ended August 31, 2004 were down slightly from recent quarters as certain R&D
resources were temporarily assigned to the completion of a customer project.
The cost of these resources was charged to cost of goods sold for the quarter. Research and development expenses include the design of new products and
the enhancement of existing products. The Companys research and development
spending is focused in four key areas. First, software tools are being
developed to aid in the development and deployment of customer applications
incorporating speech recognition, text-to-speech, and other rich media
technologies for enterprise, wireless, and fixed line providers. Next,
server-based application software platforms are being developed for operations
and management of contact center, speech, and call completion applications.
These software platforms are being developed for deployment and management of
enterprise, wireless and wireline network operator applications. These
software platforms are designed to operate in both J2EE and Microsofts®.Net
enterprise computing environments. Third, media servers, voice browsers, and
call processing infrastructure based on open standards such as SALT, VoiceXML,
and CCXML are being developed. Additionally, these media servers are VOIP
enabled, allowing operation in soft-switch and hybrid PSTN and VOIP networks.
Finally, the Company is developing packaged, speech-enabled applications for
the network operator and enterprise markets. These include a range of vertical
and horizontal applications that are designed to greatly enhance customer
return on investment by providing many commonly used, configurable functions
that can be more quickly deployed than custom applications. Additionally,
modular productivity and communications applications for wireless and
fixed-line applications including speech driven voice mail, voice activated
dialing, and enhanced personal information management are being developed. The Company expects to maintain a strong commitment to research and
development to remain at the forefront of technology development in its
markets, which is essential to the continued improvement of the Companys
position in the industry. Selling, General and Administrative Expenses.Selling, general and
administrative expenses during the second quarter and first six months of
fiscal 2005 were approximately $13.9 million, or 31.5% of total




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Company sales, and $28.1 million, or 32.6% of sales, respectively. SG&A
expenses during the second quarter and first six months of fiscal 2004 were
$13.1 million, or 31.5% and $26.6 million or 33.2%, respectively, of the
Companys total sales. The Company incurred SG&A charges of $0.1 million
during the second quarter of fiscal 2005 in connection with the Audit Committee
investigation described in Note H of Part 1 of this Form 10-Q. The Company
incurred an additional $0.5 million in such charges during September 2004 and
anticipates incurring additional significant charges during the balance of the
quarter ending November 30, 2004. The Company incurred SG&A charges described
above in Special Charges totaling $0.8 million (1.9%) during the second
quarter of fiscal 2004 and $1.4 million (1.8%) during the first six months of
fiscal 2004 respectively. Amortization of Acquisition Related Intangible Assets.Amortization expense
for the quarter ended August 31, 2004 declined $0.4 million from recent
quarters and year ago levels as the Company completed the amortization of
certain developed technology acquired in its purchase of Brite Voice Systems in
fiscal 2000. Amortization expense on acquired intangible assets is expected to
total $0.5 million for the balance of fiscal 2005 and approximately $1.0
million per year thereafter through fiscal 2009. Interest Expense.Interest expense was $0.1 million and $0.4 million during
the second quarter and first six months of fiscal 2005 as compared to $0.5
million and $1.1 million during the second quarter and first six months of
fiscal 2004. The reduction relates to two factors. First, the Companys
outstanding debt as of the beginning of fiscal 2005 totaled $13.1 million, a
31% reduction from the $19.1 million balance outstanding at the beginning of
fiscal 2004. Second, as a result of refinancings undertaken in the fourth
quarter of fiscal 2004 and the second quarter of fiscal 2005 (see Liquidity
and Capital Resources, below), the Company has lowered the interest rates it
pays on its outstanding line of credit and term debt balances by approximately
three and six percentage points, respectively, over rates in place at August 31,
2003. For the quarter ended August 31, 2004, the Companys effective average
interest rate on all outstanding debt was 3.7%. Income Taxes.Income taxes for the six months ended August 31, 2004 and 2003
were provided based on an estimated annual rate. The estimated rate for fiscal
2005 is 24%. This rate differs from the 35% U.S. federal statutory rate
primarily because of expected benefits to be realized in the United States from
the use of previously reserved net operating losses and from the effect of
non-U.S. tax rates. For the six months ended August 31, 2003, the Company
recognized current income tax expense on the pretax income of certain foreign
subsidiaries. During the same period, the Company incurred domestic pretax
losses. The Company did not recognize current income tax benefits as a result
of such losses, however, because the existence of recent domestic losses
prevented it from concluding that it was more likely than not that such
benefits would be realized. Income from Operations and Net Income.The Company generated operating income
of $6.5 million and net income of $5.1 million during the second quarter of
fiscal 2005. During the second quarter of fiscal 2004, the Company generated an
operating income of $5.4 million and net income of $3.6 million. For the six
months ended August 31, 2004, the Company generated operating income of $10.7
million and net income of $8.3 million compared to an operating income of $7.8
million and net income of $4.5 million for the six month period ended August
31, 2003. The Companys improved financial performance for the quarter and six
months ended August 31, 2004 over similar periods for fiscal 2004 reflects the
increase in sales volume, a reduction in amortization costs, the benefit of
lower interest costs and a lower effective tax rate. Liquidity and Capital Resources.The Company had approximately $49.0 million
in cash and cash equivalents at August 31, 2004, while borrowings under the
Companys long-term debt facilities totaled $11.5 million. The Companys cash
balances increased $3.5 million during the three months ended August 31, 2004,
with operating activities providing $4.0 million of cash, net investing
activities using $2.5 million of cash and net financing activities providing
$1.8 million of cash. Operating cash flow for the quarter ended August 31, 2004 was favorably
impacted by the Companys continuing profitability in the quarter and by its
related continuing focus on operating expense control and




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##### Table of Contents



balance sheet management. The Company held its days sales outstanding (DSOs) of
accounts receivable to 53 days, largely unchanged from May 31, 2004 and
February 29, 2004 levels. For sales of certain of its more complex, customized systems (generally
ones with a sales price of $0.5 million or more), the Company recognizes
revenue based on a percentage of completion methodology. Unbilled receivables
accrued under this methodology totaled $9.0 million (34.7% of total net
receivables) at August 31, 2004, up $3.4 million and $0.2 million from May 31,
2004 and February 29, 2004 balances, respectively. This increase primarily
reflects progress made during the second quarter on a large solution sale for a
major U.S. wireless telecommunications provider that is being accounted for on
a percentage of completion basis. The Company expects to bill and collect
unbilled receivables as of August 31, 2004 within the next twelve months. While the Company continues to focus on the level of its investment in
accounts receivable, it now generates a significant percentage of its sales,
particularly sales of enhanced telecommunications services systems, outside the
United States. Customers in certain countries are subject to significant
economic and political challenges that affect their cash flow, and many
customers outside the United States are generally accustomed to vendor
financing in the form of extended payment terms. To remain competitive in
markets outside the United States, the Company may offer selected customers
such payment terms. In all cases, however, the Company only recognizes revenue
at such time as its solution or service fee is fixed or determinable,
collectibility is probable and all other criteria for revenue recognition have
been met. In some limited cases, this policy may result in the Company
recognizing revenue on a cash basis, limiting revenue recognition on certain
sales of solutions and/or services to the actual cash received to date from the
customer, provided that all other revenue recognition criteria have been
satisfied. The Company used $2.5 million of cash to purchase additional equipment and
software during the quarter ended August 31, 2004. The expenditures relate
primarily to a Company initiative to upgrade its overall computing environment.
The Company expects to spend an additional $3.0 million to $4.0 million on
this initiative during the remainder of fiscal 2005. On June 3, 2004, the Company entered into an amended and restated credit
agreement with its lender that added an $8.0 million term loan to its existing
$5.5 million line of credit. The Company used the proceeds of the new term
loan to repay all amounts outstanding under its mortgage loan. With this
refinancing, the Company lowered its interest rate on $8.0 million of debt from
10.5% to a rate equal to the prime rate plus 0.5% or the London Inter-Bank
Offering Rate plus 2.25% (3.875% at August 31, 2004). The term loan principal
is due in monthly installments of $33,333 beginning July 1, 2004 with a final
balloon payment of approximately $5.0 million due June 30, 2009. The term loan
may be repaid in whole or in part without any penalty. The Company made
discretionary payments totaling $1.0 million during the second quarter of
fiscal 2005 in addition to the required monthly installments. Subsequent to
August 31, 2004, the Company made additional discretionary payments totaling
$1.0 million on the term loan. Borrowings under the Companys credit agreement
are secured by first liens on the Companys accounts receivable, general
intangibles, equipment and inventory, and by a first lien on the real property
and fixtures comprising the Companys Dallas headquarters. Adequacy of Cash Reserves The Company believes its cash reserves and internally generated cash flow
along with any cash availability under its line of credit will be sufficient to
meet its cash requirements for at least the next 12 months. Impact of Inflation The Company does not expect any significant short-term impact of inflation
on its financial condition. Technological advances should continue to reduce
costs in the computer and communications industries. Further, the Company
presently is not bound by long term fixed price sales contracts. The absence of
such contracts reduces the Companys exposure to inflationary effects.




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Item 3 Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risks The Company invests cash balances in excess of operating requirements in
short-term securities that generally have maturities of 90 days or less. The
carrying value of these securities approximates market value, and there is no
long-term interest rate risk associated with this investment. At August 31, 2004, the Companys outstanding long-term debt was comprised of
the following (in thousands): August 31, 2004Revolving Line of credit, bearing interest payable
monthly accruing at a rate equal to the
prime rate plus 0.25% or the London
Inter-Bank Offering Rate plus 1.75%;
(3.5% at August 31, 2004)
    
    $
    4,601Term loan, bearing interest payable monthly,
accruing at a rate equal to the prime rate
plus 0.50% or the London Inter-Bank Offering
Rate plus 2.25% (3.875% at August 31, 2004)
    
    
    6,934$
    11,535
 The following table provides information about the Companys credit
agreements that are sensitive to changes in interest rates. For the credit
agreements, the table presents cash flows for scheduled principal payments and
related weighted-average interest rates by expected maturity dates.
Weighted-average variable rates are based on rates in effect as of August 31,
2004. Fiscal2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010(Dollars in Thousands)Long-term debt-variable rate U.S.
    
    $
    200
    
    
    $
    400
    
    
    $
    5,001
    
    
    $
    400
    
    
    $
    400
    
    
    $
    5,134Projected weighted average
interest rate
    
    
    3.7
    %
    
    
    3.7
    %
    
    
    3.7
    %
    
    
    3.9
    %
    
    
    3.9
    %
    
    
    3.9
    %
 
 Item 4 Controls and Procedures Evaluation of disclosure controls and procedures.Based on the evaluation
by the Companys management (with the participation of the Companys chief
executive officer and chief financial officer), as of the end of the period
covered by this report, the Companys chief executive officer and chief
financial officer have concluded that, subject to limitations described below,
the Companys disclosure controls and procedures (as defined in Securities
Exchange Act Rules, 13a-15(e) and 15d-15(e)) are effective to ensure that the
material information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Changes in internal controls.There has been no change in the Companys
internal control over financial reporting identified in connection with that
evaluation that occurred during the quarter ended August 31, 2004 that has
materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting. Limitations on the effectiveness of controls.The Companys management,
including its chief executive officer and chief financial officer, does not
expect that the Companys control systems will prevent all error and all fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met.




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##### Table of Contents



Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple errors or mistakes. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people or by management override of the control.  Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected. Accordingly, the Companys
disclosure controls and procedures are designed to provide reasonable, not
absolute, assurance that the objectives of the Companys disclosure control
system are met and, as set forth above, the Companys chief executive officer
and chief financial officer have concluded, based on their evaluation as of the
end of the period covered by this report, that the Companys disclosure
controls and procedures were sufficiently effective to provide reasonable
assurance that the objectives of the Companys disclosure control system were
met.




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PART II. OTHER INFORMATION 
 Item 1 Legal Proceedings Pending Litigation David Barrie, et al., on Behalf of Themselves and All Others Similarly
Situated v. InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, pending in the
United States District Court, Northern District of Texas, Dallas Division: Several related class action lawsuits were filed in the United States
District Court for the Northern District of Texas on behalf of purchasers of
common stock of the Company during the period from October 12, 1999 through
June 6, 2000 (the Class Period). Plaintiffs have filed claims, which were
consolidated into one proceeding, under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Securities Exchange Act Rule 10b-5 against
the Company as well as certain named current and former officers and directors
of the Company on behalf of the alleged class members. In the complaint,
Plaintiffs claim that the Company and the named current and former officers and
directors issued false and misleading statements during the Class Period
concerning the financial condition of the Company, the results of the Companys
merger with Brite Voice Systems, Inc. and the alleged future business
projections of the Company. Plaintiffs have asserted that these alleged
statements resulted in artificially inflated stock prices. The Company believes that it and its officers and directors complied with
their obligations under the securities laws, and has vigorously defended the
lawsuit. The Company responded to this complaint by filing a motion to dismiss
the complaint in the consolidated proceeding. The Company asserted that the
complaint lacked the degree of specificity and factual support to meet the
pleading standards applicable to federal securities litigation. On this basis,
the Company requested that the United States District Court for the Northern
District of Texas dismiss the complaint in its entirety. On August 8, 2002, the
Court entered an order granting the Companys motion to dismiss the class
action lawsuit. In the order dismissing the lawsuit, the Court granted
plaintiffs an opportunity to reinstate the lawsuit by filing an amended
complaint. Plaintiffs filed an amended complaint on September 23, 2002. On September
15, 2003, the Court granted the Companys motion to dismiss the amended class
action complaint. Unlike the Courts prior order dismissing the original class
action complaint, the order dismissing the amended complaint did not grant
Plaintiffs an opportunity to reinstate the lawsuit by filing a new amended
complaint. On October 9, 2003, the Plaintiffs filed a notice of appeal to the
Fifth Circuit Court of Appeals from the trial courts order of dismissal
entered on September 15, 2003. The Plaintiffs filed their appellant brief on
February 20, 2004, and the Company filed its brief in opposition to the
Plaintiffs appeal on May 10, 2004. On June 7, 2004, Plaintiffs filed a
response to the Companys brief. The Company and the Plaintiffs made oral
arguments before the Fifth Circuit Court of Appeals on October 6, 2004. Audit Committee Investigation In connection with its previously disclosed investigation, the Audit Committee is continuing to
examine certain calendar year 2001 transactions accounted for as purchases of licenses from a publicly held
supplier to the Company, particularly whether a $900,000 payment and other license purchases were consideration for an amendment to permit a cashless exercise of a warrant issued to the Company
by the supplier.  Such a payment would have rendered unavailable a nonexclusive registration exemption for the
previously disclosed $21.4 million sale of the shares underlying the warrant during the fourth quarter of fiscal 2001.
The Audit Committee also is reviewing the Company's role, if any, in the reportedly improper
recognition of revenue in calendar 2001 by the supplier.  In addition, the Audit
Committee is examining whether the Company improperly recognized revenue in two quarter-end barter transactions involving
approximately 0.4% and 1.9% of annual revenues for fiscal 2000 and fiscal 2002,
respectively, and whether it improperly accelerated the recognition of revenue in four quarter-end sales transactions
totaling approximately 0.4% and 0.3% of annual revenues in fiscal 2000 and fiscal 2002, respectively.  The Audit Committee is being
assisted by separate independent legal counsel and accountants.  The
Company has previously self-reported the investigation to the
Securities and Exchange Commission. At this time, the Company cannot
predict what losses, claims, accounting adjustments or other impacts
on the Companys financial  statements, if any, might result
from the investigation. At the conclusion
of the investigation, the Company will take such actions, if any, as are necessary in light of the final investigation findings.




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separate independent legal counsel and accountants. The Company has previously
self-reported the investigation to the Securities and Exchange Commission and
will advise such agency of the results of the investigation. 
 Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders of the Company was held at 10:00 a.m.,
local time, on Wednesday, July 21, 2004 in Richardson, Texas. Proxies were solicited by the Board of Directors of the Company pursuant
to Regulation 14A under the Securities Exchange Act of 1934. There was no
solicitation in opposition to the Board of Directors nominees as listed in the
proxy statement, and all such nominees were duly elected. The following
persons are the nominees of the Board of Directors who were elected as
directors at the annual meeting: David W. Brandenburg, Joseph J. Pietropaolo,
George C. Platt, Jack P. Reily, Gerald F. Montry, Donald B. Reed, Saj-nicole A.
Joni and Robert E. Ritchey. The number of votes cast for the election of each
of the nominees for director, and the number of abstentions, were as follows:
30,694,339 votes for the election of David W. Brandenburg, with 2,174,018
abstentions; 30,252,141 votes for the election of Joseph J. Pietropaolo, with
2,616,216 abstentions; 30,510,595 votes for the election of George C. Platt,
with 2,357,762 abstentions; 30,415,677 votes for the election of Jack P. Reily,
with 2,452,680 abstentions; 30,507,860 votes for the election of Gerald F.
Montry, with 2,360,497 abstentions; 31,539,581 votes for the election of Donald
B. Reed, with 1,328,776 abstentions; 31,772,071 votes for the election of
Saj-nicole A. Joni, with 1,096,286 abstentions; and 30,684,843 votes for the
election of Robert E. Ritchey, with 2,183,514 abstentions. No votes were cast
against the election of any nominee for director. The second matter voted on and approved by the shareholders, was a
resolution to approve an amendment to the Companys 2003 Stock Option Plan to
increase from 2,000,000 to 3,500,000 the aggregate number of shares authorized
for issuance under the 2003 Stock Option Plan. The number of votes cast for
the adoption of the resolution to amend the 2003 Stock Option Plan was
16,623,197, the number of votes cast against the adoption of the resolution to
amend the Plan was 4,786,465 and the number of abstentions was 356,530. 
 Item 6 Exhibits 3.1
    
    Articles of Incorporation, as amended, of Registrant. (2)3.2
    
    Amendment to Articles of Incorporation of Registrant. (3)3.3
    
    Amendment to Articles of Incorporation of Registrant. (4)3.4
    
    Third Restated Bylaws of Registrant. (1)4.1
    
    Third Amended and Restated Rights Agreement dated as of May 1, 2001
between the Registrant and Computershare Investor Services, LLC, as
Rights Agents. (5)4.2
    
    Securities Purchase Agreement, dated as of May 29, 2002, between
the Registrant and the Buyers named therein (the Securities Purchase
Agreement). (6)4.3
    
    Form of Warrant, dated as of May 29, 2002, between the Registrant
and each of the Buyers under the Securities Purchase Agreement. (6)4.4
    
    Registration Rights Agreement, dated as of May 29, 2002, between
the Registrant and each of the Buyers under the Securities Purchase
Agreement. (6)4.5
    
    First Amendment to Third Amended and Restated Rights Agreement
dated as of May 29, 2002, between the Registrant and Computershare
Investor Services, LLC. (6)




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10.1
    
    Amended and Restated Credit Agreement dated as of June 3, 2004,
between the Registrant and Wells Fargo Bank, National Association
(Wells Fargo). (7)10.2
    
    First Amendment to Credit Agreement dated as of August 17, 2004,
between the Registrant and Wells Fargo. (1)10.3
    
    Fiscal Year 2005 Transition Year Incentive Plan Plan  Summary. (1)10.4
    
    Intervoice, Inc. 2003 Stock Option Plan. (1)31.1
    
    Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1)31.2
    
    Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1)32.1
    
    Certification by Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. (1)*32.2
    
    Certification by Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. (1)*
   (1)
    
    Filed herewith.(2)
    
    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.(3)
    
    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.(4)
    
    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.(5)
    
    Incorporated by reference to exhibits to Form 8-A/A (Amendment 3) filed
with the SEC on May 9, 2001.(6)
    
    Incorporated by reference to exhibits to the Companys Current Report on
Form 8-K, filed with the SEC on May 30, 2002.(7)
    
    Incorporated by reference to exhibit to the Companys Current Report on
Form 8-K, filed with the SEC on June 4, 2004.*
    
    The certifications attached as Exhibit 32.1 and Exhibit 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.




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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. INTERVOICE, INC.Date: October 12, 2004
    
    By:
    
    /s/ MARK C. FALKENBERGMark C. FalkenbergChief Accounting Officer




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INDEX TO EXHIBITS EXHIBITSNO.
    
    DESCRIPTION3.1
    
    Articles of Incorporation, as amended, of Registrant. (2)3.2
    
    Amendment to Articles of Incorporation of Registrant. (3)3.3
    
    Amendment to Articles of Incorporation of Registrant. (4)3.4
    
    Third Restated Bylaws of Registrant. (1)4.1
    
    Third Amended and Restated Rights Agreement dated as of May 1, 2001
between the Registrant and Computershare Investor Services, LLC, as
Rights Agents. (5)4.2
    
    Securities Purchase Agreement, dated as of May 29, 2002, between
the Registrant and the Buyers named therein (the Securities Purchase
Agreement). (6)4.3
    
    Form of Warrant, dated as of May 29, 2002, between the Registrant
and each of the Buyers under the Securities Purchase Agreement. (6)4.4
    
    Registration Rights Agreement, dated as of May 29, 2002, between
the Registrant and each of the Buyers under the Securities Purchase
Agreement. (6)4.5
    
    First Amendment to Third Amended and Restated Rights Agreement
dated as of May 29, 2002, between the Registrant and Computershare
Investor Services, LLC. (6)10.1
    
    Amended and Restated Credit Agreement dated as of June 3, 2004,
between the Registrant and Wells Fargo Bank, National Association
(Wells Fargo). (7)10.2
    
    First Amendment to Credit Agreement dated as of August 17, 2004,
between the Registrant and Wells Fargo. (1)10.3
    
    Fiscal Year 2005 Transition Year Incentive Plan Plan Summary. (1)10.4
    
    Intervoice, Inc. 2003 Stock Option Plan. (1)31.1
    
    Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1)31.2
    
    Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1)32.1
    
    Certification by Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. (1)*32.2
    
    Certification by Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. (1)*
   (1)
    
    Filed herewith.(2)
    
    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.




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(3)
    
    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.(4)
    
    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.(5)
    
    Incorporated by reference to exhibits to Form 8-A/A (Amendment 3) filed
with the SEC on May 9, 2001.(6)
    
    Incorporated by reference to exhibits to the Companys Current Report on
Form 8-K, filed with the SEC on May 30, 2002.(7)
    
    Incorporated by reference to exhibit to the Companys Current Report on
Form 8-K, filed with the SEC on June 4, 2004.*
    
    The certifications attached as Exhibit 32.1 and Exhibit 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.