##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED
November 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 1-15045
 INTERVOICE, INC.
 (Exact name of registrant as specified in its charter)
 TEXAS
(State or other jurisdiction of 
incorporation or organization)
    
    75-1927578
(I.R.S. Employer
Identification No.)17811 WATERVIEW PARKWAY, DALLAS, TX 
(Address of principal executive offices)
    
    75252(Zip Code)
 972-454-8000
(Registrants telephone number, including area code)
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
 Large accelerated filer o Accelerated filer þ Non-Accelerated Filer o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
 The Registrant had 38,644,203 shares of common stock, no par value per share, outstanding as of
December 21, 2006.




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2 Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 4 Controls and ProceduresPART II. OTHER INFORMATIONItem 1 Legal ProceedingsItem 1A Risk FactorsItem 6 ExhibitsSIGNATURESIndex to ExhibitsRule 13a-14(a)/15d-14(a) Certification of CEORule 13a-14(a)/15d-14(a) Certification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 (In Thousands, Except Share and Per Share Data)November 30, 2006
    
    
    February 28, 2006(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    17,924
    
    
    $
    42,076Trade accounts receivable, net of allowance for
doubtful accounts of $1,649 in fiscal 2007 and
$1,701 in fiscal 2006
    
    
    40,368
    
    
    
    25,745Inventory
    
    
    13,260
    
    
    
    9,439Prepaid expenses and other current assets
    
    
    4,642
    
    
    
    4,406Deferred income taxes
    
    
    3,047
    
    
    
    3,04779,241
    
    
    
    84,713Property and Equipment, net of accumulated depreciation of
$63,475 in fiscal 2007 and $59,002 in fiscal 2006
    
    
    34,086
    
    
    
    28,893Other AssetsIntangible assets, net of accumulated amortization of $19,310
in fiscal 2007 and $17,343 in fiscal 2006
    
    
    10,136
    
    
    
    10,284Goodwill
    
    
    32,461
    
    
    
    32,461Long term deferred income taxes
    
    
    2,972
    
    
    
    1,330Other assets
    
    
    401
    
    
    
    454$
    159,297
    
    
    $
    158,135LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    11,484
    
    
    $
    10,154Accrued expenses
    
    
    14,218
    
    
    
    15,176Customer deposits
    
    
    4,317
    
    
    
    6,157Deferred income
    
    
    27,223
    
    
    
    32,172Income taxes payable
    
    
    785
    
    
    
    484Deferred income taxes
    
    
    211
    
    
    
    27058,238
    
    
    
    64,413Stockholders EquityPreferred stock, $100 par value2,000,000
shares authorized: none issuedCommon stock, no par value, at nominal
assigned value62,000,000 shares
authorized: 38,640,517 issued and
outstanding in fiscal 2007 and 38,470,087 issued
and outstanding in fiscal 2006
    
    
    19
    
    
    
    19Additional capital
    
    
    96,667
    
    
    
    92,050Retained earnings
    
    
    4,661
    
    
    
    3,558Accumulated other comprehensive loss
    
    
    (288
    )
    
    
    (1,905
    )Stockholders equity
    
    
    101,059
    
    
    
    93,722$
    159,297
    
    
    $
    158,135
  2




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##### Table of Contents



(In Thousands, Except Per Share Data)Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,2006
    
    
    2005
    
    
    2006
    
    
    2005SalesSolutions
    
    $
    27,151
    
    
    $
    19,328
    
    
    $
    70,865
    
    
    $
    62,720Recurring services
    
    
    25,617
    
    
    
    21,683
    
    
    
    78,051
    
    
    
    64,84452,768
    
    
    
    41,011
    
    
    
    148,916
    
    
    
    127,564Cost of goods soldSolutions
    
    
    16,604
    
    
    
    11,474
    
    
    
    44,194
    
    
    
    37,328Recurring services
    
    
    7,405
    
    
    
    6,409
    
    
    
    22,071
    
    
    
    18,79424,009
    
    
    
    17,883
    
    
    
    66,265
    
    
    
    56,122Gross marginSolutions
    
    
    10,547
    
    
    
    7,854
    
    
    
    26,671
    
    
    
    25,392Recurring services
    
    
    18,212
    
    
    
    15,274
    
    
    
    55,980
    
    
    
    46,05028,759
    
    
    
    23,128
    
    
    
    82,651
    
    
    
    71,442Research and development expenses
    
    
    6,258
    
    
    
    4,226
    
    
    
    17,279
    
    
    
    12,305Selling, general and administrative expenses
    
    
    21,959
    
    
    
    15,801
    
    
    
    62,967
    
    
    
    46,601Amortization of acquisition related intangible assets
    
    
    673
    
    
    
    252
    
    
    
    1,836
    
    
    
    756Income (loss) from operations
    
    
    (131
    )
    
    
    2,849
    
    
    
    569
    
    
    
    11,780Interest income
    
    
    290
    
    
    
    685
    
    
    
    1,237
    
    
    
    1,781Interest expense
    
    
    (17
    )
    
    
    
    
    
    
    (17
    )
    
    
    (31
    )Other income (expense)
    
    
    (292
    )
    
    
    212
    
    
    
    (210
    )
    
    
    379Income (loss) before taxes
    
    
    (150
    )
    
    
    3,746
    
    
    
    1,579
    
    
    
    13,909Income taxes
    
    
    (62
    )
    
    
    121
    
    
    
    476
    
    
    
    1,764Net income (loss)
    
    $
    (88
    )
    
    $
    3,625
    
    
    $
    1,103
    
    
    $
    12,145Net income per share  basic
    
    $
    0.00
    
    
    $
    0.09
    
    
    $
    0.03
    
    
    $
    0.32Shares used in basic per share computation
    
    
    38,616
    
    
    
    38,251
    
    
    
    38,557
    
    
    
    37,970Net income per share  diluted
    
    $
    0.00
    
    
    $
    0.09
    
    
    $
    0.03
    
    
    $
    0.31Shares used in diluted per share computation
    
    
    38,616
    
    
    
    39,080
    
    
    
    39,120
    
    
    
    39,046
  3




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(In Thousands)Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating activitiesNet income (loss)
    
    $
    (88
    )
    
    $
    3,625
    
    
    $
    1,103
    
    
    $
    12,145Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    3,023
    
    
    
    2,324
    
    
    
    8,274
    
    
    
    5,916Non-cash compensation expense
    
    
    1,055
    
    
    
    
    
    
    
    3,804
    
    
    
    Change in accounts receivable
    
    
    (7,412
    )
    
    
    884
    
    
    
    (13,415
    )
    
    
    5,814Other changes in operating activities
    
    
    (6,224
    )
    
    
    (2,500
    )
    
    
    (10,666
    )
    
    
    (5,112
    )Net cash provided by (used in) operating activities
    
    
    (9,646
    )
    
    
    4,333
    
    
    
    (10,900
    )
    
    
    18,763Investing activitiesPurchases of property and equipment
    
    
    (2,109
    )
    
    
    (3,055
    )
    
    
    (10,723
    )
    
    
    (10,099
    )Purchase of Nuasis assets, net of cash acquired
    
    
    (2,439
    )
    
    
    
    
    
    
    (2,439
    )
    
    
    Purchase of Edify Corporation
    
    
    
    
    
    
    
    
    
    
    (926
    )
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (300
    )Net cash used in investing activities
    
    
    (4,548
    )
    
    
    (3,055
    )
    
    
    (14,088
    )
    
    
    (10,399
    )Financing activitiesPaydown of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,733
    )Exercise of stock options
    
    
    118
    
    
    
    314
    
    
    
    376
    
    
    
    2,392Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500Net cash provided by financing activities
    
    
    118
    
    
    
    314
    
    
    
    376
    
    
    
    3,159Effect of exchange rates on cash
    
    
    37
    
    
    
    (726
    )
    
    
    460
    
    
    
    (1,507
    )Increase (decrease) in cash and cash equivalents
    
    
    (14,039
    )
    
    
    866
    
    
    
    (24,152
    )
    
    
    10,016Cash and cash equivalents, beginning of period
    
    
    31,963
    
    
    
    69,392
    
    
    
    42,076
    
    
    
    60,242Cash and cash equivalents, end of period
    
    $
    17,924
    
    
    $
    70,258
    
    
    $
    17,924
    
    
    $
    70,258
  4




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Accumulated OtherCommon Stock
    
    Additional
    
    Retained
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Earnings
    
    Loss
    
    TotalBalance at February 28, 2006
    
    
    38,470,087
    
    
    $
    19
    
    
    $
    92,050
    
    
    $
    3,558
    
    
    $
    (1,905
    )
    
    $
    93,722Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,103
    
    
    
    
    
    
    
    1,103Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,617
    
    
    
    1,617Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,720Tax benefit from exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    437
    
    
    
    
    
    
    
    
    
    
    
    437Exercise of stock options
    
    
    170,430
    
    
    
    
    
    
    
    376
    
    
    
    
    
    
    
    
    
    
    
    376Non-cash compensation
    
    
    
    
    
    
    
    
    
    
    3,804
    
    
    
    
    
    
    
    
    
    
    
    3,804Balance at November 30, 2006
    
    
    38,640,517
    
    
    $
    19
    
    
    $
    96,667
    
    
    $
    4,661
    
    
    $
    (288
    )
    
    $
    101,059
  5




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED NOVEMBER 30, 2006
 Note A  Basis of Presentation
   Note B
 Acquisition of Edify Corporation
   Three Months Ended
    
    Nine Months EndedNovember 30, 2005
    
    November 30, 2005(unaudited)
    
    (unaudited)Sales
    
    $
    50,899
    
    
    $
    152,986Income before income taxes
    
    
    4,624
    
    
    
    14,553Net income
    
    
    4,518
    
    
    
    12,940Net income per share
    
    
    0.12
    
    
    
    0.33
 6




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##### Table of Contents



Note C  Inventory
  November 30, 2006
    
    
    February 28, 2006Purchased parts
    
    $
    3,931
    
    
    $
    3,908Work in progress
    
    
    9,329
    
    
    
    5,531$
    13,260
    
    
    $
    9,439
 Note D  Property and Equipment
  November 30, 2006
    
    
    February 28, 2006Land and buildings
    
    $
    17,400
    
    
    $
    16,932Computer equipment and software
    
    
    51,328
    
    
    
    42,817Furniture and fixtures
    
    
    3,416
    
    
    
    3,165Hosted solutions equipment
    
    
    17,931
    
    
    
    16,331Maintenance services equipment
    
    
    7,486
    
    
    
    8,65097,561
    
    
    
    87,895Less allowance for accumulated depreciation
    
    
    63,475
    
    
    
    59,002Property and equipment, net
    
    $
    34,086
    
    
    $
    28,893
  Note E
 Stock-based Compensation
 Accounting for Stock Issued to Employees
 Share-Based Payments
 7




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Three Months Ended
    
    
    Nine Months EndedNovember 30, 2006
    
    
    November 30, 2006Cost of Goods Sold
    
    $
    175
    
    
    $
    699R&D
    
    
    111
    
    
    
    392SG&A
    
    
    704
    
    
    
    2,561Decrease in operating income
    
    $
    990
    
    
    $
    3,652Related deferred income tax benefit
    
    
    294
    
    
    
    1,072Decrease in net income
    
    $
    696
    
    
    $
    2,580Decrease in earnings per share  basic
    
    $
    0.02
    
    
    $
    0.07Decrease in earnings per share  diluted
    
    $
    0.02
    
    
    $
    0.07
 Accounting for Stock-Based Compensation-Transition
and Disclosure, an amendment of FASB Statement No. 123
 Three Months Ended
    
    
    Nine Months EndedNovember 30, 2005
    
    
    November 30, 2005Net income, as reported
    
    $
    3,625
    
    
    $
    12,145Less: Total stock-based compensation
expense determined under fair
value based methods for all awards
    
    
    (2,615
    )
    
    
    (5,854
    )Pro forma net income
    
    
    1,010
    
    
    
    6,291Net income per share:Basic  as reported
    
    $
    0.09
    
    
    $
    0.32Basic  pro forma
    
    $
    0.03
    
    
    $
    0.17Diluted  as reported
    
    $
    0.09
    
    
    $
    0.31Diluted  pro forma
    
    $
    0.03
    
    
    $
    0.16
 Note F
 Special Charges
 Fiscal 2007
  Cost of Goods
    
    
    Research and
    
    
    Selling, GeneralSold
    
    
    Development
    
    
    and Administrative
    
    
    TotalSeverance payments and related
benefits
    
    $
    573
    
    
    $
    195
    
    
    $
    519
    
    
    $
    1,287Facility Costs
    
    
    
    
    
    
    
    
    
    $
    1,075
    
    
    $
    1,075Total
    
    $
    573
    
    
    $
    195
    
    
    $
    1,594
    
    
    $
    2,362
  Fiscal 2006
  8




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Accrued Balance
    
    
    
    
    
    
    
    
    
    Accrued BalanceFebruary 28, 2006
    
    Payments
    
    Adjustments
    
    November 30, 2006Severance payments and related
benefits
    
    $
    1,748
    
    
    $
    1,536
    
    
    $
    (29
    )
    
    $
    183
  Note G
 Income Taxes
    Accounting for Income Tax Uncertainties,
  9




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Note H  Earnings Per Share
 Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,(in thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income (loss)
    
    $
    (88
    )
    
    $
    3,625
    
    
    $
    1,103
    
    
    $
    12,145Denominator:Denominator for basic
earnings per share
    
    
    38,616
    
    
    
    38,251
    
    
    
    38,557
    
    
    
    37,970Dilutive potential common sharesEmployee stock options
    
    
    
    
    
    
    829
    
    
    
    563
    
    
    
    1,005Outstanding warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71Denominator for diluted
earnings per share
    
    
    38,616
    
    
    
    39,080
    
    
    
    39,120
    
    
    
    39,046Net income per share:Basic
    
    $
    0.00
    
    
    $
    0.09
    
    
    $
    0.03
    
    
    $
    0.32Diluted
    
    $
    0.00
    
    
    $
    0.09
    
    
    $
    0.03
    
    
    $
    0.31
  Note I  Operating Segment Information and Major Customers
  Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Voice automation/IVR solution sales
    
    $
    19,062
    
    
    $
    10,438
    
    
    $
    52,060
    
    
    $
    38,371Messaging solution sales
    
    
    4,347
    
    
    
    5,877
    
    
    
    11,634
    
    
    
    16,743Payment solution sales
    
    
    3,742
    
    
    
    3,013
    
    
    
    7,171
    
    
    
    7,606Total solution sales
    
    
    27,151
    
    
    
    19,328
    
    
    
    70,865
    
    
    
    62,720Maintenance and related
service revenues
    
    
    21,329
    
    
    
    15,589
    
    
    
    62,180
    
    
    
    45,964Hosted solutions revenues
    
    
    4,288
    
    
    
    6,094
    
    
    
    15,871
    
    
    
    18,880Total recurring services revenues
    
    
    25,617
    
    
    
    21,683
    
    
    
    78,051
    
    
    
    64,844Total sales
    
    $
    52,768
    
    
    $
    41,011
    
    
    $
    148,916
    
    
    $
    127,564
 10




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Geographic Operations
  Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,2006
    
    
    2005
    
    
    2006
    
    
    2005North America
    
    $
    34,880
    
    
    $
    22,105
    
    
    $
    94,127
    
    
    $
    67,508Europe
    
    
    7,168
    
    
    
    7,233
    
    
    
    22,551
    
    
    
    28,938Middle East and Africa
    
    
    4,660
    
    
    
    5,201
    
    
    
    12,219
    
    
    
    17,146Central and South America
    
    
    2,898
    
    
    
    4,831
    
    
    
    12,342
    
    
    
    10,207Pacific Rim
    
    
    3,162
    
    
    
    1,641
    
    
    
    7,677
    
    
    
    3,765Total
    
    $
    52,768
    
    
    $
    41,011
    
    
    $
    148,916
    
    
    $
    127,564
 Concentration of Revenue
  Note J
 Contingencies
 Intellectual Property Matters
     11




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Pending Litigation
 David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v.
InterVoice-Brite, Inc., et al.
    12




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Phoenix Solutions, Inc. v. Sony Electronics, Inc.
 Audit Committee Investigation
     13




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Other Matters
        14




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Barrie Barrie
 15




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Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Critical Accounting Policies. Share-Based Payments
 Stock-Based Compensation
   Sales.
 Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    
    
    
    
    November 30,
    
    
    November 30,
    
    
    
    
    
    
    November 30,2006
    
    
    % Change
    
    
    2005
    
    
    2006
    
    
    % Change
    
    
    2005Voice automation/IVR solution sales
    
    $
    19,062
    
    
    
    82.6
    %
    
    $
    10,438
    
    
    $
    52,060
    
    
    
    35.7
    %
    
    $
    38,371Messaging solution sales
    
    
    4,347
    
    
    
    (26.0
    )%
    
    
    5,877
    
    
    
    11,634
    
    
    
    (30.5
    )%
    
    
    16,743Payment solution sales
    
    
    3,742
    
    
    
    24.2
    %
    
    
    3,013
    
    
    
    7,171
    
    
    
    (5.7
    )%
    
    
    7,606Total solution sales
    
    
    27,151
    
    
    
    40.5
    %
    
    
    19,328
    
    
    
    70,865
    
    
    
    13.0
    %
    
    
    62,720Maintenance and related services
revenues
    
    
    21,329
    
    
    
    36.8
    %
    
    
    15,589
    
    
    
    62,180
    
    
    
    35.3
    %
    
    
    45,964Hosted solutions revenues
    
    
    4,288
    
    
    
    (29.6
    )%
    
    
    6,094
    
    
    
    15,871
    
    
    
    (15.9
    )%
    
    
    18,880Total recurring services revenues
    
    
    25,617
    
    
    
    18.1
    %
    
    
    21,683
    
    
    
    78,051
    
    
    
    20.4
    %
    
    
    64,844Total sales
    
    $
    52,768
    
    
    
    28.7
    %
    
    $
    41,011
    
    
    $
    148,916
    
    
    
    16.7
    %
    
    $
    127,564
  16




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    
    
    
    
    November 30,
    
    
    November 30,
    
    
    
    
    
    
    November 30,2006
    
    
    % Change
    
    
    2005
    
    
    2006
    
    
    % Change
    
    
    2005North America
    
    $
    34,880
    
    
    
    57.8
    %
    
    $
    22,105
    
    
    $
    94,127
    
    
    
    39.4
    %
    
    $
    67,508Europe
    
    
    7,168
    
    
    
    (0.9
    )%
    
    
    7,233
    
    
    
    22,551
    
    
    
    (22.1
    )%
    
    
    28,938Middle East and Africa
    
    
    4,660
    
    
    
    (10.4
    )%
    
    
    5,201
    
    
    
    12,219
    
    
    
    (28.7
    )%
    
    
    17,146Central and South America
    
    
    2,898
    
    
    
    (40.0
    )%
    
    
    4,831
    
    
    
    12,342
    
    
    
    20.9
    %
    
    
    10,207Pacific Rim
    
    
    3,162
    
    
    
    92.7
    %
    
    
    1,641
    
    
    
    7,677
    
    
    
    103.9
    %
    
    
    3,765Total
    
    $
    52,768
    
    
    
    28.7
    %
    
    $
    41,011
    
    
    $
    148,916
    
    
    
    16.7
    %
    
    $
    127,564
       17




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##### Table of Contents



Three Months Ended November 302006
    
    2005Sales from recurring services and
support contracts, including
contracts for hosted solutions
    
    
    48
    %
    
    
    53
    %Sales from beginning solutions backlog
    
    
    30
    %
    
    
    29
    %Sales from the quarters pipeline
    
    
    22
    %
    
    
    18
    %100
    %
    
    
    100
    %
   Quarter Ended
    
    BacklogNovember 30, 2006
    
    $
    46,345August 31, 2006
    
    $
    41,639May 31, 2006
    
    $
    41,221February 28, 2006
    
    $
    33,867November 30, 2005
    
    $
    29,915
   Cost of Goods Sold.
 Three Months Ended
    
    Nine Months EndedNovember 30,
    
    November 30,
    
    November 30,
    
    November 30,2006
    
    2005
    
    2006
    
    2005Solutions COGS
    
    $
    16,604
    
    
    $
    11,474
    
    
    $
    44,194
    
    
    $
    37,328As percentage of solutions sales
    
    
    61.2
    %
    
    
    59.4
    %
    
    
    62.4
    %
    
    
    59.5
    %Services COGS
    
    $
    7,405
    
    
    $
    6,409
    
    
    $
    22,071
    
    
    $
    18,794As percentage of services sales
    
    
    28.9
    %
    
    
    29.6
    %
    
    
    28.3
    %
    
    
    29.0
    %Total COGS
    
    $
    24,009
    
    
    $
    17,883
    
    
    $
    66,265
    
    
    $
    56,122As percentage of total sales
    
    
    45.5
    %
    
    
    43.6
    %
    
    
    44.5
    %
    
    
    44.0
    %
 18




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##### Table of Contents



Research and Development Expenses.
 Three Months Ended
    
    Nine Months EndedNovember 30,
    
    November 30,
    
    November 30,
    
    November 30,2006
    
    2005
    
    2006
    
    2005Research and development expenses
(in thousands)
    
    $
    6,258
    
    
    $
    4,226
    
    
    $
    17,279
    
    
    $
    12,305As percentage of total sales
    
    
    11.9
    %
    
    
    10.3
    %
    
    
    11.6
    %
    
    
    9.6
    %
  ®
  Selling, General and Administrative Expenses.
 Three Months Ended
    
    Nine Months EndedNovember 30,
    
    November 30,
    
    November 30,
    
    November 30,2006
    
    2005
    
    2006
    
    2005Selling, general and administrative
expenses (in thousands)
    
    $
    21,959
    
    
    $
    15,801
    
    
    $
    62,967
    
    
    $
    46,601As percentage of total sales
    
    
    41.6
    %
    
    
    38.5
    %
    
    
    42.3
    %
    
    
    36.5
    %
  19




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##### Table of Contents



Amortization of Acquired Intangible Assets.
 Income Taxes.
   Accounting for Income Tax Uncertainties,
  Income (Loss) from Operations and Net Income (Loss).
 Liquidity and Capital Resources.
  20




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##### Table of Contents



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




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1 Legal Proceedings
  
 Item 1A Risk Factors
  
    
    We are prone to quarterly sales fluctuations.The sales value of an individual order
for our solutions and services can range from a few thousand dollars to several million
dollars depending on the complexity of our customers business need and the size of its
operations. The quantity and size of large sales (sales valued at approximately $2.0
million or more) during any quarter can cause wide variations in our quarterly sales and
earnings, as such sales are often unevenly distributed throughout the fiscal year. In
addition, some of our sales transactions are completed in the same fiscal quarter as
ordered. Our accuracy in estimating future sales is largely dependent on our ability to
successfully qualify, estimate and close solution sales from our pipeline of sales
opportunities during a quarter. No matter how promising a pipeline opportunity may appear,
there is no assurance it will ever result in a sale. The accuracy of our estimate of future
sales is also dependent on our ability to accurately estimate the amount of revenue to be
contributed from beginning backlog and revenue from cash basis customers during any fiscal
quarter. This estimate can be affected by factors outside our control, including changes
in project timing requested by our customers. In addition, estimating the amount of
revenue which may be recognized on a percentage of completion project is complex and such
estimates are subject to revision based upon a variety of factors. Accordingly, our actual
sales for any fiscal reporting period may be significantly different than any estimate of
sales we make for such period. See the discussion entitled Sales in Item 2 of Part I for
a discussion of our system for estimating sales and tracking sales trends in our business.
    
    We are subject to potential and pending lawsuits and other claims.We are subject to
certain potential and pending lawsuits and other claims discussed in Note J in Item 1 of
Part I of this quarterly report on Form 10-Q. Furthermore, we may become subject to claims,
including claims by the government, or other adverse consequences arising from the findings
of the Audit Committee investigation and related SEC investigation discussed in Note J. We, and
certain of our current and former officers and non-officer employees are currently
responding to or have responded to SEC subpoenas to produce documents and provide testimony
about the transactions that were the subject of the investigation. Any adverse judgment,
penalty or settlement related to any lawsuit or other such claim could have consequences
that would be material to our financial position or results of operations. We may be
required to indemnify certain of our current and former directors and officers under
existing arrangements in connection with the indemnification we are currently providing to
certain individuals in connection with the class action lawsuit and the SEC investigation.
Our insurance policies provide coverage for losses and expenses incurred by us and our
current and former directors and officers in connection with claims made under the federal
securities laws. These policies, however, exclude losses and expenses related to the
Barrie class action lawsuit discussed in Note J or to other litigation based on
claims that are substantially the same as the claims in the Barrie class action and
contain other customary provisions to limit or exclude coverage for certain losses and
expenses.
    
    We may not be successful in integrating the operations and products and retaining the
customers of Edify, and this could negatively impact our business.We believe we will be
able to achieve certain cost savings and other synergies as a result of combining
Intervoice and Edify, but there can be no assurance that
 22




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##### Table of Contents



such synergies will be realized. Our future success will depend in part upon our ability to
integrate and operate Edify successfully with our business. Any inability to integrate the
products of Intervoice and Edify while maintaining or increasing the market share that such
products had prior to the merger could decrease the revenues historically generated from
these products. Customers of Intervoice and Edify may delay their purchase of products or
services from one or both companies to consider any potential implications the acquisition
may have for products and services offered by either company. In addition, the integration
process will require the dedication of management resources, which may temporarily distract
attention from our day-to-day business. Our future success will also depend in part on our
ability to retain and assimilate certain key employees of Edify. There can be no assurance
that we will be able to efficiently integrate and operate Edify and its products with our
business, maintain business relationships with Edifys customers and retain and assimilate
key employees of Edify. Failure to do so could have a material adverse effect on our
results of operations or our financial condition. Further, Edify provides products and
services which are similar to our products and services and, accordingly, our Edify
operations are generally subject to most of the other risk factors discussed in this Item
1A.
 
    
    We face intense competition based on product capabilities, and we experience ever
increasing demands from our actual and prospective customers for our products to be
compatible with a variety of rapidly proliferating computing, telephony and computer
networking technologies and standards.Our success is dependent, to a large degree, on our
effectiveness in allocating resources to developing and improving products compatible with
those technologies, standards and functionalities that ultimately become widely accepted by
our current and prospective customers. Our success is also dependent, to a large degree, on
our ability to implement arrangements with vendors of complementary product offerings so
that we can provide our current and prospective customers greater functionality. Our
principal competitors include Genesys, Avaya, Nortel, Nuance Communications, Comverse
Technology, Unisys and Lucent Technologies. Many of our competitors have greater financial,
technological and marketing resources than we have, as well as greater name recognition.
Although we have committed substantial resources to enhance our existing products and to
develop and market new products, there is no assurance we will be successful. In addition,
it is possible that new entrants to the market and strategic acquisitions and partnerships
between existing companies could increase the competition in the markets in which we
participate. An increase in such competition could materially adversely affect our ability
to sell our products, thereby adversely affecting our business, operating results and
financial condition.
    
    We may not be successful in transitioning our products and services to an open,
standards-based business model.Intervoice has historically provided complete, bundled
hardware and software solutions using internally developed components to address our
customers total business needs. Increasingly, the markets for our products are requiring a
shift to the development of products and services based on an open, standards-based
architecture such as the J2EE and Microsoftsâ.NET environments utilizing VoiceXML
and/or SALT standards. Such an open, standards-based approach allows customers to
independently purchase and combine hardware components, standardized software modules, and
customization, installation and integration services from individual vendors deemed to
offer the best value in the particular class of product or service. In such an environment,
we believe we may sell less hardware and fewer bundled systems and may become increasingly
dependent on our development and sale of software application packages, customized software
and consulting and integration services. This shift will place new challenges on us to
transition our products and to hire and retain the mix of personnel necessary to respond to
this business environment, to adapt to the changing expense structure that the new
environment may tend to foster, and to increase sales of services, customized software and
application packages to offset reduced sales of hardware and bundled solutions. Failure to
develop, enhance, acquire and introduce new products and services to respond to changing
market conditions or customer requirements, or lack of customer acceptance of our products
or services will materially adversely affect our business, results of operations and financial
condition.
    
    We may not be able to retain our customer base, and, in particular, our more significant
customers.Our success is heavily dependent on our ability to retain our significant
customers. The loss of one of our significant customers could negatively impact our
operating results. Our installed base of customers generally is not contractually
obligated to place further solutions orders with us or to extend their services contracts
with us at the expiration of their current contracts.
    
    We will be harmed if we lose key business and technical personnel.We rely upon
the services of a relatively small number of key technical, project management and senior
management personnel, most of whom do not have employment contracts. If we were to lose
any of our key personnel, replacing them
 23




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##### Table of Contents



could be difficult and costly. If we were unable to successfully and promptly
replace such personnel, our business could be materially harmed.
    
    Our reliance on significant vendor relationships could result in significant expense or
an inability to serve our customers if we lose these relationships.Although we generally
use standard parts and components in our products, some of our components, including
semi-conductors and, in particular, digital signal processors manufactured by Texas
Instruments, are available only from a small number of vendors. Likewise, we license speech
recognition technology from a small number of vendors. Two of these vendors, ScanSoft, Inc.
and Nuance Communications, Inc., completed a merger of their organizations and now the
combined company has a dominant market position. As we continue to migrate to open,
standards-based systems, we will become increasingly dependent on our component suppliers
and software vendors. To date, we have been able to obtain adequate supplies of needed
components and licenses in a timely manner, and we expect to continue to be able to do so.
Nevertheless, if our significant vendors are unable to supply components or licenses at
current levels, we may not be able to obtain these items from another source or at
historical prices. In such instances, we would be unable to provide products and services
to our customers or generate historical operating margins, and our business and operating
results would suffer.
    
    If third parties assert claims that our products or services infringe on their
technology and related intellectual property rights, whether the claims are made directly
against us or against our customers, we could incur substantial costs in connection with
these claims.We believe software and technology companies, including Intervoice and others
in our industry, increasingly may become subject to infringement claims. Such claims may
require us to enter into costly license agreements or result in even more costly
litigation. To the extent a licensing arrangement is required, the arrangement may not be
available at all, or, if available, may be very expensive or even prohibitively expensive.
As with any legal proceeding, there is no guarantee we will prevail in any litigation
instituted against us asserting infringement of intellectual property rights. To the extent
we suffer an adverse judgment, we might have to pay substantial damages, discontinue the
use and sale of infringing products, repurchase infringing products from our customers in
accordance with indemnity obligations, expend significant resources to acquire
non-infringing alternatives, and/or obtain licenses to the intellectual property that has
been infringed upon. As with licensing arrangements, non-infringing substitute technologies
may not be available and, if available, may be very expensive, or even prohibitively
expensive, to implement. Accordingly, for all of the foregoing reasons, a claim of
infringement could ultimately have a material adverse effect on our business, financial
condition and results of operations.
    
    We are exposed to risks related to our international operations that could increase our
costs and hurt our business.Our products are currently sold in more than 75 countries.
Our international sales were 34% and 46% of total sales for the fiscal quarters ended
November 30, 2006 and 2005, respectively. International sales, personnel and property are
subject to certain risks, including:
 §
    
    terrorism;§
    
    fluctuations in currency exchange rates;§
    
    the difficulty and expense of maintaining foreign offices and distribution channels;§
    
    tariffs and other barriers to trade;§
    
    greater difficulty in protecting and enforcing intellectual property rights;§
    
    general economic and political conditions in each country;§
    
    loss of revenue, property and equipment from expropriation;§
    
    import and export licensing requirements; and§
    
    additional expenses and risks inherent in conducting operations in
geographically distant locations, including risks arising from differences in
language and cultural approaches to the conduct of business.
 
    
    Our inability to meet contracted performance targets could subject us to significant
penalties.Many of our contracts, particularly for hosted solutions, foreign contracts and
contracts with telecommunication companies, include provisions for the assessment of
damages for delayed project completion and/or for our failure to achieve certain minimum
service levels. We have had to pay damages in the past and may have to pay additional
damages in the future. Any such future damages could be significant.
    
    Increasing consolidation in the telecommunications and financial industries could
adversely affect our revenues and profitability.The majority of our largest customers are
in the telecommunications and financial industries. These industries are undergoing
significant consolidation as a result of merger and
 24




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##### Table of Contents



acquisition activity. This activity could result in a decrease in the number of customers
purchasing our products and/or in delayed purchases of our products by customers that are
reviewing their strategic alternatives in light of a pending merger or acquisition. If these
results occur, our revenues and profitability could decline.
    
    Our products are complex, and software defects could reduce our revenues and expose us
to litigation.The software products we offer are complex and may contain errors or
defects, even after extensive testing and quality control, particularly in early versions.
Furthermore, because our products increasingly are designed around an open standards based
architecture incorporating elements developed by third parties, such errors or defects may
be outside of our direct ability to control or correct. Our recently introduced Media
Exchange offering is an example of a complex product which includes third party elements
that has and may continue to experience certain software errors in its initial customer
deployments. Any defects or errors could potentially result in loss of revenues, product
returns or order cancellations, and could potentially hinder market acceptance of our
products and harm our reputation. Accordingly, any defects or errors could have a material
adverse effect on our business, results of operations and financial condition. Our
customer license agreements typically contain provisions to limit our product warranty
obligations and exposure to potential liability claims.
    
    We implemented a new company-wide ERP system during the third quarter of fiscal 2007.
During the third quarter of fiscal 2007, we completed the implementation of a new,
company-wide ERP system. Our new system affects all facets of our business including our
ability to quote, receive and process orders, track inventory and work in process, ship and
bill completed orders, process and apply cash receipts from our customers and summarize and
report the results of our operations. If we encounter problems in the operation of our new
system, our ability to conduct our daily operations in an efficient, effective and properly
controlled manner could be compromised, and our operating results could suffer. In
addition, any such operational problems could cause us to expend significant time and other
resources in an effort to resolve such problems, and this diversion of management and staff
time could further adversely affect our ability to serve our customers and sustain our
normal operations.
 
 Item 6 Exhibits
  3.1
    
    Articles of Incorporation, as amended, of Registrant. (1)3.2
    
    Amendment to Articles of Incorporation of Registrant. (2)3.3
    
    Amendment to Articles of Incorporation of Registrant. (3)3.4
    
    Third Restated Bylaws of Registrant. (4)4.1
    
    Third Amended and Restated Rights Agreement dated as of May 1, 2001 between the
Registrant and Computershare Investor Services, LLC, as Rights Agent. (5)4.2
    
    Securities Purchase Agreement, dated as of May 20, 2002, between the Registrant and
the Buyers named therein (the Securities Purchase Agreement). (6)4.3
    
    Form of Warrant, dated as of May 20, 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 Registrant and Computershare Investor Services, LLC, as Rights Agent.
(6)10.1
    
    Asset Purchase Agreement dated September 1, 2006 between Registrant and Nuasis
Corporation. (7)10.2
    
    Separation Agreement dated September 19, 2006 between the Company and Ronald Nieman.
(8)31.1
    
    Certification of Chief Executive Officer of Periodic Report Pursuant to Rule
13a-14(a) or Rule 15d-14(a). (10)31.2
    
    Certification of Chief Financial Officer of Periodic Report Pursuant to Rule
13a-14(a) or Rule 15d-14(a). (10)32.1
    
    Certification of Chief Executive Officer of Periodic Report Pursuant to Rule
13a-14(b) and 18 U.S.C. Section 1350. (10)*32.2
    
    Certification of Chief Financial Officer of Periodic Report Pursuant to Rule
13a-14(b) and 18 U.S.C. Section 1350. (10)*99.1
    
    Lease Termination Agreement dated as of September 14, 2006 between Registrant and
San Tomas Towers LLC. (9)
 25




---



##### Table of Contents



99.2
    
    Assignment, Assumption and Amendment of Sublease dated as of August 30, 2006, among
Registrant, Nuasis Corporation, and PayPal Inc. (9)99.3
    
    Exercise of Option Letter dated September 18, 2006 from Registrant to PayPal Inc. (9)
 
 (1)
    
    Incorporated by reference to exhibits to the Companys 1995 Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, filed with the SEC on May 30, 1995.(2)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1999, filed with the SEC on October 14, 1999.(3)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
quarter ended August 31, 2002, filed with the SEC on October 15, 2002.(4)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2004, filed with the SEC on October 12, 2004.(5)
    
    Incorporated by reference to exhibits to Form 8-A/A (Amendment 3) filed with the SEC on May
9, 2001.(6)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on May 30, 2002.(7)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on September 6, 2006.(8)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on October 5, 2006.(9)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on September 20, 2006.(10)
    
    Filed herewith.*
    
    The certifications attached as Exhibit 32.1 and 32.2 accompany the Quarterly Report on Form 10-Q
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 26




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##### Table of Contents



SIGNATURES
  INTERVOICE, INC.Date:  January 8, 2007
    By:
    /s/ CRAIG E. HOLMESCraig E. HolmesExecutive Vice President and
Chief Financial Officer 27




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##### Table of Contents



Index to Exhibits
 ExhibitNo.
    
    Description3.1
    
    Articles of Incorporation, as amended, of Registrant. (1)3.2
    
    Amendment to Articles of Incorporation of Registrant. (2)3.3
    
    Amendment to Articles of Incorporation of Registrant. (3)3.4
    
    Third Restated Bylaws of Registrant. (4)4.1
    
    Third Amended and Restated Rights Agreement dated as of May 1, 2001 between the
Registrant and Computershare Investor Services, LLC, as Rights Agent. (5)4.2
    
    Securities Purchase Agreement, dated as of May 20, 2002, between the Registrant and
the Buyers named therein (the Securities Purchase Agreement). (6)4.3
    
    Form of Warrant, dated as of May 20, 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 Registrant and Computershare Investor Services, LLC, as Rights Agent.
(6)10.1
    
    Asset Purchase Agreement dated September 1, 2006 between Registrant and Nuasis
Corporation. (7)10.2
    
    Separation Agreement dated September 19, 2006 between the Company and Ronald Nieman.
(8)31.1
    
    Certification of Chief Executive Officer of Periodic Report Pursuant to Rule
13a-14(a) or Rule 15d-14(a). (10)31.2
    
    Certification of Chief Financial Officer of Periodic Report Pursuant to Rule
13a-14(a) or Rule 15d-14(a). (10)32.1
    
    Certification of Chief Executive Officer of Periodic Report Pursuant to Rule
13a-14(b) and 18 U.S.C. Section 1350. (10)*32.2
    
    Certification of Chief Financial Officer of Periodic Report Pursuant to Rule
13a-14(b) and 18 U.S.C. Section 1350. (10)*99.1
    
    Lease Termination Agreement dated as of September 14, 2006 between Registrant and
San Tomas Towers LLC. (9)99.2
    
    Assignment, Assumption and Amendment of Sublease dated as of August 30, 2006, among
Registrant, Nuasis Corporation, and PayPal Inc. (9)99.3
    
    Exercise of Option Letter dated September 18, 2006 from Registrant to PayPal Inc. (9)
 
 (1)
    
    Incorporated by reference to exhibits to the Companys 1995 Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, filed with the SEC on May 30, 1995.(2)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1999, filed with the SEC on October 14, 1999.(3)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
quarter ended August 31, 2002, filed with the SEC on October 15, 2002.(4)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2004, filed with the SEC on October 12, 2004.(5)
    
    Incorporated by reference to exhibits to Form 8-A/A (Amendment 3) filed with the SEC on May
9, 2001.(6)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on May 30, 2002.(7)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on September 6, 2006.(8)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on October 5, 2006.(9)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on September 20, 2006.(10)
    
    Filed herewith.*
    
    The certifications attached as Exhibit 32.1 and 32.2 accompany the Quarterly Report on Form 10-Q
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 28