##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED
August 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 1-15045
 INTERVOICE, INC.
 (Exact name of registrant as specified in its charter)
 TEXAS
    
    75-1927578(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 17811 WATERVIEW PARKWAY, DALLAS, TX 75252
(Address of principal executive offices)
 972-454-8000
(Registrants telephone number, including area code)
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ No o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes þ No 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 38,231,466 shares of common stock, no par value per share, outstanding as of
September 23, 2005.




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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 4 Submission of Matters to a Vote of Security HoldersItem 6 ExhibitsSIGNATURESIndex to Exhibits2005 Stock Incentive Plan Summary2005 Stock Incentive Plan SummaryCertification of CEOCertification of CFOCertification of CEOCertification of CFO    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 Item 1 Financial Statements
 
 (In Thousands, Except Share and Per Share Data)August 31, 2005
    
    
    February 28, 2005(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    69,392
    
    
    $
    60,242Trade accounts receivable, net of allowance for
doubtful accounts of $996 in fiscal 2006 and
$799 in fiscal 2005
    
    
    26,698
    
    
    
    32,605Inventory
    
    
    8,963
    
    
    
    7,642Prepaid expenses and other current assets
    
    
    4,802
    
    
    
    4,339109,855
    
    
    
    104,828Property and Equipment, net of accumulated depreciation of
$55,313 in fiscal 2006 and $54,303 in fiscal 2005
    
    
    26,152
    
    
    
    21,755Other AssetsIntangible assets, net of accumulated amortization of $16,482
in fiscal 2006 and $15,840 in fiscal 2005
    
    
    4,365
    
    
    
    4,707Goodwill
    
    
    3,401
    
    
    
    3,401Other assets
    
    
    147
    
    
    
    168$
    143,290
    
    
    $
    134,859LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    11,457
    
    
    $
    11,485Accrued expenses
    
    
    8,861
    
    
    
    13,745Customer deposits
    
    
    7,770
    
    
    
    6,871Deferred income
    
    
    25,793
    
    
    
    24,448Current portion of long-term borrowings
    
    
    
    
    
    
    400Income taxes payable
    
    
    5,151
    
    
    
    4,129Deferred income taxes
    
    
    636
    
    
    
    59,668
    
    
    
    61,078Long-Term Borrowings
    
    
    
    
    
    
    1,333Stockholders 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: 38,213,454 issued and
outstanding in fiscal 2006 and 37,196,216 issued
and outstanding in fiscal 2005
    
    
    19
    
    
    
    19Additional capital
    
    
    89,999
    
    
    
    85,421Accumulated deficit
    
    
    (4,411
    )
    
    
    (12,931
    )Accumulated other comprehensive loss
    
    
    (1,355
    )
    
    
    (61
    )Stockholders equity
    
    
    84,252
    
    
    
    72,448$
    143,920
    
    
    $
    134,859
  2




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(In Thousands, Except Per Share Data)Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2005
    
    
    2004
    
    
    2005
    
    
    2004SalesSolutions
    
    $
    22,022
    
    
    $
    25,244
    
    
    $
    43,392
    
    
    $
    46,389Recurring services
    
    
    21,268
    
    
    
    19,015
    
    
    
    43,161
    
    
    
    39,78643,290
    
    
    
    44,259
    
    
    
    86,553
    
    
    
    86,175Cost of goods soldSolutions
    
    
    13,050
    
    
    
    13,276
    
    
    
    25,854
    
    
    
    25,256Recurring services
    
    
    6,273
    
    
    
    6,894
    
    
    
    12,385
    
    
    
    13,97519,323
    
    
    
    20,170
    
    
    
    38,239
    
    
    
    39,231Gross marginSolutions
    
    
    8,972
    
    
    
    11,968
    
    
    
    17,538
    
    
    
    21,133Recurring services
    
    
    14,995
    
    
    
    12,121
    
    
    
    30,776
    
    
    
    25,81123,967
    
    
    
    24,089
    
    
    
    48,314
    
    
    
    46,944Research and development expenses
    
    
    3,884
    
    
    
    3,419
    
    
    
    8,079
    
    
    
    7,162Selling, general and administrative expenses
    
    
    15,367
    
    
    
    13,936
    
    
    
    30,800
    
    
    
    28,088Amortization of acquisition related intangible assets
    
    
    252
    
    
    
    252
    
    
    
    504
    
    
    
    957Income from operations
    
    
    4,464
    
    
    
    6,482
    
    
    
    8,931
    
    
    
    10,737Interest income
    
    
    599
    
    
    
    189
    
    
    
    1,096
    
    
    
    267Interest expense
    
    
    
    
    
    
    (110
    )
    
    
    (25
    )
    
    
    (384
    )Other income (expense)
    
    
    36
    
    
    
    (92
    )
    
    
    162
    
    
    
    197Income before taxes
    
    
    5,099
    
    
    
    6,469
    
    
    
    10,164
    
    
    
    10,817Income taxes
    
    
    498
    
    
    
    1,387
    
    
    
    1,644
    
    
    
    2,558Net income
    
    $
    4,601
    
    
    $
    5,082
    
    
    $
    8,520
    
    
    $
    8,259Net income per share  basic
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.23
    
    
    $
    0.23Shares used in basic per share computation
    
    
    38,130
    
    
    
    35,988
    
    
    
    37,831
    
    
    
    35,918Net income per share  diluted
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.22
    
    
    $
    0.22Shares used in diluted per share computation
    
    
    38,997
    
    
    
    37,963
    
    
    
    39,043
    
    
    
    38,299
  3




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(In Thousands)Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Operating activitiesNet income
    
    $
    4,601
    
    
    $
    5,082
    
    
    $
    8,520
    
    
    $
    8,259Adjustments
to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    1,870
    
    
    
    1,783
    
    
    
    3,592
    
    
    
    4,067Other changes in operating activities
    
    
    4,987
    
    
    
    (2,819
    )
    
    
    2,318
    
    
    
    (3,655
    )Net cash provided by operating activities
    
    
    11,458
    
    
    
    4,046
    
    
    
    14,430
    
    
    
    8,671Investing activitiesPurchases of property and equipment
    
    
    (3,912
    )
    
    
    (2,531
    )
    
    
    (7,044
    )
    
    
    (3,464
    )Other
    
    
    
    
    
    
    
    
    
    
    (300
    )
    
    
    Net cash used in investing activities
    
    
    (3,912
    )
    
    
    (2,531
    )
    
    
    (7,344
    )
    
    
    (3,464
    )Financing activitiesPaydown of debt
    
    
    
    
    
    
    (9,066
    )
    
    
    (1,733
    )
    
    
    (9,566
    )Borrowings
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    8,000Premium on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Release of restricted cash
    
    
    
    
    
    
    2,750
    
    
    
    
    
    
    
    2,750Exercise of stock options
    
    
    585
    
    
    
    120
    
    
    
    2,078
    
    
    
    1,703Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    Net cash provided by financing activities
    
    
    585
    
    
    
    1,804
    
    
    
    2,845
    
    
    
    2,882Effect of exchange rates on cash
    
    
    (155
    )
    
    
    148
    
    
    
    (781
    )
    
    
    7Increase in cash and cash equivalents
    
    
    7,976
    
    
    
    3,467
    
    
    
    9,150
    
    
    
    8,096Cash and cash equivalents, beginning of period
    
    
    61,416
    
    
    
    45,488
    
    
    
    60,242
    
    
    
    40,859Cash and cash equivalents, end of period
    
    $
    69,392
    
    
    $
    48,955
    
    
    $
    69,392
    
    
    $
    48,955
  4




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Accumulated OtherCommon Stock
    
    Additional
    
    Accumulated
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Deficit
    
    Loss
    
    TotalBalance at February 28, 2005
    
    
    37,196,216
    
    
    $
    19
    
    
    $
    85,421
    
    
    $
    (12,931
    )
    
    $
    (61
    )
    
    $
    72,448Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,520
    
    
    
    
    
    
    
    8,520Foreign
currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,294
    )
    
    
    (1,294
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,226Exercise of stock options
    
    
    395,934
    
    
    
    
    
    
    
    2,078
    
    
    
    
    
    
    
    
    
    
    
    2,078Exercise of warrants
    
    
    621,304
    
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    2,500Balance at August 31, 2005
    
    
    38,213,454
    
    
    $
    19
    
    
    $
    89,999
    
    
    $
    (4,411
    )
    
    $
    (1,355
    )
    
    $
    84,252
  5




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED AUGUST 31, 2005
 Note A  Basis of Presentation
   Note B  Inventory
  August 31, 2005
    
    
    February 28, 2005Purchased parts
    
    $
    4,290
    
    
    $
    3,815Work in progress
    
    
    4,673
    
    
    
    3,827$
    8,963
    
    
    $
    7,642
 Note C  Property and Equipment
  August 31, 2005
    
    
    February 28, 2005Land and buildings
    
    $
    16,913
    
    
    $
    16,932Computer equipment and software
    
    
    37,187
    
    
    
    34,004Furniture and fixtures
    
    
    3,220
    
    
    
    3,345Managed services equipment
    
    
    15,682
    
    
    
    12,510Maintenance services equipment
    
    
    8,463
    
    
    
    9,26781,465
    
    
    
    76,058Less allowance for accumulated depreciation
    
    
    (55,313
    )
    
    
    (54,303
    )Property and equipment, net
    
    $
    26,152
    
    
    $
    21,755
  6




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Note D
 Long-Term Borrowings
  February 28, 2005Term 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%, principal repaid in full during March 2005
    
    $
    1,733Less: current portion
    
    
    (400
    )Long-term debt, net of current portion
    
    $
    1,333
  Note E
 Income Taxes
   7




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Note F  Earnings Per Share
 Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,(in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Net income
    
    $
    4,601
    
    
    $
    5,082
    
    
    $
    8,520
    
    
    $
    8,259Denominator:Denominator for basic
earnings per share
    
    
    38,130
    
    
    
    35,988
    
    
    
    37,831
    
    
    
    35,918Dilutive potential common sharesEmployee stock options
    
    
    867
    
    
    
    1,598
    
    
    
    1,105
    
    
    
    1,964Outstanding warrants
    
    
    
    
    
    
    377
    
    
    
    107
    
    
    
    417Denominator for diluted
earnings per share
    
    
    38,997
    
    
    
    37,963
    
    
    
    39,043
    
    
    
    38,299Net income per share:Basic
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.23
    
    
    $
    0.23Diluted
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.22
    
    
    $
    0.22
 
   8




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Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    4,601
    
    
    $
    5,082
    
    
    $
    8,520
    
    
    $
    8,259Less: Total
stock-based employee
compensation expense
determined under fair
value based methods
for all awards, net of
tax
    
    
    (2,005
    )
    
    
    (1,516
    )
    
    
    (3,238
    )
    
    
    (2,488
    )Pro forma net income
    
    $
    2,596
    
    
    $
    3,566
    
    
    $
    5,282
    
    
    $
    5,771Net income per share:Basic  as reported
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.23
    
    
    $
    0.23Basic  pro forma
    
    $
    0.07
    
    
    $
    0.10
    
    
    $
    0.14
    
    
    $
    0.16Diluted  as reported
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.22
    
    
    $
    0.22Diluted  pro forma
    
    $
    0.06
    
    
    $
    0.09
    
    
    $
    0.13
    
    
    $
    0.15
 Note G  Operating Segment Information and Major Customers
  Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Voice automation/IVR solution sales
    
    $
    10,497
    
    
    $
    18,860
    
    
    $
    21,205
    
    
    $
    33,838Network portal solution sales
    
    
    3,244
    
    
    
    1,590
    
    
    
    6,728
    
    
    
    2,198Messaging solution sales
    
    
    6,018
    
    
    
    2,224
    
    
    
    10,866
    
    
    
    4,630Payment solution sales
    
    
    2,263
    
    
    
    2,570
    
    
    
    4,593
    
    
    
    5,723Total solution sales
    
    
    22,022
    
    
    
    25,244
    
    
    
    43,392
    
    
    
    46,389Maintenance and support
services revenues
    
    
    14,940
    
    
    
    13,778
    
    
    
    30,375
    
    
    
    28,993Managed services revenues
    
    
    6,328
    
    
    
    5,237
    
    
    
    12,786
    
    
    
    10,793Total recurring services revenues
    
    
    21,268
    
    
    
    19,015
    
    
    
    43,161
    
    
    
    39,786Total sales
    
    $
    43,290
    
    
    $
    44,259
    
    
    $
    86,553
    
    
    $
    86,175
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Geographic Operations
  Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2005
    
    
    2004
    
    
    2005
    
    
    2004North America
    
    $
    22,323
    
    
    $
    28,033
    
    
    $
    45,403
    
    
    $
    53,370Europe
    
    
    10,825
    
    
    
    10,187
    
    
    
    21,705
    
    
    
    18,834Middle East and Africa
    
    
    4,890
    
    
    
    3,518
    
    
    
    11,945
    
    
    
    9,507Central and South America
    
    
    4,025
    
    
    
    1,259
    
    
    
    5,376
    
    
    
    2,363Pacific Rim
    
    
    1,227
    
    
    
    1,262
    
    
    
    2,124
    
    
    
    2,101Total
    
    $
    43,290
    
    
    $
    44,259
    
    
    $
    86,553
    
    
    $
    86,175
 Concentration of Revenue
  Note H
 Contingencies
 Intellectual Property Matters
    10




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##### Table of Contents



Ronald A.
Katz Technology Licensing, L.P. v. Citibank, et al.; No. 505CV 142
   Pending Litigation
 David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v.
InterVoice-Brite, Inc., et al.
   11




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Shareholder Demand Letter
  Audit Committee Investigation
    12




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Other Matters
        13




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14




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Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Disclosures To Qualify Forward Looking Statements
  
    
    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. 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 this Item 2 for a
discussion of our system for estimating sales and 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 Item 1
Financial Statements of Part I of this quarterly report on Form 10-Q. We believe the
pending lawsuit to which we are subject is without merit, and we intend to defend the
matter vigorously. There can be no assurances, however, that we will prevail in this
matter. Furthermore, we may become subject to claims, including claims by the government,
or other adverse consequences arising from the findings of an Audit Committee investigation
we completed in December 2004. We, two of our former officers and two current employees who
are not officers are currently responding 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.
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 Item 1 and contain other customary provisions to
limit or exclude coverage for certain losses and expenses.
    
    We face intense competition based on product capabilities, and we experience ever
increasing demands from our actual and prospective customers for our products to be
compatible with a variety of rapidly proliferating computing, telephony and computer
networking technologies and standards.Our success is dependent, to a large
degree, on our effectiveness in allocating resources to developing and improving products
compatible with those technologies, standards and functionalities that ultimately become
widely accepted by our current and prospective customers. Our success is also dependent, to
a large degree, on our ability to implement arrangements with vendors of complementary
product offerings so that we can provide our current and prospective customers greater
functionality. Our principal competitors include Genesys, Avaya, Nortel, Edify, Comverse
Technology, Huawei and Lucent Technologies. Many of our competitors have greater financial,
 15




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technological and marketing resources than we have. 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.
 
    
    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. The shift to open standards will also challenge us 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 we are
unsuccessful in resolving one or more of these challenges, our revenues and profitability
could decline.
    
    We may not be able to retain our customer base, and, in particular, our more significant
customers.Our success is heavily dependent on our ability to retain our
significant customers. The loss of one of our significant customers could negatively
impact our operating results. Our installed base of customers generally is not
contractually obligated to place further solutions orders with us or to extend their
services contracts with us at the expiration of their current contracts.
    
    We will be harmed if we lose key business and technical personnel.We rely
upon the services of a relatively small number of key technical, project management and
senior management personnel, most of whom do not have employment contracts. If we were to
lose any of our key personnel, replacing them could be difficult and costly. If we were
unable to successfully and promptly replace such personnel, our business could be
materially harmed.
    
    Our reliance on significant vendor relationships could result in significant expense or
an inability to serve our customers if we lose these relationships.Although we
generally use standard parts and components in our products, some of our components,
including semi-conductors and, in particular, digital signal processors manufactured by
Texas Instruments, are available only from a small number of vendors. Likewise, we license
speech recognition technology from a small number of vendors. Two of these vendors,
ScanSoft, Inc. and Nuance Communications, Inc., recently completed a merger of their
organizations. 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 to defend 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
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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 48% and 37% of total sales for the fiscal quarters
ending August 31, 2005 and 2004, 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 managed services, foreign
contracts and contracts with telecommunication companies, include provisions for the
assessment of liquidated damages for delayed project completion and/or for our failure to
achieve certain minimum service levels. We have 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.
    
    Increasing consolidation in the telecommunications and financial industries could
adversely affect our revenues and profitability.The majority of our largest
customers are in the telecommunications and financial industries. These industries are
undergoing significant consolidation as a result of merger and acquisition activity. This
activity could result in a decrease in the number of customers purchasing our products
and/or in delayed purchases of our products by customers that are reviewing their strategic
alternatives in light of a pending merger or acquisition. If these results occur, our
revenues and profitability could decline.
    
    The occurrence of force majeure events could impact our results from operations.The
occurrence of one or more of the following events could potentially cause us to incur
significant losses: acts of God, war, riot, embargoes, acts of civil or military
authorities, acts of terrorism or sabotage, the spread of disease, fire, flood, explosion,
earthquake, accident, strikes, radiation, inability to secure transportation, failure of
communications, failure of utilities or similar events.
 Sales.
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Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Voice automation/IVR solution sales
    
    $
    10,497
    
    
    $
    18,860
    
    
    $
    21,205
    
    
    $
    33,838Network portal solution sales
    
    
    3,244
    
    
    
    1,590
    
    
    
    6,728
    
    
    
    2,198Messaging solution sales
    
    
    6,018
    
    
    
    2,224
    
    
    
    10,866
    
    
    
    4,630Payment solution sales
    
    
    2,263
    
    
    
    2,570
    
    
    
    4,593
    
    
    
    5,723Total solution sales
    
    
    22,022
    
    
    
    25,244
    
    
    
    43,392
    
    
    
    46,389Maintenance and support
services revenues
    
    
    14,940
    
    
    
    13,778
    
    
    
    30,375
    
    
    
    28,993Managed services revenues
    
    
    6,328
    
    
    
    5,237
    
    
    
    12,786
    
    
    
    10,793Total recurring services revenues
    
    
    21,268
    
    
    
    19,015
    
    
    
    43,161
    
    
    
    39,786Total sales
    
    $
    43,290
    
    
    $
    44,259
    
    
    $
    86,553
    
    
    $
    86,175
  Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,
    
    
    August 31,
    
    
    August 31,2005
    
    
    2004
    
    
    2005
    
    
    2004North America
    
    $
    22,323
    
    
    $
    28,033
    
    
    $
    45,403
    
    
    $
    53,370Europe
    
    
    10,825
    
    
    
    10,187
    
    
    
    21,705
    
    
    
    18,834Middle East and Africa
    
    
    4,890
    
    
    
    3,518
    
    
    
    11,945
    
    
    
    9,507Central and South America
    
    
    4,025
    
    
    
    1,259
    
    
    
    5,376
    
    
    
    2,363Pacific Rim
    
    
    1,227
    
    
    
    1,262
    
    
    
    2,124
    
    
    
    2,101Total
    
    $
    43,290
    
    
    $
    44,259
    
    
    $
    86,553
    
    
    $
    86,175
    18




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##### Table of Contents



Three Months Ended August 312005
    
    2004Sales from recurring services and
support contracts, including contracts
for managed services
    
    
    49
    %
    
    
    43
    %Sales from beginning solutions backlog
    
    
    31
    %
    
    
    43
    %Sales from the quarters pipeline
    
    
    20
    %
    
    
    14
    %100
    %
    
    
    100
    %
   Quarter Ended
    
    BacklogAugust 31, 2005
    
    $
    30,265May 31, 2005
    
    $
    28,473February 28, 2005
    
    $
    35,446November 30, 2004
    
    $
    35,166August 31, 2004
    
    $
    40,214
   19




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##### Table of Contents



Cost of Goods Sold.
  Research and Development Expenses.
 â
  Selling, General and Administrative Expenses.
 Income Taxes.
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Income from Operations and Net Income.
 Liquidity and Capital Resources.
      21




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##### Table of Contents



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



PART II. OTHER INFORMATION
 
 Item 1 Legal Proceedings
  
 Item 4 Submission of Matters to a Vote of Security Holders
    
 Item 6 Exhibits
 (a) Exhibits3.1
    
    Articles of Incorporation, as amended, of Registrant. (1)3.2
    
    Amendment to Articles of Incorporation of Registrant. (2)3.3
    
    Amendment to Articles of Incorporation of Registrant. (3)3.4
    
    Third Restated Bylaws of Registrant. (6)4.1
    
    Third Amended and Restated Rights Agreement dated as of May 1, 2001
between the Registrant and Computershare Investor Services, LLC, as
Rights Agent. (4)4.2
    
    Securities Purchase Agreement, dated as of May 20, 2002, between the
Registrant and the Buyers named therein (the Securities Purchase
Agreement). (5)4.3
    
    Form of Warrant, dated as of May 20, 2002, between the Registrant and
each of the Buyers under the Securities Purchase Agreement. (5)4.4
    
    Registration Rights Agreement, dated as of May 29, 2002, between the
Registrant and each of the Buyers under the Securities Purchase
Agreement. (5)4.5
    
    First Amendment to Third Amended and Restated Rights Agreement dated
as of May 29, 2002, between Registrant and Computershare Investor
Services, LLC, as Rights Agent. (5)10.1
    
    Intervoice, Inc. 2005 Stock Incentive Plan Summary of Stock Option
Grant and Stock Option Award Agreement for Employees. (7)10.2
    
    Intervoice, Inc. 2005 Stock Incentive Plan Summary of Stock Option
Grant and Stock Option Award Agreement for Non-employee Directors. (7)31.1
    
    Certification of Chief Executive Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a). (7)31.2
    
    Certification of Chief Financial Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a). (7)32.1
    
    Certification of Chief Executive Officer of Periodic Report Pursuant
to Rule 13a-14(b) and 18 U.S.C. Section 1350.
(7)*32.2
    
    Certification of Chief Financial Officer of Periodic Report Pursuant
to Rule 13a-14(b) and 18 U.S.C. Section 1350. (7)*
 
 (1)
    
    Incorporated by reference to exhibits to the Companys 1995 Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, filed with the SEC on May 30, 1995.(2)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1999, filed with the SEC on October 14, 1999. 23




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##### Table of Contents



(3)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
quarter ended August 31, 2002, filed with the SEC on October 15, 2002.(4)
    
    Incorporated by reference to exhibits to Form 8-A/A (Amendment 3) filed with the SEC on May
9, 2001.(5)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on May 30, 2002.(6)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2004, filed with the SEC on October 12, 2004.(7)
    
    Filed herewith. *
    
    The certifications attached as Exhibit 32.1 and 32.2 accompany the Quarterly Report on Form 10-Q
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
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##### Table of Contents



SIGNATURES
  INTERVOICE, INC.Date: October 7, 2005
    
    By:
    
    /s/ MARK C. FALKENBERGMark C. FalkenbergChief Accounting Officer
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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. (6)4.1
    
    Third Amended and Restated Rights Agreement dated as of May 1,
2001 between the Registrant and Computershare Investor
Services, LLC, as Rights Agent. (4)4.2
    
    Securities Purchase Agreement, dated as of May 20, 2002,
between the Registrant and the Buyers named therein (the
Securities Purchase Agreement). (5)4.3
    
    Form of Warrant, dated as of May 20, 2002, between the
Registrant and each of the Buyers under the Securities
Purchase Agreement. (5)4.4
    
    Registration Rights Agreement, dated as of May 29, 2002,
between the Registrant and each of the Buyers under the
Securities Purchase Agreement. (5)4.5
    
    First Amendment to Third Amended and Restated Rights Agreement
dated as of May 29, 2002, between Registrant and Computershare
Investor Services, LLC, as Rights Agent. (5)10.1
    
    Intervoice, Inc. 2005 Stock Incentive Plan Summary of Stock Option Grant and Stock Option Award Agreement for Employees. (7)10.2
    
    Intervoice, Inc. 2005 Stock Incentive Plan Summary of Stock Option Grant and Stock Option Award Agreement for Non-employee Directors. (7)31.1
    
    Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (7)31.2
    
    Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (7)32.1
    
    Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. (7)*32.2
    
    Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. (7)*
 
 (1)
    
    Incorporated by reference to exhibits to the Companys 1995 Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, filed with the SEC on May 30, 1995.(2)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1999, filed with the SEC on October 14, 1999.(3)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
quarter ended August 31, 2002, filed with the SEC on October 15, 2002.(4)
    
    Incorporated by reference to exhibits to Form 8-A/A (Amendment 3) filed with the SEC on May
9, 2001.(5)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on May 30, 2002.(6)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2004, filed with the SEC on October 12, 2004.(7)
    
    Filed herewith. *
    
    The certifications attached as Exhibit 32.1 and 32.2 accompany the Quarterly Report on Form 10-Q
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
 26