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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED
NOVEMBER 30, 2003

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM ______ TO ______

COMMISSION FILE NUMBER: 1-15045

INTERVOICE, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


|                                                               |  |                                    
|-------------------------------------------------------------- |  | -----------------------------------
|TEXAS                                                          |  | 75-1927578                         
|(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYERIDENTIFICATION NO.)

17811 WATERVIEW PARKWAY, DALLAS, TX 75252
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, WITH ZIP CODE)

972-454-8000
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT
(1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.

YES [X] NO [   ]

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE ACT).

YES [X] NO [   ]

THE REGISTRANT HAD 35,204,690 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE,
OUTSTANDING AS OF JANUARY 9, 2004.



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TABLE OF CONTENTS



|                                                           |                                                                                              |  |  |  |  |  |  | 
|---------------------------------------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|CONSOLIDATED BALANCE SHEETS                               
|CONSOLIDATED STATEMENTS OF OPERATIONS                     
|CONSOLIDATED STATEMENTS OF CASH FLOWS                     
|CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                           | Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                           | Item 3 Quantitative and Qualitative Disclosures About Market Risk                           
|                                                           | Item 4 Controls and Procedures                                                              
|PART II. OTHER INFORMATION                                
|                                                           | Item 1 Legal Proceedings                                                                    
|                                                           | Item 6 Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                
|INDEX TO EXHIBITS                                         
|EX-31.1 Certification of Chief Executive Officer          
|EX-31.2 Certification of Chief Financial Officer          
|EX-32.1 Certification by Chief Executive Officer          
|EX-32.2 Certification by Chief Financial Officer          



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INTERVOICE, INC.
CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |         |        | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------- | ----------------------------------------------- | ------ | ----------------- | ------- | ------- | ------ | 
|                                     |                                                                                                                                                                                          |                      |         | (In Thousands, Except Share and Per Share Data)
|                                     |                                                                                                                                                                                          |                      |         | November 30, 2003                               |        | February 28, 2003
|                                     |                                                                                                                                                                                          |                      |         |                                                 |        |                  
|                                     |                                                                                                                                                                                          |                      |         | (Unaudited)                                     |        |                   |         |        
|ASSETS                               |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |        
|Current Assets                       |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |        
|                                     | Cash and cash equivalents                                                                                                                                                                |                      | $       | 38,620                                          |        |                   | $       | 26,211  |       
|                                     | Trade accounts receivable, net of allowance for
doubtful accounts of $2,585 in fiscal 2004 and
$2,527 in fiscal 2003                                                                     |                      |         | 23,815                                          |        |                   |         | 25,853  |       
|                                     | Inventory                                                                                                                                                                                |                      |         | 8,239                                           |        |                   |         | 8,895   |       
|                                     | Prepaid expenses and other current assets                                                                                                                                                |                      |         | 6,007                                           |        |                   |         | 5,277   |       
|                                     |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |         |       
|                                     |                                                                                                                                                                                          |                      | 76,681  |                                                 |        |                   | 66,236  |        
|                                     |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |         |       
|Property and Equipment               |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |        
|                                     | Land and buildings                                                                                                                                                                       |                      |         | 16,811                                          |        |                   |         | 16,708  |       
|                                     | Computer equipment and software                                                                                                                                                          |                      |         | 36,636                                          |        |                   |         | 32,660  |       
|                                     | Furniture, fixtures and other                                                                                                                                                            |                      |         | 2,867                                           |        |                   |         | 2,667   |       
|                                     | Service equipment                                                                                                                                                                        |                      |         | 9,384                                           |        |                   |         | 8,744   |       
|                                     |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |         |       
|                                     |                                                                                                                                                                                          |                      | 65,698  |                                                 |        |                   | 60,779  |        
|                                     | Less allowance for depreciation                                                                                                                                                          |                      |         | 46,390                                          |        |                   |         | 40,406  |       
|                                     |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |         |       
|                                     |                                                                                                                                                                                          |                      | 19,308  |                                                 |        |                   | 20,373  |        
|Other Assets                         |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |        
|                                     | Intangible assets, net of accumulated amortization
of $33,684 in fiscal 2004 and $32,218 in fiscal 2003                                                                                  |                      |         | 7,122                                           |        |                   |         | 9,326   |       
|                                     | Goodwill                                                                                                                                                                                 |                      |         | 3,401                                           |        |                   |         | 3,401   |       
|                                     | Other assets                                                                                                                                                                             |                      |         | 1,035                                           |        |                   |         | 1,655   |       
|                                     |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |         |       
|                                     |                                                                                                                                                                                          | $                    | 107,547 |                                                 |        | $                 | 100,991 |        
|                                     |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |         |       
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |        
|Current Liabilities                  |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |        
|                                     | Accounts payable                                                                                                                                                                         |                      | $       | 11,219                                          |        |                   | $       | 12,513  |       
|                                     | Accrued expenses                                                                                                                                                                         |                      |         | 12,925                                          |        |                   |         | 12,705  |       
|                                     | Customer deposits                                                                                                                                                                        |                      |         | 6,621                                           |        |                   |         | 9,061   |       
|                                     | Deferred income                                                                                                                                                                          |                      |         | 23,814                                          |        |                   |         | 25,478  |       
|                                     | Current portion of long term borrowings                                                                                                                                                  |                      |         | 3,333                                           |        |                   |         | 3,333   |       
|                                     | Income taxes payable                                                                                                                                                                     |                      |         | 11,203                                          |        |                   |         | 6,240   |       
|                                     |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |         |       
|                                     |                                                                                                                                                                                          |                      | 69,115  |                                                 |        |                   | 69,330  |        
|Long term borrowings                 |                                                                                                                                                                                          |                      | 11,278  |                                                 |        |                   | 15,778  |        
|Other long term liabilities          |                                                                                                                                                                                          |                      | 464     |                                                 |        |                   | 856     |        
|Deferred income taxes                |                                                                                                                                                                                          |                      | 68      |                                                 |        |                   | 44      |        
|Stockholders Equity                 |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |        
|                                     | Preferred Stock, $100 par value2,000,000
shares authorized: none issued                                                                                                                 |                      |         |                                                 |        |                   |         |         |       
|                                     | Common Stock, no par value, at nominal
assigned value  62,000,000 shares
authorized: 34,481,697 issued and
outstanding in fiscal 2004, 34,111,101
issued and outstanding in fiscal 2003 |                      |         | 17                                              |        |                   |         | 17      |       
|                                     | Additional capital                                                                                                                                                                       |                      |         | 67,783                                          |        |                   |         | 65,144  |       
|                                     | Accumulated deficit                                                                                                                                                                      |                      |         | (38,648                                         | )      |                   |         | (46,768 | )     
|                                     | Accumulated other comprehensive loss                                                                                                                                                     |                      |         | (2,530                                          | )      |                   |         | (3,410  | )     
|                                     |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |         |       
|                                     |                                                                                                                                                                                          | Stockholders equity |         |                                                 | 26,622 |                   |         |         | 14,983 | 
|                                     |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |         |       
|                                     |                                                                                                                                                                                          | $                    | 107,547 |                                                 |        | $                 | 100,991 |        
|                                     |                                                                                                                                                                                          |                      |         |                                                 |        |                   |         |         |       

See notes to consolidated financial statements.





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INTERVOICE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |        | 
|---------------------------------------------------------------------------------------- | -------- | - | ------------------------------------- | ------ | ----------------- | - | ------------ | ------ | ------------ | - | ------- | ------ |  | - | ------- | ------ | 
|                                                                                         |          |   | (In Thousands, Except Per Share Data)
|                                                                                         |          |   | Three Months Ended                    |        | Nine Months Ended
|                                                                                         |          |   |                                       |        |                  
|                                                                                         |          |   | November 30,                          |        | November 30,      |   | November 30, |        | November 30,
|                                                                                         |          |   | 2003                                  |        | 2002              |   | 2003         |        | 2002        
|                                                                                         |          |   |                                       |        |                   |   |              |        |             
|Sales                                                                                    |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|                                                                                         | Systems  |   | $                                     | 22,034 |                   |   | $            | 23,679 |              |   | $       | 60,689 |  |   | $       | 63,219 | 
|                                                                                         | Services |   |                                       | 19,726 |                   |   |              | 20,271 |              |   |         | 61,079 |  |   |         | 54,760 | 
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|                                                                                         |          |   | 41,760                                |        |                   |   | 43,950       |        |              |   | 121,768 |        |  |   | 117,979 |       
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|Cost of goods sold                                                                       |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|                                                                                         | Systems  |   |                                       | 12,606 |                   |   |              | 15,488 |              |   |         | 35,090 |  |   |         | 48,706 | 
|                                                                                         | Services |   |                                       | 6,359  |                   |   |              | 6,725  |              |   |         | 20,561 |  |   |         | 21,020 | 
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|                                                                                         |          |   | 18,965                                |        |                   |   | 22,213       |        |              |   | 55,651  |        |  |   | 69,726  |       
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|Gross margin                                                                             |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|                                                                                         | Systems  |   |                                       | 9,428  |                   |   |              | 8,191  |              |   |         | 25,599 |  |   |         | 14,513 | 
|                                                                                         | Services |   |                                       | 13,367 |                   |   |              | 13,546 |              |   |         | 40,518 |  |   |         | 33,740 | 
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|                                                                                         |          |   | 22,795                                |        |                   |   | 21,737       |        |              |   | 66,117  |        |  |   | 48,253  |       
|Research and development expenses                                                        |          |   | 3,677                                 |        |                   |   | 5,020        |        |              |   | 11,251  |        |  |   | 17,544  |       
|Selling, general and administrative expenses                                             |          |   | 13,555                                |        |                   |   | 15,787       |        |              |   | 40,117  |        |  |   | 51,880  |       
|Amortization of goodwill and acquisition
related intangible assets                       |          |   | 705                                   |        |                   |   | 1,775        |        |              |   | 2,115   |        |  |   | 5,325   |       
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|Income (loss) from operations                                                            |          |   | 4,858                                 |        |                   |   | (845         | )      |              |   | 12,634  |        |  |   | (26,496 | )     
|Other income (expense)                                                                   |          |   | (352                                  | )      |                   |   | (89          | )      |              |   | (400    | )      |  |   | (858    | )     
|Interest expense                                                                         |          |   | (507                                  | )      |                   |   | (774         | )      |              |   | (1,587  | )      |  |   | (3,792  | )     
|Loss on extinguishment of debt                                                           |          |   |                                      |        |                   |   | (1,868       | )      |              |   |        |        |  |   | (1,868  | )     
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|Income (loss) before taxes and the cumulative
effect of a change in accounting principle |          |   | 3,999                                 |        |                   |   | (3,576       | )      |              |   | 10,647  |        |  |   | (33,014 | )     
|Income taxes (benefit)                                                                   |          |   | 411                                   |        |                   |   | 4,256        |        |              |   | 2,527   |        |  |   | (231    | )     
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|Income (loss) before the cumulative effect
of a change in accounting principle           |          |   | 3,588                                 |        |                   |   | (7,832       | )      |              |   | 8,120   |        |  |   | (32,783 | )     
|Cumulative effect on prior years of a
change in accounting principle                     |          |   |                                      |        |                   |   |             |        |              |   |        |        |  |   | (15,791 | )     
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|Net income (loss)                                                                        |          | $ | 3,588                                 |        |                   | $ | (7,832       | )      |              | $ | 8,120   |        |  | $ | (48,574 | )     
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|Per Basic Share:                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|Income (loss) before the cumulative effect of
a change in accounting principle           |          | $ | 0.10                                  |        |                   | $ | (0.23        | )      |              | $ | 0.24    |        |  | $ | (0.96   | )     
|Cumulative effect on prior years of
a change in accounting principle                     |          |   |                                      |        |                   |   |             |        |              |   |        |        |  |   | (0.47   | )     
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|Net income (loss)                                                                        |          | $ | 0.10                                  |        |                   | $ | (0.23        | )      |              | $ | 0.24    |        |  | $ | (1.43   | )     
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|Per Diluted Share:                                                                       |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|Income (loss) before the cumulative effect of
a change in accounting principle           |          | $ | 0.10                                  |        |                   | $ | (0.23        | )      |              | $ | 0.23    |        |  | $ | (0.96   | )     
|Cumulative effect on prior years of
a change in accounting principle                     |          |   |                                      |        |                   |   |             |        |              |   |        |        |  |   | (0.47   | )     
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       
|Net income (loss)                                                                        |          | $ | 0.10                                  |        |                   | $ | (0.23        | )      |              | $ | 0.23    |        |  | $ | (1.43   | )     
|                                                                                         |          |   |                                       |        |                   |   |              |        |              |   |         |        |  |   |         |       

See notes to consolidated financial statements.





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INTERVOICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


|                                                    |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |         |        | 
|--------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ------------------ | ------ | ----------------- | ------ | -------------- | ----- | ------------ | ------ | ------ | ----- | - | ------- | ------- | ------ | 
|                                                    |                                                                                                                                                       |                                       |        |                    |        |                   |        | (In Thousands) |       |              |        |       
|                                                    |                                                                                                                                                       |                                       |        | Three Months Ended |        | Nine Months Ended
|                                                    |                                                                                                                                                       |                                       |        |                    |        |                  
|                                                    |                                                                                                                                                       |                                       |        | November 30,       |        | November 30,      |        | November 30,   |       | November 30,
|                                                    |                                                                                                                                                       |                                       |        | 2003               |        | 2002              |        | 2003           |       | 2002        
|                                                    |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |             
|Operating activities                                |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |        
|                                                    | Income (loss) before the cumulative effect of a
change in accounting principle                                                                        |                                       | $      | 3,588              |        |                   | $      | (7,832         | )     |              | $      | 8,120  |       |   | $       | (32,783 | )     
|                                                    | Adjustments to reconcile income (loss)
before the cumulative effect of a change
in accounting principle to net cash provided
by operating activities: |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |         |       
|                                                    |                                                                                                                                                       | Depreciation and amortization         |        |                    | 2,368  |                   |        |                | 3,841 |              |        |        | 7,168 |   |         |         | 12,307 | 
|                                                    |                                                                                                                                                       | Other changes in operating activities |        |                    | (4,299 | )                 |        |                | 3,634 |              |        |        | 1,723 |   |         |         | 30,251 | 
|                                                    |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |        
|Net cash provided by (used in) operating activities |                                                                                                                                                       |                                       | 1,657  |                    |        |                   | (357   | )              |       |              | 17,011 |        |       |   | 9,775   |        
|                                                    |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |        
|Investing activities                                |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |        
|                                                    | Purchases of property and equipment                                                                                                                   |                                       |        | (1,062             | )      |                   |        | (369           | )     |              |        | (3,536 | )     |   |         | (2,817  | )     
|                                                    | Proceeds from sale of assets                                                                                                                          |                                       |        | 7                  |        |                   |        | 11             |       |              |        | 22     |       |   |         | 1,863   |       
|                                                    |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |        
|Net cash used in investing activities               |                                                                                                                                                       |                                       | (1,055 | )                  |        |                   | (358   | )              |       |              | (3,514 | )      |       |   | (954    | )      
|                                                    |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |        
|Financing activities                                |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |        
|                                                    | Paydown of debt                                                                                                                                       |                                       |        | (1,833             | )      |                   |        | (12,056        | )     |              |        | (4,500 | )     |   |         | (42,036 | )     
|                                                    | Debt issuance costs                                                                                                                                   |                                       |        |                   |        |                   |        | (497           | )     |              |        |       |       |   |         | (2,515  | )     
|                                                    | Premium on debt extinguishment                                                                                                                        |                                       |        |                   |        |                   |        | (470           | )     |              |        |       |       |   |         | (470    | )     
|                                                    | Borrowings                                                                                                                                            |                                       |        |                   |        |                   |        | 10,000         |       |              |        |       |       |   |         | 34,000  |       
|                                                    | Exercise of stock options                                                                                                                             |                                       |        | 1,453              |        |                   |        |               |       |              |        | 2,360  |       |   |         | 130     |       
|                                                    |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |        
|Net cash used in financing activities               |                                                                                                                                                       |                                       | (380   | )                  |        |                   | (3,023 | )              |       |              | (2,140 | )      |       |   | (10,891 | )      
|                                                    |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |        
|Effect of exchange rates on cash                    |                                                                                                                                                       |                                       | 1,384  |                    |        |                   | 85     |                |       |              | 1,052  |        |       |   | 902     |        
|                                                    |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |        
|Increase (decrease) in cash and cash equivalents    |                                                                                                                                                       |                                       | 1,606  |                    |        |                   | (3,653 | )              |       |              | 12,409 |        |       |   | (1,168  | )      
|Cash and cash equivalents, beginning of period      |                                                                                                                                                       |                                       | 37,014 |                    |        |                   | 20,131 |                |       |              | 26,211 |        |       |   | 17,646  |        
|                                                    |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |        
|Cash and cash equivalents, end of period            |                                                                                                                                                       | $                                     | 38,620 |                    |        | $                 | 16,478 |                |       | $            | 38,620 |        |       | $ | 16,478  |        
|                                                    |                                                                                                                                                       |                                       |        |                    |        |                   |        |                |       |              |        |        |       |   |         |        

See notes to consolidated financial statements.





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INTERVOICE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(Unaudited)


(In Thousands, Except Share Data)

|                                        |  |              |            |            |  |             |    |               |  |      |        |                   |  |   |         |   |  |   |        |   |  |   |        | 
|--------------------------------------- |  | ------------ | ---------- | ---------- |  | ----------- | -- | ------------- |  | ---- | ------ | ----------------- |  | - | ------- | - |  | - | ------ | - |  | - | ------ | 
|                                        |  | Common Stock |            |            |  |             |    |               |  |      |        | Accumulated Other |  |   |         |  
|                                        |  |              |            | Additional |  | Accumulated |    | Comprehensive |  |      |        |                  
|                                        |  | Shares       |            | Amount     |  | Capital     |    | Deficit       |  | Loss |        | Total            
|                                        |  |              |            |            |  |             |    |               |  |      |        |                  
|Balance at February 28, 2003            |  |              | 34,111,101 |            |  | $           | 17 |               |  | $    | 65,144 |                   |  | $ | (46,768 | ) |  | $ | (3,410 | ) |  | $ | 14,983 | 
|Net income                              |  |              |           |            |  |             |   |               |  |      |       |                   |  |   | 8,120   |   |  |   |       |   |  |   | 8,120  | 
|Foreign currency translation
adjustment |  |              |           |            |  |             |   |               |  |      |       |                   |  |   |        |   |  |   | 880    |   |  |   | 880    | 
|Extension of stock options              |  |              |           |            |  |             |   |               |  |      | 279    |                   |  |   |        |   |  |   |       |   |  |   | 279    | 
|Exercise of stock options               |  |              | 370,596    |            |  |             |   |               |  |      | 2,360  |                   |  |   |        |   |  |   |       |   |  |   | 2,360  | 
|                                        |  |              |            |            |  |             |    |               |  |      |        |                   |  |   |         |   |  |   |        |   |  |   |        | 
|Balance at November 30, 2003            |  |              | 34,481,697 |            |  | $           | 17 |               |  | $    | 67,783 |                   |  | $ | (38,648 | ) |  | $ | (2,530 | ) |  | $ | 26,622 | 
|                                        |  |              |            |            |  |             |    |               |  |      |        |                   |  |   |         |   |  |   |        |   |  |   |        | 

See notes to consolidated financial statements.





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##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED NOVEMBER 30, 2003

Note A  Basis of Presentation

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. The consolidated balance sheet at February 28, 2003 has been
derived from audited financial statements at that date. In the opinion of
management, all adjustments considered necessary for a fair presentation of the
unaudited November 30, 2003 and 2002 consolidated financial statements have
been included. Operating results for the three and nine month periods ended
November 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending February 29, 2004 as they may be affected by a
number of factors including the timing and ultimate receipt of orders from
significant customers which continue to constitute a large portion of the
Companys sales, the sales channel mix of products sold, and changes in general
economic conditions, any of which could have an adverse effect on operations.

In accordance with Statement of Financial Accounting Standards No. 130,
the following comprehensive income disclosures are provided. Total
comprehensive income (loss) for the third quarters of fiscal 2004 and 2003 was
$4.5 million and $(7.7) million, respectively. For the nine month periods ended
November 30, 2003 and 2002, total comprehensive income (loss) was $9.0 million
and $(46.4) million, respectively. Total comprehensive income (loss) is
comprised of net income (loss), foreign currency translation adjustments, and,
in fiscal 2003, adjustments to the carrying value of certain derivative
instruments.

Financial statements of the Companys foreign subsidiaries have been
translated into U.S. dollars at current and average exchange rates. Resulting
translation adjustments are recorded as a separate component of stockholders
equity. Any transaction gains or losses are included in the accompanying
consolidated statements of operations.

Note B  Change in Accounting Principle for Goodwill and Other Intangible
Assets

Effective March 1, 2002, the Company adopted Statements of Financial
Accounting Standards No. 141, Business Combinations and No. 142, Goodwill
and Other Intangible Assets (the Statements). Statement No. 141 refines the
definition of what assets may be considered as separately identified intangible
assets apart from goodwill. Statement No. 142 provides that goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized,
but will be subject to impairment tests on at least an annual basis.

In adopting the Statements in fiscal 2003, the Company first reclassified
$2.7 million of intangible assets associated with its assembled workforce (net
of related deferred taxes of $1.4 million) to goodwill because such assets did
not meet the new criteria for separate identification. The Company then
allocated its adjusted goodwill balance of $19.2 million to its then existing
Enterprise and Networks divisions and completed the transitional impairment
tests required by Statement No. 142. The fair values of the reporting units
were estimated using a combination of the expected present values of future
cash flows and an assessment of comparable market values. As a result of these
tests, the Company determined that the goodwill associated with its Networks
division was fully impaired, and, accordingly, it recognized a non-cash,
goodwill impairment charge of $15.8 million as the cumulative effect on prior
years of this change in accounting principle. This impairment resulted
primarily from the significant decline in Networks sales and profitability
during the fourth quarter of fiscal 2002 and related reduced forecasts for the
divisions sales and profitability.





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##### Table of Contents



Note C  Inventories

Inventories consist of the following (in thousands):

|                 |  |                   |       |                   |  |   |       | 
|---------------- |  | ----------------- | ----- | ----------------- |  | - | ----- | 
|                 |  | November 30, 2003 |       | February 28, 2003
|                 |  |                   |       |                  
|Purchased parts  |  | $                 | 4,985 |                   |  | $ | 4,906 | 
|Work in progress |  |                   | 3,254 |                   |  |   | 3,989 | 
|                 |  |                   |       |                   |  |   |       | 
|                 |  | $                 | 8,239 |                   |  | $ | 8,895 | 
|                 |  |                   |       |                   |  |   |       | 

Note D  Special Charges

The Company did not record any special charges during the quarter ended
November 30, 2003. During the quarter ended May 31, 2003, the Company incurred
severance charges of approximately $1.4 million in connection with a reduction
in its workforce affecting 56 positions. Virtually all such charges were paid
during the first two quarters of fiscal 2004. During the quarter ended August
31, 2003, the Companys chief financial officer resigned to pursue other
opportunities. The Company incurred cash and non-cash charges totaling
approximately $0.5 million and $0.3 million, respectively, during the second
quarter under the terms of a separation agreement executed in connection with
the officers resignation. All cash charges were paid as of August 31, 2003.

The following table summarizes the effect on reported operating results by
financial statement category of all special charges activities for the nine
months ended November 30, 2003 (in thousands).

|                                        |  |         |     |             |  |                |     |       |  |          |       |  |  |   |       | 
|--------------------------------------- |  | ------- | --- | ----------- |  | -------------- | --- | ----- |  | -------- | ----- |  |  | - | ----- | 
|                                        |  |         |     |             |  |                |     |       |  | Selling, |       |  |  |  
|                                        |  | Cost of |     | Research    |  | General        |     |       |  |         
|                                        |  | Goods   |     | and         |  | and            |     |       |  |         
|                                        |  | Sold    |     | Development |  | Administrative |     | Total
|                                        |  |         |     |             |  |                |     |      
|Severance payments and related benefits |  | $       | 562 |             |  | $              | 228 |       |  | $        | 603   |  |  | $ | 1,393 | 
|Separation settlement                   |  |         |    |             |  |                |    |       |  |          | 791   |  |  |   | 791   | 
|                                        |  |         |     |             |  |                |     |       |  |          |       |  |  |   |       | 
|Total                                   |  | $       | 562 |             |  | $              | 228 |       |  | $        | 1,394 |  |  | $ | 2,184 | 
|                                        |  |         |     |             |  |                |     |       |  |          |       |  |  |   |       | 

During the first three quarters of fiscal 2003, the Company took various
actions designed to lower costs and improve operational efficiency. During the
quarter ended May 31, 2002, the Company incurred special charges of
approximately $2.8 million, including $2.4 million for severance payments and
related benefits, and $0.4 million for the closure of its leased facility in
Chicago, Illinois. The severance and related costs were associated with a
workforce reduction affecting 103 employees. During the first quarter of fiscal
2003, the Company also revised its estimates of severance charges originally
recorded in the fourth quarter of fiscal 2002, reducing its accrual for such
charges by $0.2 million.

During the quarter ended August 31, 2002, the Company incurred special
charges of approximately $10.1 million, including $2.8 million for severance
payments and related benefits associated with a workforce reduction affecting
approximately 120 employees, $0.4 million associated with the closing of a
portion of its leased facilities in Manchester, United Kingdom, $2.2 million
for the write down of excess inventories and $4.7 million associated with two
loss contracts. The severance and related costs were associated with the
Companys consolidation of its separate Enterprise and Networks divisions into
a single, unified organizational structure. The downsizing of the leased space
in Manchester followed from the Companys decision to consolidate virtually all
of its manufacturing operations into its Dallas, Texas facilities. The
inventory adjustments reflected the Companys continuing assessment of its
inventory levels in light of short term sales projections, the decision to
eliminate the UK manufacturing operation and the consolidation of the business
units discussed above. The charges for loss contracts reflected the costs
incurred during the quarter on two contracts that are expected to result in net
losses to the Company upon completion. The charges included costs actually
incurred during the quarter as well as an accrual of the amounts by which total
contract costs were expected to exceed total contract revenue.

During the quarter ended November 30, 2002, the Company incurred special
charges of approximately $4.9 million, including $1.2 million for severance
payments and related benefits associated with a workforce reduction affecting
approximately 50 employees, $1.8 million for the write down of excess
inventories and $1.9 million of charges incurred upon the early extinguishment
of the Companys





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##### Table of Contents



convertible notes. The inventory adjustments reflected the Companys
continuing assessment of its inventory levels in light of short term sales
projections. The loss on early extinguishment of debt included $1.4 million in
non-cash charges to write-off unamortized debt discount and unamortized debt
issuance costs and $0.5 million in prepayment premiums.

The following table summarizes the effect on reported operating results by
financial statement category of all special charges activities for the quarter
and nine months ended November 30, 2002 (in thousands).

|                                        |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 
|--------------------------------------- |  | ------- | ------ | ----------- |  | -------------- | --- | -------- |  | -------- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                        |  |         |        |             |  |                |     |          |  | Selling, |       |  |  |   |       |  |  |  
|                                        |  | Cost of |        | Research    |  | General        |     |          |  |          |       |  |  |  
|                                        |  | Goods   |        | and         |  | and            |     | Other    |  |          |       | 
|                                        |  | Sold    |        | Development |  | Administrative |     | Expenses |  | Total   
|                                        |  |         |        |             |  |                |     |          |  |         
|Quarter ended November 30, 2002         |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 
|Severance payments and related benefits |  | $       | 363    |             |  | $              | 25  |          |  | $        | 792   |  |  | $ |      |  |  | $ | 1,180  | 
|Write down of excess inventories        |  |         | 1,840  |             |  |                |    |          |  |          |      |  |  |   |      |  |  |   | 1,840  | 
|Loss on early extinguishment of debt    |  |         |       |             |  |                |    |          |  |          |      |  |  |   | 1,868 |  |  |   | 1,868  | 
|                                        |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 
|Total                                   |  | $       | 2,203  |             |  | $              | 25  |          |  | $        | 792   |  |  | $ | 1,868 |  |  | $ | 4,888  | 
|                                        |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 
|Nine months ended November 30, 2002     |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 
|Severance payments and related benefits |  | $       | 2,305  |             |  | $              | 826 |          |  | $        | 3,083 |  |  | $ |      |  |  | $ | 6,214  | 
|Facility closures                       |  |         | 244    |             |  |                | 125 |          |  |          | 388   |  |  |   |      |  |  |   | 757    | 
|Write down of excess inventories        |  |         | 4,080  |             |  |                |    |          |  |          |      |  |  |   |      |  |  |   | 4,080  | 
|Costs associated with loss contracts    |  |         | 4,672  |             |  |                |    |          |  |          |      |  |  |   |      |  |  |   | 4,672  | 
|Loss on early extinguishment of debt    |  |         |       |             |  |                |    |          |  |          |      |  |  |   | 1,868 |  |  |   | 1,868  | 
|                                        |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 
|Total                                   |  | $       | 11,301 |             |  | $              | 951 |          |  | $        | 3,471 |  |  | $ | 1,868 |  |  | $ | 17,591 | 
|                                        |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 

Accrued expenses and other long-term liabilities at February 28, 2003
included amounts associated with certain special charges incurred during fiscal
2003 and 2002. Activity during the first nine months of fiscal 2004 related to
such accruals was as follows (in thousands):

|                                                       |  |                   |       |          |  |              |      |                   |  |                 |      |   |  |   |       | 
|------------------------------------------------------ |  | ----------------- | ----- | -------- |  | ------------ | ---- | ----------------- |  | --------------- | ---- | - |  | - | ----- | 
|                                                       |  | Accrued Balance   |       |          |  |              |      | Revisions         |  | Accrued Balance
|                                                       |  | February 28, 2003 |       | Payments |  | to Estimates |      | November 30, 2003
|                                                       |  |                   |       |          |  |              |      |                  
|Severance and related charges                          |  | $                 | 466   |          |  | $            | (273 | )                 |  | $               | (135 | ) |  | $ | 58    | 
|Future lease costs for properties
no longer being used |  | $                 | 1,896 |          |  | $            | (682 | )                 |  | $               | (13  | ) |  | $ | 1,201 | 

The Company expects to pay the balance of accrued severance and related
charges during fiscal 2004 and to pay the balance of future lease costs over
the remaining lease terms, which extend through June 2005.





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##### Table of Contents



Note E  Long-Term Borrowings

At November 30, 2003 and February 28, 2003 the Companys long-term debt
was comprised of the following (in thousands):

|                                                                                                                                                                                                                                                                                                     |  |                   |        |                   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ----------------- |  | - | ------ | -
|                                                                                                                                                                                                                                                                                                     |  | November 30, 2003 |        | February 28, 2003
|                                                                                                                                                                                                                                                                                                     |  |                   |        |                  
|Mortgage loan, bearing interest payable
monthly at the greater of 10.5% or the
prime rate plus 2.0%; principal due
May 28, 2005                                                                                                                                                                      |  | $                 | 9,500  |                   |  | $ | 10,500 |  
|Amortizing term loan, principal due in equal
monthly installments of approximately
$0.3 million through May 2005 with a
final payment totaling approximately
$0.1 million in June 2005; interest
payable monthly, accruing at a rate
equal to the prime rate plus 2.75%
(6.75% at November 30, 2003) |  |                   | 5,111  |                   |  |   | 8,611  |  
|                                                                                                                                                                                                                                                                                                     |  |                   |        |                   |  |   |        |  
|Total debt outstanding                                                                                                                                                                                                                                                                               |  |                   | 14,611 |                   |  |   | 19,111 |  
|Less: current portion                                                                                                                                                                                                                                                                                |  |                   | (3,333 | )                 |  |   | (3,333 | )
|                                                                                                                                                                                                                                                                                                     |  |                   |        |                   |  |   |        |  
|Long-term debt, net of current portion                                                                                                                                                                                                                                                               |  | $                 | 11,278 |                   |  | $ | 15,778 |  
|                                                                                                                                                                                                                                                                                                     |  |                   |        |                   |  |   |        |  

Mortgage Loan

The Companys mortgage loan is secured by a first lien on the Companys
Dallas headquarters and contains a covenant requiring the Company to have at
least $5.0 million in net equity at the end of each of its fiscal quarters
beginning with the quarter ending August 31, 2004. The mortgage loan also
contains cross-default provisions with respect to the Companys term loan and
revolving credit agreement, such that a default under the credit facility which
leads to the acceleration of amounts due under the facility and the enforcement
of liens against the mortgaged property also creates a default under the
mortgage loan. The Company made an elective principal payment of $1.0 million
during the quarter ended August 31, 2003.

Term Loan and Revolving Credit Agreement

In August 2002, the Company entered into a credit facility agreement with
a lender which provided for an amortizing term loan of $10.0 million and a
revolving credit commitment equal to the lesser of $25.0 million minus the
principal outstanding under the term loan and the balance of any letters of
credit ($19.9 million maximum at November 30, 2003) or a defined borrowing base
comprised primarily of eligible U.S. and U.K. accounts receivable ($1.3 million
maximum at November 30, 2003).

Any advances under the revolver loan will accrue interest at the prime
rate plus a margin of 0.5% to 1.5%, or at the London Inter-bank Offering Rate
plus a margin of 3% to 4%. The Company may request an advance under the
revolver loan at any time during the term of the revolver agreement so long as
the requested advance does not exceed the then available borrowing base. The
Company has not requested an advance under the revolver as of the date of this
filing.

The Company made an elective principal payment of $1.0 million to reduce
amounts outstanding under the term loan during the quarter ended November 30,
2003. The term loan and the revolving credit agreement expire on August 29,
2005.

Borrowings under the credit facility are secured by first liens on the
Companys personal property and by a subordinated lien on the Companys Dallas
headquarters. The credit facility contains cross-default provisions with
respect to the Companys mortgage loan, such that an event of default under the
mortgage loan which allows the mortgage lender to accelerate the mortgage loan
or terminate the agreement creates a default under the credit facility.





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The credit facility contains terms, conditions and representations that
are generally customary for asset-based credit facilities, including
requirements that the Company comply with certain significant financial and
operating covenants. In particular, the Company was required to generate
cumulative earnings before interest, taxes, depreciation and amortization,
EBITDA, (as defined in the credit agreement) of at least $15.0 million for the
12-month period ended November 30, 2003, and is required to generate minimum
cumulative EBITDA of $20.0 million for the 12-month period ending February 29,
2004, and $25.0 million for the 12-month periods ending each fiscal quarter
thereafter. The Company is also required to maintain defined levels of actual
and projected service revenues and is prohibited from declaring or paying cash
dividends, incurring additional bank or similar debt in excess of $0.5 million without lender
approval and incurring capital expenditures in excess of $4.0 million for any
fiscal year except in certain circumstances and with the lenders prior
approval. As of November 30, 2003, the Company was in compliance with all
financial and operating covenants.

Note F  Income Taxes

For the nine months ended November 30, 2003, the Company recognized
current income tax expense on the pretax income of certain foreign
subsidiaries. The Companys regular taxable income for the nine months ended
November 30, 2003 associated with its U.S. operations, as further described
below, will be offset by net operating losses carried forward from prior years.
The Company, however, has incurred certain alternative minimum tax expense
associated with its U.S. operations for the nine month period. Because the
Company has provided a valuation reserve against its net operating loss
carryforward benefit in prior years, the Company does not expect and has not
provided any net income tax expense or benefit for the nine months ended
November 30, 2003 related to its U.S. operations other than that associated
with the alternative minimum tax liability.

The Companys U.S. taxable income for fiscal 2003 and projected taxable
income for fiscal 2004 include significant distributions deemed to have been
made to the Company as an U.S. entity from several of its foreign subsidiaries,
including, particularly, its U.K. subsidiary. Such deemed distributions stem
from the existence of intercompany debt owed by the U.S. entity to certain of
its foreign subsidiaries and from the pledging of certain U.K. assets as
collateral for the Companys term loan and revolving credit facility. As a
result of these deemed distributions and other taxable income in fiscal 2003
and fiscal 2004, the Company expects to use virtually all tax net operating
loss carryforwards by the end of fiscal 2004. Under certain circumstances,
future tax expense may reflect benefits from tax credits attributable to
previously paid foreign taxes and benefits from the reversals of previously
provided valuation reserves against deferred tax assets. At this time,
however, there can be no assurance that such benefits will actually be realized
by the Company in future periods.

During the third quarter of fiscal 2004, the Company reached final
settlement with the Internal Revenue Service regarding previously disclosed
audits of its federal income tax returns for its fiscal years 2000 and 2001. In
the settlement, the Company lost the ability to carry back approximately $5.4
million in net operating losses generated in fiscal 2001 and agreed to repay
approximately $2.1 million of refunds previously received from the IRS plus
approximately $0.5 million in accrued interest. The final settlements had been
anticipated in the Companys fiscal 2003 net tax provision and had no material
effect on the tax provision or net income for the three and nine months ended
November 30, 2003. The Company paid all amounts due under the settlement in
December 2003.

During the third quarter of fiscal 2004, the Companys wholly owned
subsidiary, Brite Voice Systems, Inc. (Brite), reached final settlement with
the IRS regarding a disputed Notice of Deficiency relating to Brites August
1999 federal income tax return. As a result of the settlement, the Company
reversed approximately $1.2 million of taxes payable it had accrued in prior
years in response to the IRS challenge.

During the first quarter of fiscal 2003, United States tax law was amended
to allow companies which incurred net operating losses in 2001 and 2002 to
carry such losses back a maximum of five years instead of the maximum of two
years previously allowed. As a result of this change, the Company used $21.5
million of its then existing net operating loss carryforwards and $0.4 million
of its then existing tax credit carryforwards and recognized a one-time tax
benefit of $7.9 million, of which $2.2 million was





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recognized as additional capital associated with previous stock option
exercises. Also during the first quarter of fiscal 2003, and as discussed in
Note B, the Company reduced its deferred tax liabilities by $1.4 million in
connection with the reclassification of its assembled workforce intangible
asset to goodwill. As a result of this reduction in deferred tax liabilities,
the Company increased the valuation allowance associated with its net deferred
tax asset by $1.4 million. During the third quarter of fiscal 2003, the
Company became aware of the audit issues described above associated with its
fiscal 2000 and 2001 U.S. tax returns and recorded a charge of approximately
$2.7 million as part of its tax provision for the quarter.

The effects of these first and third quarter events are included in the
Companys net tax benefit of $0.2 million in the consolidated statement of
operations for the nine months ended November 30, 2002. For the quarter ended
November 30, 2002, the Company recognized a tax expense of approximately $1.2
million on the pretax profit of certain foreign subsidiaries. This tax
provision largely offset a second quarter tax benefit recorded on pretax losses
of those subsidiaries. The Company did not recognize a current benefit
associated with its domestic pretax losses, because it had exhausted its
ability to offset such losses against taxable income of prior years, and the
existence of losses prevented it from concluding that it was more likely than
not that such benefit will be realized.

Note G  Earnings Per Share and Stock Compensation

(in thousands except per share data)

|                                                                               |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |   | 
|------------------------------------------------------------------------------ | ---------------------- | - | ------------------ | ----- | ----------------- | - | ------------ | - | ------------ | - | ------ | ----- |  | - | ------- | - | 
|                                                                               |                        |   | Three Months Ended |       | Nine Months Ended
|                                                                               |                        |   | November 30,       |       | November 30,      |   | November 30, |   | November 30,
|                                                                               |                        |   | 2003               |       | 2002              |   | 2003         |   | 2002        
|                                                                               |                        |   |                    |       |                   |   |              |   |             
|Numerator:                                                                     |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  
|Income (loss) before the cumulative
effect of a change in accounting
principle |                        | $ | 3,588              |       |                   | $ | (7,832       | ) |              | $ | 8,120  |       |  | $ | (32,783 | )
|Cumulative effect on prior years of
a change in accounting principle           |                        |   |                   |       |                   |   |             |   |              |   |       |       |  |   | (15,791 | )
|                                                                               |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  
|Net income (loss)                                                              |                        | $ | 3,588              |       |                   | $ | (7,832       | ) |              | $ | 8,120  |       |  | $ | (48,574 | )
|                                                                               |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  
|Denominator:                                                                   |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  
|Denominator for basic
earnings per share                                       |                        |   | 34,364             |       |                   |   | 34,077       |   |              |   | 34,223 |       |  |   | 34,061  |  
|Dilutive potential common shares:                                              |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  
|                                                                               | Employee stock options |   |                    | 2,157 |                   |   |              |  |              |   |        | 1,099 |  |   |         |  | 
|                                                                               | Outstanding warrants   |   |                    | 360   |                   |   |              |  |              |   |        | 192   |  |   |         |  | 
|                                                                               |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  
|Denominator for diluted
earnings per share                                     |                        |   | 36,881             |       |                   |   | 34,077       |   |              |   | 35,514 |       |  |   | 34,061  |  
|                                                                               |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  
|BASIC:                                                                         |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  
|Income (loss) before the cumulative
effect of a change in
accounting principle |                        | $ | 0.10               |       |                   | $ | (0.23        | ) |              | $ | 0.24   |       |  | $ | (0.96   | )
|Cumulative effect on prior years of
a change in accounting principle           |                        |   |                   |       |                   |   |             |   |              |   |       |       |  |   | (0.47   | )
|                                                                               |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  
|Net income (loss)                                                              |                        | $ | 0.10               |       |                   | $ | (0.23        | ) |              | $ | 0.24   |       |  | $ | (1.43   | )
|                                                                               |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  
|DILUTED:                                                                       |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  
|Income (loss) before the cumulative
effect of a change in
accounting principle |                        | $ | 0.10               |       |                   | $ | (0.23        | ) |              | $ | 0.23   |       |  | $ | (0.96   | )
|Cumulative effect on prior years of
a change in accounting principle           |                        |   |                   |       |                   |   |             |   |              |   |       |       |  |   | (0.47   | )
|                                                                               |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  
|Net income (loss)                                                              |                        | $ | 0.10               |       |                   | $ | (0.23        | ) |              | $ | 0.23   |       |  | $ | (1.43   | )
|                                                                               |                        |   |                    |       |                   |   |              |   |              |   |        |       |  |   |         |  





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Options to purchase 2,051,399 and 4,992,461 shares of common stock at an
average exercise price of $12.52 and $9.19 were outstanding during the three
and nine month periods ended November 30, 2003, respectively, but were not
included in the computation of diluted earnings per share for these periods as
the effect would have been antidilutive because the options exercise prices
were greater than the average price of the Companys common shares during such
periods.

Options to purchase 5,543,967 and 5,537,519 shares of common stock at
average exercise prices of $9.02 and $9.03 and warrants to purchase 621,304
shares of common stock at an exercise price of $4.0238 per share were
outstanding during the three and nine month periods ended November 30, 2002,
respectively, but were not included in the computation of diluted earnings per
share for these periods because the effect would have been antidilutive given
the Companys loss for the quarter and nine month period.

The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25) and related Interpretations. Under APB 25, no
compensation expense is recognized for stock option grants if the exercise
price of the Companys stock option grants is at or above the fair market value
of the underlying stock on the date of grant. The Company has adopted the pro
forma disclosure features of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123), as amended by
Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. The following table
illustrates the effect on net income and net income per share amounts if the
Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation (in thousands, except per share amounts):

|                                                                                                                          |  |                    |        |                   |  |              |        |              |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ------------ | ------ | ------------ |  | - | ------ | - |  | - | ------- | -
|                                                                                                                          |  | Three Months Ended |        | Nine Months Ended
|                                                                                                                          |  | November 30,       |        | November 30,      |  | November 30, |        | November 30,
|                                                                                                                          |  | 2003               |        | 2002              |  | 2003         |        | 2002        
|                                                                                                                          |  |                    |        |                   |  |              |        |             
|Net income (loss), as reported                                                                                            |  | $                  | 3,588  |                   |  | $            | (7,832 | )            |  | $ | 8,120  |   |  | $ | (48,574 | )
|Add stock compensation expense
included in net income                                                                     |  |                    |       |                   |  |              |       |              |  |   | 279    |   |  |   |        |  
|Less total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of tax |  |                    | (1,594 | )                 |  |              | (648   | )            |  |   | (2,504 | ) |  |   | (1,841  | )
|                                                                                                                          |  |                    |        |                   |  |              |        |              |  |   |        |   |  |   |         |  
|Pro forma net income (loss)                                                                                               |  | $                  | 1,994  |                   |  | $            | (8,480 | )            |  | $ | 5,895  |   |  | $ | (50,415 | )
|                                                                                                                          |  |                    |        |                   |  |              |        |              |  |   |        |   |  |   |         |  
|Net income (loss) per share:                                                                                              |  |                    |        |                   |  |              |        |              |  |   |        |   |  |   |         |  
|Basic   as reported                                                                                                      |  | $                  | 0.10   |                   |  | $            | (0.23  | )            |  | $ | 0.24   |   |  | $ | (1.43   | )
|Diluted  as reported                                                                                                     |  | $                  | 0.10   |                   |  | $            | (0.23  | )            |  | $ | 0.23   |   |  | $ | (1.43   | )
|Basic  pro forma                                                                                                         |  | $                  | 0.06   |                   |  | $            | (0.25  | )            |  | $ | 0.17   |   |  | $ | (1.48   | )
|Diluted  pro forma                                                                                                       |  | $                  | 0.05   |                   |  | $            | (0.25  | )            |  | $ | 0.17   |   |  | $ | (1.48   | )

The pro forma stock-based compensation expense and related per share data
shown above are estimated using a Black-Scholes option pricing model. The
Black-Scholes model was developed for use in estimating the fair value of
publicly traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Companys employee stock options have characteristics significantly
different from those of publicly traded options, and because changes in the
subjective input assumptions can materially affect the estimate of the fair
value of stock-based compensation, in managements opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of such
compensation.





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Note H  Operating Segment Information and Major Customers

The Company operates as a single, integrated business unit. The Companys
chief operating decision maker assesses performance and allocates resources on
an enterprise wide basis. The Companys product line includes IVR/portal
systems, messaging systems, payment systems, maintenance and related services,
and managed services provided for customers on an outsourced or application
service provider (ASP) basis. In prior years, the Company identified its sales
of systems and related services as being sales to the Enterprise and Network
markets. Generally sales of IVR/portal systems and related services were made
to Enterprise customers, while sales of messaging and payment systems were made
to Network customers. Going forward, the Company believes that product line
distinction provides the most meaningful breakdown of quarterly and annual
sales activity. The Company is not able to provide the historical breakdown of
Network system sales into its messaging and payment systems components. The
Companys net sales by product line for the three and nine month periods ended
November 30, 2003 and 2002 were as follows (in thousands):

|                                                                         |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 
|------------------------------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | ------------ | ------ | ------------ |  | - | ------- |  |  | - | ------- | 
|                                                                         |  | Three Months Ended |        | Nine Months Ended
|                                                                         |  | November 30,       |        | November 30,      |  | November 30, |        | November 30,
|                                                                         |  | 2003               |        | 2002              |  | 2003         |        | 2002        
|                                                                         |  |                    |        |                   |  |              |        |             
|IVR/portal system sales
(Enterprise system
sales in fiscal 2003)         |  | $                  | 12,633 |                   |  | $            | 13,079 |              |  | $ | 39,978  |  |  | $ | 36,646  | 
|Messaging system sales
(included in Network
system sales in fiscal 2003) |  |                    | 2,811  |                   |  |              |       |              |  |   | 5,954   |  |  |   |        | 
|Payment system sales
(included in Network
system sales in fiscal 2003)   |  |                    | 6,590  |                   |  |              |       |              |  |   | 14,757  |  |  |   |        | 
|Network system sales                                                     |  |                    |       |                   |  |              | 10,600 |              |  |   |        |  |  |   | 26,573  | 
|                                                                         |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Total system sales                                                       |  |                    | 22,034 |                   |  |              | 23,679 |              |  |   | 60,689  |  |  |   | 63,219  | 
|                                                                         |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Maintenance and related services sales                                   |  |                    | 13,878 |                   |  |              | 12,873 |              |  |   | 41,748  |  |  |   | 37,630  | 
|Managed service sales                                                    |  |                    | 5,848  |                   |  |              | 7,398  |              |  |   | 19,331  |  |  |   | 17,130  | 
|                                                                         |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Total services sales                                                     |  |                    | 19,726 |                   |  |              | 20,271 |              |  |   | 61,079  |  |  |   | 54,760  | 
|                                                                         |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Total Company sales                                                      |  | $                  | 41,760 |                   |  | $            | 43,950 |              |  | $ | 121,768 |  |  | $ | 117,979 | 
|                                                                         |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 

Geographic Operations

Revenues are attributed to geographic locations based on locations of
customers. The Companys net sales by geographic area for the three and nine
month periods ended November 30, 2003 and 2002 were as follows (in thousands):

|                               |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 
|------------------------------ |  | ------------------ | ------ | ----------------- |  | ------------ | ------ | ------------ |  | - | ------- |  |  | - | ------- | 
|                               |  | Three Months Ended |        | Nine Months Ended
|                               |  | November 30,       |        | November 30,      |  | November 30, |        | November 30,
|                               |  |                    |        |                   |  |              |        |             
|                               |  | 2003               |        | 2002              |  | 2003         |        | 2002        
|                               |  |                    |        |                   |  |              |        |             
|North America                  |  | $                  | 22,408 |                   |  | $            | 24,648 |              |  | $ | 71,426  |  |  | $ | 67,728  | 
|Europe, Middle East and Africa |  |                    | 16,428 |                   |  |              | 17,213 |              |  |   | 43,597  |  |  |   | 43,713  | 
|Pacific Rim                    |  |                    | 631    |                   |  |              | 780    |              |  |   | 1,791   |  |  |   | 1,742   | 
|Central and South America      |  |                    | 2,293  |                   |  |              | 1,309  |              |  |   | 4,954   |  |  |   | 4,796   | 
|                               |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Total                          |  | $                  | 41,760 |                   |  | $            | 43,950 |              |  | $ | 121,768 |  |  | $ | 117,979 | 
|                               |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 





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Concentration of Revenue

There were no customers accounting for 10% or more of the Companys total
sales during the three months ended November 30, 2003. Sales to one customer,
O2, which has purchased both systems and managed services from the Company,
accounted for approximately 10% of the Companys total sales for the
three-month period ended November 30, 2002 and for 10% and 11% of the Companys
total sales during the nine month periods ended November 30, 2003 and 2002,
respectively. There were no other customers accounting for 10% or more of the
Companys sales during the three months ended November 30, 2002 or the nine
months ended November 30, 2003 and 2002.

Note I  Contingencies

Intellectual Property Matters

The Company provides its customers a qualified indemnity against the
infringement of third party intellectual property rights. From time to time
various owners of patents and copyrighted works send the Company or its
customers letters alleging that the Companys products do or might infringe
upon the owners intellectual property rights, and/or suggesting that the
Company or its customers should negotiate a license or cross-license agreement
with the owner. The Companys policy is to never knowingly infringe upon any
third partys intellectual property rights. Accordingly, the Company forwards
any such allegation or licensing request to its outside legal counsel for their
review and, if appropriate, opinion. The Company generally attempts to resolve
any such matter by informing the owner of its position concerning
non-infringement or invalidity, and/or, if appropriate, negotiating a license
or cross-license agreement. Even though the Company attempts to resolve these
matters without litigation, it is always possible that the owner of the patent
or copyrighted works will institute litigation. Owners of patent(s) and/or
copyrighted work(s) have previously instituted litigation against the Company
alleging infringement of their intellectual property rights, although no such
litigation is currently pending against the Company. The Company currently has
a portfolio of 67 patents, and it has applied for and will continue to apply
for and receive a number of additional patents to reflect its technological
innovations. The Company believes that its patent portfolio could allow it to
assert counterclaims for infringement against certain owners of intellectual
property rights if those owners were to assert claims of infringement against
the Company.

From time to time Ronald A. Katz Technology Licensing L.P. (RAKTL) has
sent letters to certain customers of the Company suggesting that the customer
should negotiate a license agreement to cover the practice of certain patents
owned by RAKTL. In the letters, RAKTL has alleged that certain of its patents
pertain to certain enhanced services offered by network providers, including
prepaid card and wireless services and postpaid card services. RAKTL has
further alleged that certain of its patents pertain to certain call processing
applications, including applications for call centers that route calls using a
called partys DNIS identification number. As a result of the correspondence,
an increasing number of the Companys customers have had discussions, or are in
discussions, with RAKTL. Certain products offered by the Company can be
programmed and configured to provide enhanced services to network providers and
call processing applications for call centers. The Companys contracts with
customers usually include a qualified obligation to indemnify and defend
customers against claims that products as delivered by the Company infringe a
third partys patent.

None of the Companys customers have notified the Company that RAKTL has
claimed that any product provided by the Company infringes any claims of any
RAKTL patent. Accordingly, the Company has not been required to defend any
customers against a claim of infringement under a RAKTL patent. The Company
has, however, received letters from customers notifying the Company of the
efforts by RAKTL to license its patent portfolio and reminding the Company of
its potential obligations under the indemnification provisions of the
applicable agreements in the event that a claim is asserted. In response to
correspondence from RAKTL, a few customers have attempted to tender to the
Company the defense of its products under contractual indemnity provisions. The
Company has informed these customers that while it fully intends to honor any
contractual indemnity provisions, it does not believe it currently has any
obligation to provide such a defense because RAKTL does not appear to have made
a claim that a Company product infringes a patent. Some of these customers have
disagreed with the Company and





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believe that the correspondence from RAKTL can be construed as claim(s)
against the Companys products. An affiliate of Verizon Communications, Inc.,
Cellco Partnership d/b/a Verizon Wireless, recently settled all claims of
patent infringement asserted against it in the matter of RAKTL v. Verizon
Communications, Inc. et al, No. 01-CV-5627, in U.S. District Court, Eastern
District of Pennsylvania. Verizon Wireless had previously notified the Company
of the lawsuit and referenced provisions in a contract for prepaid services
which required a wholly owned subsidiary of the Company, Brite Voice Systems
Inc., to indemnify Verizon Wireless against claims that its services infringe
patents. The claims in the lawsuit made general reference to prepaid services
and a variety of other services offered by Verizon Wireless and its affiliates
but did not refer to Brites products or services. The Company had informed
Verizon Wireless that it could find no basis for an indemnity obligation under
the expired contract and, accordingly, the Company did not participate in the
defense or settlement of the matter.

Even though RAKTL has not alleged that a product provided by the Company
infringes a RAKTL patent, it is always possible that RAKTL may do so. In the
event that a Company product becomes the subject of litigation, a customer
could attempt to invoke the Companys indemnity obligations under the
applicable agreement. As with most sales contracts with suppliers of
computerized equipment, the Companys contractual indemnity obligations are
generally limited to the products and services provided by the Company, and
generally require the customer to allow the Company to have control over any
litigation and settlement negotiations with the patent holder. The customers
who have received letters from RAKTL generally have multiple suppliers of the
types of products that might potentially be subject to claims by RAKTL.

Even though no claims have been made that a specific product offered by
the Company infringes any claim under the RAKTL patent portfolio, the Company
has received opinions from its outside patent counsel that certain products and
applications offered by the Company do not infringe certain claims of the RAKTL
patents. The Company has also received opinions from its outside counsel that
certain claims under the RAKTL patent portfolio are invalid or unenforceable.
Furthermore, based on the reviews by outside counsel, the Company is not aware
of any valid and enforceable claims under the RAKTL portfolio that are
infringed by the Companys products. If the Company does become involved in
litigation in connection with the RAKTL patent portfolio, under a contractual
indemnity or any other legal theory, the Company intends to vigorously contest
the claims and to assert appropriate defenses. An increasing number of
companies, including some large, well known companies and some customers of the
Company, have already licensed certain rights under the RAKTL patent portfolio.
RAKTL has previously announced license agreements with, among others, AT&T
Corp., Microsoft Corporation and International Business Machines Corporation.

Litigation

David Barrie, et al., on Behalf of Themselves and All Others Similarly
Situated v. InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, originally filed
in the United States District Court, Northern District of Texas, Dallas
Division:

Several related class action lawsuits were filed in the United States
District Court for the Northern District of Texas on behalf of purchasers of
common stock of the Company during the period from October 12, 1999 through
June 6, 2000 (the Class Period). Plaintiffs filed claims, which were
consolidated into one proceeding, under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Securities and Exchange Commission Rule
10b-5 against the Company as well as certain named current and former officers
and directors of the Company on behalf of the alleged class members. In the
complaint, Plaintiffs claimed that the Company and the named current and former
officers and directors issued false and misleading statements during the Class
Period concerning the financial condition of the Company, the results of the
Companys merger with Brite and the alleged future business projections of the
Company. Plaintiffs asserted that these alleged statements resulted in
artificially inflated stock prices.

The Company believes that it and its officers and directors complied with
their obligations under the securities laws, and vigorously defended the
lawsuit. The Company responded to the complaint by filing a motion to dismiss
the complaint in the consolidated proceeding. The Company asserted that the





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complaint lacked the degree of specificity and factual support to meet the
pleading standards applicable to federal securities litigation. On this basis,
the Company requested that the United States District Court for the Northern
District of Texas dismiss the complaint in its entirety. Plaintiffs responded
to the Companys request for dismissal. On August 8, 2002, the Court entered an
order granting the Companys motion to dismiss the class action lawsuit. In the
order dismissing the lawsuit, the Court granted plaintiffs an opportunity to
reinstate the lawsuit by filing an amended complaint.

Plaintiffs filed an amended class action complaint on September 23, 2002.
The Company filed a motion to dismiss the amended complaint, and plaintiffs
filed a response in opposition to the Companys motion to dismiss. On September
15, 2003, the Court granted the Companys motion to dismiss the amended class
action complaint. Unlike the Courts prior order dismissing the original class
action complaint, the order dismissing the amended complaint did not grant
plaintiffs an opportunity to reinstate the lawsuit by filing a new amended
complaint. On October 9, 2003, the Plaintiffs filed a notice of appeal to the
Fifth Circuit Court of Appeals from the trial courts order of dismissal
entered on September 15, 2003. The plaintiffs brief is due on or before
February 23, 2004.

Other Matters

The Company is a defendant from time to time in lawsuits incidental to its
business. Other than the matter discussed above, the Company is not a party to
any lawsuit that potentially could be considered material to the Companys
financial position or results of operations as of the date of this filing.
There can be no assurance that expenses, including any potential settlements or
judgments, related to any lawsuits that might arise in the future would not be
material to the Companys financial position or results of operations.

The Company has employment agreements with three executive officers. Two
of these agreements require the Company to make termination payments to the
officer of two times the officers annual base compensation in the event the
officers services are terminated without cause or payments of up to 2.99 times
the officers annual compensation including bonuses in connection with a
termination of the officers services following a change in ownership of the
Company, as defined in the agreement, prior to the expiration of the agreement.
If both officers with such agreements were terminated for one of the preceding
reasons during fiscal 2004, the cost to the Company would range from $1.2
million to $1.8 million. The third employment agreement requires that in the
event the officers services are terminated without cause, the Company either
must make termination payments to the officer of one times the officers annual
base compensation and accelerate vesting on 33,333 shares of Company common
stock covered by a stock option or make termination payments to the officer of
two times the officers annual base compensation. If the officer covered by
this agreement were terminated during fiscal 2004, the Company would be
required to make payments ranging from $0.2 million to $0.5 million.





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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

This report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-Q, including,
without limitation, statements contained in this Managements Discussion and
Analysis of Financial Condition and Results of Operations and Notes to
Consolidated Financial Statements located elsewhere herein regarding the
Companys financial position, business strategy, plans and objectives of
management of the Company for future operations, and industry conditions, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In addition to
important factors described elsewhere in this report, the Company cautions
current and potential investors that the following important risk factors,
among others, sometimes have affected, and in the future could affect, the
Companys actual results and could cause such results during fiscal 2004, and
beyond, to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company:



| |  |  | Prior to fiscal 2004, the Company experienced operating losses, and
it may not operate profitably in the future. The Company incurred net
losses of approximately $66.4 million, $44.7 million and $2.3 million
in fiscal 2003, 2002 and 2001, respectively. Although the Company
generated net income of $3.6 million and $8.1 million for the quarter
and nine months ended November 30, 2003, respectively, it may incur
additional losses in the future, which could hinder the Companys
ability to operate its current business. The Company may not be able to
generate sufficient revenues from its operations to achieve or sustain
profitability in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company has significant obligations under its financing
agreements. The Company has material indebtedness outstanding under a
mortgage loan secured by the Companys office facilities in Dallas,
Texas and under a senior secured term loan and revolving credit
facility. The Company is required to make periodic payments of interest
under each of these financing agreements and, in the case of the term
loan, periodic payments of principal. In addition, the financing
agreements contain significant financial covenants, operating covenants
and default provisions. If the Company at any time defaults on any of
its payment or other obligations under any financing agreement, the
secured creditors can accelerate all indebtedness outstanding under the
facilities and foreclose on substantially all of the Companys assets.
Under such circumstances, the Companys cash position and liquidity
would be severely impacted. See Liquidity and Capital Resources in
this Item 2 for a discussion of the Companys liquidity and ability to
meet its obligations under its financing agreements.
|
| |  |  | The general economic climate remains uncertain. The Companys sales
are largely dependent on the strength of the domestic and international
economies and, in particular, on demand for telecommunications
equipment, computers, software and other technology products. The
market for telecommunications equipment has declined sharply over the
last three years, and the markets for computers, software and other
technology products also have declined. While the Company enjoyed
revenue growth during the first nine months of fiscal 2004 as compared
to the same period of fiscal 2003, there is still concern that demand
for certain types of products offered by the Company may remain soft
for some period of time as a result of domestic and global economic and
political conditions.                                                                                                                                                                                                                                                                                                                  
|
| |  |  | The Company is prone to quarterly sales fluctuations. Some of the
Companys transactions are completed in the same fiscal quarter as
ordered. The quantity and size of large sales (sales valued at
approximately $2.0 million or more) during any quarter can cause wide
variations in the Companys quarterly sales and earnings, as such sales
are unevenly distributed throughout the fiscal year. The Companys
accuracy in estimating future sales is largely dependent on its ability                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              





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| |   |  | to successfully qualify, estimate and close system sales from its
pipeline of sales opportunities during a quarter. No matter how
promising a pipeline opportunity may appear, there is no assurance it
will ever result in a sale. Accordingly, the Companys actual sales for
any fiscal reporting period may be significantly different from any
estimate of sales for such period. See the discussion entitled Sales in
this Item 2 for a discussion of the Companys system for estimating sales
and trends in its business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company is subject to potential lawsuits and other claims. The
Company is subject to certain potential lawsuits and other claims as
discussed in Note I - Contingencies in Item 1 of Part I of this
Quarterly Report on Form 10-Q. Except for the litigation discussed in
Note I, the Company is not a party to any lawsuit that potentially
could be considered material to the Companys financial position or
results of operations as of the date of this filing. There can be no
assurance that expenses, including any potential settlements or
judgments, related to any lawsuits that might arise in the future would
not be material to the Companys financial position or results of
operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | The Company faces intense competition based on product capabilities
and experiences ever increasing demands from its actual and prospective
customers for its products to be compatible with a variety of rapidly
proliferating computing, telephony and computer networking technologies
and standards. The ultimate success of the Companys products is
dependent, to a large degree, on the Company allocating its resources
to developing and improving products compatible with those
technologies, standards and functionalities that ultimately become
widely accepted by the Companys actual and prospective customers. The
Companys success is also dependent, to a large degree, on the
Companys ability to implement arrangements with other vendors with
complementary product offerings to provide actual and prospective
customers greater functionality and to ensure that the Companys
products are compatible with the increased variety of technologies and
standards. The principal competitors for the Companys systems include
Avaya, IBM, Nortel, Aspect Communications, Security First, Comverse
Technology, Lucent Technologies and UNISYS. Many of the Companys
competitors have greater financial, technological and marketing
resources than the Company has. Although the Company has committed
substantial resources to enhance its existing products and to develop
and market new products, it may not be successful.                                             
|
| |  |  | The Company may not be able to retain its customer base and, in
particular, its more significant customers. The Companys success
depends substantially on retaining its significant customers. The loss
of one of the Companys significant customers could negatively impact
the Companys results of operations. The Companys installed base of
customers generally is not contractually obligated to place further
systems orders with the Company or to extend their services contracts
with the Company at the expiration of their current contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | The Company may not be successful in transitioning its products and
services to an open, standards-based business model. The Company has
historically provided complete, bundled hardware and software systems
using internally developed components to address its customers total
business needs. Increasingly, the markets for the Companys products
are requiring a shift to the development of products and services based
on an open, standards-based architecture such as the J2EE and
Microsofts®.NET environments utilizing VoiceXML and/or SALT
standards. Such an open, standards-based approach allows customers to
independently purchase and combine hardware components, standardized
software modules, and customization, installation and integration
services from individual vendors deemed to offer the best value in the
particular class of product or service. In such an environment, the
Company believes it may sell less hardware and fewer bundled systems
and may become increasingly dependent on its development and sale of
software application packages, customized software and consulting and
integration services. This shift will place new challenges on the
Companys management to transition its products and to hire and retain
the mix of personnel necessary to respond to this business environment,
to adapt to the changing expense structure that the new environment may
tend to foster, and to increase sales of services, customized software
and





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| |   |  | application packages to offset reduced sales of hardware and bundled
systems. If the Company is unsuccessful in resolving one or more of these
challenges, the Companys revenues and profitability could decline.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company will incur substantial expenses to transition its
products and services to an open, standards-based business model. The
Company anticipates that it will incur substantial research and
development expenses and other expenses to adapt its organization and
product and service offerings to an open, standards-based business
model. If the Company is unable to accurately estimate the future
expenses associated with these strategic initiatives, or if the Company
must divert its resources to fund other strategic or operational
obligations, the Companys ability to fund the strategic initiatives
and to operate profitably will be adversely affected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | The Companys reliance on significant vendor relationships could
result in significant expense or an inability to serve its customers if
it loses these relationships. Although the Company generally uses
standard parts and components for its products, some of its components,
including semi-conductors and, in particular, digital signal processors
manufactured by Texas Instruments, are available only from a small
number of vendors. Likewise, the Company licenses speech recognition
technology from a small number of vendors. As the Company continues to
migrate to open, standards-based systems, it will become increasingly
dependent on its component suppliers and software vendors. To date, the
Company has been able to obtain adequate supplies of needed components
and licenses in a timely manner. If the Companys significant vendors
are unable or cease to supply components or licenses at current levels,
the Company may not be able to obtain these items from another source
or at historical prices. Consequently, the Company would be unable to
provide products and to service its customers or to generate historical
operating margins, which would negatively impact its business and
operating results.
|
| |  |  | If third parties assert claims that the Companys products or
services infringe on their technology and related intellectual property
rights, whether the claims are made directly against the Company or
against the Companys customers, the Company could incur substantial
costs to defend these claims. If any of these claims is ultimately
successful, a third party could require the Company to pay substantial
damages, discontinue the use and sale of infringing products, expend
significant resources to acquire non-infringing alternatives, and/or
obtain licenses to use the infringed intellectual property rights.
Moreover, where the claims are asserted with respect to the Companys
customers, additional expenses may be involved in indemnifying the
customer and/or designing and providing non-infringing products.                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | The Company is exposed to risks related to its international
operations that could increase its costs and hurt its business. The
Companys products are currently sold in more than 75 countries. The
Companys international sales, as a percentage of total Company sales,
were 46% and 43% in fiscal quarters ended November 30, 2003 and 2002,
respectively. International sales are subject to certain risks,
including:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|

| |  |  | fluctuations in currency exchange rates;                                            
| | - |  | ------------------------------------------------------------------------------------
|
| |  |  | the difficulty and expense of maintaining foreign offices and distribution channels;
|
| |  |  | tariffs and other barriers to trade;                                                
|
| |  |  | greater difficulty in protecting and enforcing intellectual property rights;        
|
| |  |  | general economic and political conditions in each country;                          
|
| |  |  | loss of revenue, property and equipment from expropriation;                         
|
| |  |  | import and export licensing requirements; and                                       





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| |  |  | additional expenses and risks inherent in conducting
operations in geographically distant locations, including risks
arising from customers speaking different languages and having
different cultural approaches to the conduct of business.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| |  |  | The Companys inability to properly estimate costs under fixed
price contracts could negatively impact its profitability. Some of the
Companys contracts to develop application software and customized
systems provide for the customer to pay a fixed price for its products
and services regardless of whether the Companys costs to perform under
the contract exceed the amount of the fixed price. If the Company is
unable to estimate accurately the amount of future costs under these
fixed price contracts, or if unforeseen additional costs must be
incurred to perform under these contracts, the Companys ability to
operate profitably under these contracts may be adversely affected. The
Company has realized significant losses under certain customer
contracts in the past and may experience similar significant losses in
the future.                                                                                                               
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Companys inability to meet contracted performance targets
could subject it to significant penalties. Many of the Companys
contracts, particularly for managed services, foreign contracts and
contracts with telecommunication companies, include provisions for the
assessment of liquidated damages for delayed project completion and/or
for the Companys failure to achieve certain minimum service levels.
The Company has had to pay liquidated damages in the past and may have
to pay additional liquidated damages in the future. Any such future
liquidated damages could be significant.                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | Increasing consolidation in the telecommunications and financial
industries could affect the Companys revenues and profitability. The
majority of the Companys significant customers are in the
telecommunications and financial industries, which are undergoing
increasing consolidation as a result of merger and acquisition
activity. This activity involving the Companys significant customers
could decrease the number of customers purchasing the Companys
products and/or delay purchases of the Companys products by customers
that are in the process of reviewing their strategic alternatives in
light of a pending merger or acquisition. If the Company has fewer
customers or its customers delay purchases of the Companys products as
a result of merger and acquisition activity, the Companys revenues and
profitability could decline.                                                                                                           
|
| |  |  | Any failure by the Company to satisfy its registration, listing and
other obligations with respect to the common stock underlying certain
warrants could result in adverse consequences. Subject to certain
exceptions, the Company is required to maintain the effectiveness of
the registration statement that became effective June 27, 2002 covering
the common stock underlying certain warrants to purchase up to 621,304
shares of the Companys common stock at a price of $4.0238 per share
until the earlier of the date the underlying common stock may be resold
pursuant to Rule 144(k) under the Securities Act of 1933 or the date on
which the sale of all the underlying common stock is completed. The
Company is subject to various penalties for failure to meet its
registration obligations and the related stock exchange listing for the
underlying common stock, including cash penalties. The warrants are
also subject to anti-dilution adjustments.
|
| |  |  | The occurrence of force majuere events could impact the Companys
results from operations. The occurrence of one or more of the following
events could potentially cause the Company to incur significant losses:
acts of God, war, riot, embargoes, acts of civil or military
authorities, acts of terrorism or sabotage, shortage of supply or delay
in delivery by the Companys vendors, the spread of SARS or other
diseases, fire, flood, explosion, earthquake, accident, strikes,
radiation, inability to secure transportation, failure of
communications, failure of utilities or similar events.                                                                                                                                                                                                                                                                                                                                                                    

Sales.The Companys total sales for the third quarter and first nine months of
fiscal 2004 were $41.8 million and $121.8 million, respectively, a decrease of
$2.2 million (5.0%) and an increase of $3.8 million (3.2%), respectively, as
compared to the same periods of fiscal 2003. Total system sales decreased $1.6
million (6.9%) for the third quarter of fiscal 2004 as compared to the same
period of fiscal 2003, while service sales decreased $0.6 million (2.7%) for
the same time frames. For the nine month period ended





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##### Table of Contents



November 30, 2003, total system sales decreased $2.5 million (4.0%) as compared
to the same period of fiscal 2003, while services sales increased $6.3 million
(11.5%) for the same time frames. Services sales during the third quarter and
first nine months of fiscal 2004 included $1.1 million and $5.1 million,
respectively, relating to services performed for an international managed
services customer for which the Company recognizes revenue on a cash basis.
Revenues from this customer during the three and nine months ended November 30,
2002 totaled $2.9 million.

The Company operates as a single, integrated business unit. The Companys
chief operating decision maker assesses performance and allocates resources on
an enterprise wide basis. The Companys product line includes IVR/portal
systems, messaging systems, payment systems, maintenance and related services,
and managed services provided for customers on an outsourced or application
service provider basis. In prior years, the Company has identified its sales of
systems and related services as being sales to the Enterprise and Network
markets. Generally, sales of IVR/portal systems and related services were made
to Enterprise customers, while sales of messaging and payment systems were made
to Network customers. Going forward, the Company believes that product line
distinction provides the most meaningful breakdown of quarterly and annual
sales activity. The Company is not able to provide the historical breakdown of
Network system sales into its messaging and payment systems components. The
Companys net sales by product line for the three and nine months ended
November 30, 2003 and 2002 were as follows (in thousands):

|                                                                         |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 
|------------------------------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | ------------ | ------ | ------------ |  | - | ------- |  |  | - | ------- | 
|                                                                         |  | Three Months Ended |        | Nine Months Ended
|                                                                         |  |                    |        |                  
|                                                                         |  | November 30,       |        | November 30,      |  | November 30, |        | November 30,
|                                                                         |  | 2003               |        | 2002              |  | 2003         |        | 2002        
|                                                                         |  |                    |        |                   |  |              |        |             
|IVR/portal system sales
(Enterprise system sales in fiscal 2003)         |  | $                  | 12,633 |                   |  | $            | 13,079 |              |  | $ | 39,978  |  |  | $ | 36,646  | 
|Messaging system sales (included in
Network system sales in fiscal 2003) |  |                    | 2,811  |                   |  |              |       |              |  |   | 5,954   |  |  |   |        | 
|Payment system sales (included in Network
system sales in fiscal 2003)   |  |                    | 6,590  |                   |  |              |       |              |  |   | 14,757  |  |  |   |        | 
|Network system sales                                                     |  |                    |       |                   |  |              | 10,600 |              |  |   |        |  |  |   | 26,573  | 
|                                                                         |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Total system sales                                                       |  |                    | 22,034 |                   |  |              | 23,679 |              |  |   | 60,689  |  |  |   | 63,219  | 
|                                                                         |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Maintenance and related services sales                                   |  |                    | 13,878 |                   |  |              | 12,873 |              |  |   | 41,748  |  |  |   | 37,630  | 
|Managed service sales                                                    |  |                    | 5,848  |                   |  |              | 7,398  |              |  |   | 19,331  |  |  |   | 17,130  | 
|                                                                         |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Total services sales                                                     |  |                    | 19,726 |                   |  |              | 20,271 |              |  |   | 61,079  |  |  |   | 54,760  | 
|                                                                         |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Total Company sales                                                      |  | $                  | 41,760 |                   |  | $            | 43,950 |              |  | $ | 121,768 |  |  | $ | 117,979 | 
|                                                                         |  |                    |        |                   |  |              |        |              |  |   |         |  |  |   |         | 

As identified in the preceding chart, the Companys sale of IVR/portal
systems for the quarter and nine months ended November 30, 2003 decreased $0.4
million (3.4%) and grew $3.3 million (9.1%), respectively, over corresponding
periods for fiscal 2003. The gains for the nine month period were offset by
softness in the sales of messaging and payment systems. The sale of such
systems continues to be affected by the decline in the market for
telecommunication equipment which the Company has experienced over the past two
years. The Company believes that the market for network products may remain
soft through fiscal 2004.

The Company continued to show steady growth compared to fiscal 2003 in the
sale of maintenance and related services with revenues from such services
increasing 7.8% and 10.9% for the quarter and nine months ended November 30,
2003 as compared to corresponding prior year totals. The Companys managed
services sales were down $1.6 million (21.0%) for the quarter ended November
30, 2003 as compared to the corresponding period of fiscal 2003, but up $2.2
million (12.8%) for the first nine months of fiscal 2004 as compared to fiscal
2003. Virtually all of the differences for both the quarter and nine months
were attributable to differences in amount recognized from the cash basis
managed services customer referred to above. The Companys managed services
contract with this customer expired November 30, 2003. The Company has begun
negotiations with its customer regarding a potential extension of the contract,
but the Company cannot guarantee that it will be able to negotiate an extension





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on terms satisfactory to both parties.

Sales to one customer, O2, which has purchased both systems and ASP
managed services from the Company, accounted for approximately 9% and 10% of
the Companys total sales during the quarters ended November 30, 2003 and 2002,
respectively, and for approximately 10% and 11% of the Companys total sales
during the nine month periods ended November 30, 2003 and 2002, respectively.
There were no other customers accounting for 10% or more of the Companys sales
during the three or nine month periods ended November 30, 2003 and 2002.

International sales comprised 46% of the Companys total sales during the
third quarter of fiscal 2004, up slightly from 43% during the third quarter of
fiscal 2003. For the first nine months of fiscal 2004, international sales
comprised 41% of the Companys total sales, down from 43% during the same
period of fiscal 2003. International sales for the three and nine months ended
November 30, 2003 were even with prior year amounts on an absolute dollar
basis.

The Company uses a system combining estimated sales from its service and
support contracts, its backlog of committed systems orders and its pipeline
of systems sales opportunities to estimate sales and trends in its business.
For the quarter ended November 30, 2003 and 2002, sales were sourced as
follows:

|                                                                                   |  |                    |     |      |  |  |     |  
|---------------------------------------------------------------------------------- |  | ------------------ | --- | ---- |  |  | --- | -
|                                                                                   |  | Three Months Ended
|                                                                                   |  | November
30,      
|                                                                                   |  |                   
|                                                                                   |  | 2003               |     | 2002
|                                                                                   |  |                    |     |     
|Sales from service and support contracts,
including contracts for managed services |  |                    | 47  | %    |  |  | 46  | %
|Sales from beginning systems backlog                                               |  |                    | 31  | %    |  |  | 32  | %
|Sales from the quarters pipeline                                                  |  |                    | 22  | %    |  |  | 22  | %
|                                                                                   |  |                    |     |      |  |  |     |  
|                                                                                   |  |                    | 100 | %    |  |  | 100 | %
|                                                                                   |  |                    |     |      |  |  |     |  

The Companys service and support contracts range in original duration
from one month to five years, with most managed service contracts having
initial terms of two to three years and most maintenance and related contracts
having initial terms of one year. Because many of the longer duration contracts
give customers early cancellation privileges, the Company does not consider its
book of services contracts to be reportable backlog, and a portion of the
potential revenue reflected in the contract values may never be realized.
Nevertheless, it is easier for the Company to estimate service and support
sales than to estimate systems sales for the next quarter because the service
and support contracts generally span multiple quarters and revenues recognized
under each contract are generally similar from one quarter to the next.

The Companys backlog is made up of customer orders for systems for which
it has received complete purchase orders and which the Company expects to ship
within twelve months. Backlog as of the end of the Companys last four fiscal
quarters was as follows (in thousands):

|                  |  |         |        | 
|----------------- |  | ------- | ------ | 
|Quarter Ended     |  | Backlog
|                  |  |        
|November 30, 2003 |  | $       | 34,003 | 
|August 31, 2003   |  | $       | 30,072 | 
|May 31, 2003      |  | $       | 29,540 | 
|February 28, 2003 |  | $       | 33,485 | 

Approximately $1.3 million of the increase in backlog for the period ended
November 30, 2003 resulted from a weakening in the foreign exchange rate
between the U.S. dollar and the U.K. pound.

The Companys pipeline of opportunities for systems sales is the
aggregation of its sales opportunities, with each opportunity evaluated for the
date the potential customer will make a purchase decision, competitive risks,
and the potential amount of any resulting sale. No matter how promising a
pipeline opportunity may appear, there is no assurance it will ever result in a
sale. While this pipeline may provide





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the Company some sales guidelines in its business planning and budgeting,
pipeline estimates are necessarily speculative and may not consistently
correlate to revenues in a particular quarter or over a longer period of time.
While the Company knows the amount of systems backlog available at the
beginning of a quarter, it must speculate on its pipeline of systems
opportunities for the quarter. The Companys accuracy in estimating total
systems sales for the next fiscal quarter is, therefore, highly dependent upon
its ability to successfully estimate which pipeline opportunities will close
during the quarter.

Special Charges.The Company did not record any special charges during the
quarter ended November 30, 2003. During the quarter ended May 31, 2003, the
Company incurred severance charges of approximately $1.4 million in connection
with a reduction in its workforce affecting 56 positions. Virtually all such
charges were paid during the first two quarters of fiscal 2004. During the
quarter ended August 31, 2003, the Companys chief financial officer resigned
to pursue other opportunities. The Company incurred cash and non-cash charges
totaling approximately $0.5 million and $0.3 million, respectively, during the
second quarter under the terms of a separation agreement executed in connection
with the officers resignation. All cash charges were paid as of August 31,
2003.

The following table summarizes the effect on reported operating results by
financial statement category of all special charges activities for the nine
months ended November 30, 2003 (in thousands).

|                                        |  |         |     |             |  |                |     |       |  |          |       |  |  |   |       | 
|--------------------------------------- |  | ------- | --- | ----------- |  | -------------- | --- | ----- |  | -------- | ----- |  |  | - | ----- | 
|                                        |  |         |     |             |  |                |     |       |  | Selling, |       |  |  |  
|                                        |  | Cost of |     | Research    |  | General        |     |       |  |         
|                                        |  | Goods   |     | and         |  | and            |     |       |  |         
|                                        |  | Sold    |     | Development |  | Administrative |     | Total
|                                        |  |         |     |             |  |                |     |      
|Severance payments and related benefits |  | $       | 562 |             |  | $              | 228 |       |  | $        | 603   |  |  | $ | 1,393 | 
|Separation settlement                   |  |         |    |             |  |                |    |       |  |          | 791   |  |  |   | 791   | 
|                                        |  |         |     |             |  |                |     |       |  |          |       |  |  |   |       | 
|Total                                   |  | $       | 562 |             |  | $              | 228 |       |  | $        | 1,394 |  |  | $ | 2,184 | 
|                                        |  |         |     |             |  |                |     |       |  |          |       |  |  |   |       | 

During the first three quarters of fiscal 2003, the Company took various
actions designed to lower costs and improve operational efficiency. During the
quarter ended May 31, 2002, the Company incurred special charges of
approximately $2.8 million, including $2.4 million for severance payments and
related benefits, and $0.4 million for the closure of its leased facility in
Chicago, Illinois. The severance and related costs were associated with a
workforce reduction affecting 103 employees. During the first quarter of fiscal
2003, the Company also revised its estimates of severance charges originally
recorded in the fourth quarter of fiscal 2002, reducing its accrual for such
charges by $0.2 million.

During the quarter ended August 31, 2002, the Company incurred special
charges of approximately $10.1 million, including $2.8 million for severance
payments and related benefits associated with a workforce reduction affecting
approximately 120 employees, $0.4 million associated with the closing of a
portion of its leased facilities in Manchester, United Kingdom, $2.2 million
for the write down of excess inventories and $4.7 million associated with two
loss contracts. The severance and related costs were associated with the
Companys consolidation of its separate Enterprise and Networks divisions into
a single, unified organizational structure. The downsizing of the leased space
in Manchester followed from the Companys decision to consolidate virtually all
of its manufacturing operations into its Dallas, Texas facilities. The
inventory adjustments reflected the Companys continuing assessment of its
inventory levels in light of short term sales projections, the decision to
eliminate the UK manufacturing operation and the consolidation of the business
units discussed above. The charges for loss contracts reflected the costs
incurred during the quarter on two contracts that are expected to result in net
losses to the Company upon completion. The charges included costs actually
incurred during the quarter as well as an accrual of the amounts by which total
contract costs were expected to exceed total contract revenue.

During the quarter ended November 30, 2002, the Company incurred special
charges of approximately $4.9 million, including $1.2 million for severance
payments and related benefits associated with a workforce reduction affecting
approximately 50 employees, $1.8 million for the write down of excess
inventories and $1.9 million of charges incurred upon the early extinguishment
of the Companys convertible notes. The inventory adjustments reflected the
Companys continuing assessment of its





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inventory levels in light of short term sales projections. The loss on
early extinguishment of debt included $1.4 million in non-cash charges to write
off unamortized debt discount and unamortized debt issuance costs and $0.5
million in prepayment premiums.

The following table summarizes the effect on reported operating results by
financial statement category of all special charges activities for the quarter
and nine months ended November 30, 2002 (in thousands).

|                                        |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 
|--------------------------------------- |  | ------- | ------ | ----------- |  | -------------- | --- | -------- |  | -------- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                        |  |         |        |             |  |                |     |          |  | Selling, |       |  |  |   |       |  |  |  
|                                        |  | Cost of |        | Research    |  | General        |     |          |  |          |       |  |  |  
|                                        |  | Goods   |        | and         |  | and            |     | Other    |  |          |       | 
|                                        |  | Sold    |        | Development |  | Administrative |     | Expenses |  | Total   
|                                        |  |         |        |             |  |                |     |          |  |         
|Quarter ended November 30, 2002         |  |         |        |             |  |                |     |          |  |         
|Severance payments and related benefits |  | $       | 363    |             |  | $              | 25  |          |  | $        | 792   |  |  | $ |      |  |  | $ | 1,180  | 
|Write down of excess inventories        |  |         | 1,840  |             |  |                |    |          |  |          |      |  |  |   |      |  |  |   | 1,840  | 
|Loss on early extinguishment of debt    |  |         |       |             |  |                |    |          |  |          |      |  |  |   | 1,868 |  |  |   | 1,868  | 
|                                        |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 
|Total                                   |  | $       | 2,203  |             |  | $              | 25  |          |  | $        | 792   |  |  | $ | 1,868 |  |  | $ | 4,888  | 
|                                        |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 
|Nine months ended November 30, 2002     |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 
|Severance payments and related benefits |  | $       | 2,305  |             |  | $              | 826 |          |  | $        | 3,083 |  |  | $ |      |  |  | $ | 6,214  | 
|Facility closures                       |  |         | 244    |             |  |                | 125 |          |  |          | 388   |  |  |   |      |  |  |   | 757    | 
|Write down of excess inventories        |  |         | 4,080  |             |  |                |    |          |  |          |      |  |  |   |      |  |  |   | 4,080  | 
|Costs associated with loss contracts    |  |         | 4,672  |             |  |                |    |          |  |          |      |  |  |   |      |  |  |   | 4,672  | 
|Loss on early extinguishment of debt    |  |         |       |             |  |                |    |          |  |          |      |  |  |   | 1,868 |  |  |   | 1,868  | 
|                                        |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 
|Total                                   |  | $       | 11,301 |             |  | $              | 951 |          |  | $        | 3,471 |  |  | $ | 1,868 |  |  | $ | 17,591 | 
|                                        |  |         |        |             |  |                |     |          |  |          |       |  |  |   |       |  |  |   |        | 

Cost of Goods Sold.Cost of goods sold for the third quarter and first nine
months of fiscal 2004 was approximately $19.0 million or 45.4% of sales and
$55.7 million or 45.7% of sales, respectively. This compares to $22.2 million
or 50.5% of sales and $69.7 million or 59.1% of sales for the third quarter and
first nine months of fiscal 2003. As described above, the Company incurred
special charges to cost of goods sold during the first nine months of fiscal
2004 totaling $0.6 million or 0.5% of sales. It incurred special charges to
cost of goods sold totaling $2.2 million or 5.0% of sales during the third
quarter of fiscal 2003 and $11.3 million or 9.6% of sales during the first nine
months of fiscal 2003.

Cost of goods sold on system sales was $12.6 million (57.2%) and $35.1
million (57.8%) for the third quarter and first nine months of fiscal 2004,
respectively, as compared to $15.5 million (65.4%) and $48.7 million (77.0%)
for the same periods of fiscal 2003. This decrease resulted from the Companys
cost cutting initiatives as well as from differences in the sales channel mix
over the time frames. In addition, the fiscal 2003 Special Charges related to
loss contracts and inventory writedowns, discussed in Special Charges above,
adversely affected systems cost of goods sold in fiscal 2003. Cost of goods
sold on service sales was $6.4 million (32.2%) and $20.6 million (33.7%) for
the third quarter and first nine months of fiscal 2004, respectively, as
compared to $6.7 million (33.2%) and $21.0 million (38.4%) for the same periods
of fiscal 2003. This improvement resulted from a combination of efficiency
gains, as the Company served a larger customer base while holding costs in
fiscal 2004 to fiscal 2003 levels, and the effect on the calculation of the
differences in cash basis managed services revenue recognized during the third
quarter and first nine months of fiscal 2004 and fiscal 2003.

Research and Development Expenses.Research and development expenses during the
third quarter and first nine months of fiscal 2004 were approximately $3.7
million, or 8.8% of total Company sales, and $11.3 million, or 9.2% of sales,
respectively. During the third quarter and first nine months of the previous
fiscal year, research and development expenses were $5.0 million, or 11.4% and
$17.5 million or 14.9%, respectively, of the Companys total sales. The Company
incurred R&D charges described above in Special Charges totaling $0.2 million
(0.2%) and $1.0 million (0.8%) during the first nine months of fiscal 2004 and
fiscal 2003, respectively. Expenses were down from fiscal 2003 as a result of
the Companys cost reduction initiatives and the reassignment of certain
resources from R&D to direct customer service activities (cost of goods sold)
in connection with the Companys fiscal 2003 reorganization.





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Research and development expenses include the design of new products and
the enhancement of existing products. The Companys research and development
spending is focused in four key areas. First, software tools are being
developed to aid in the development, deployment and management of customer
applications incorporating speech recognition and text to speech technologies.
Next, hardware and software platforms are being developed which interface with
telephony networks and an enterprises internal data network. Such platforms
are being developed to operate in traditional enterprise networks as well as
newer network environments such as J2EE and Microsofts .NET. Third, voice
browsers based on open standards such as SALT and VoiceXML are being
developed. Voice browsers incorporate speech recognition technologies and
perform the task of formatting a users verbal query into an inquiry that can
be acted upon and/or responded to by an enterprise system. Finally, research
and development activities are focusing on modularization of key hardware and
software elements and the development of packaged applications. This is
increasingly important in a standards-based, open systems architecture as
modularization will allow for interchange of commodity elements to reduce
overall systems cost and for the Companys best of breed and core technology
strengths to be leveraged into new applications and vertical markets.

The Company expects to maintain a strong commitment to research and
development to remain at the forefront of technology development in its
markets, which is essential to the continued improvement of the Companys
position in the industry.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses during the third quarter and first nine months of
fiscal 2004 were approximately $13.6 million, or 32.5% of total Company sales,
and $40.1 million, or 32.9% of sales, respectively. SG&A expenses during the
third quarter and first nine months of fiscal 2003 were $15.8 million or 35.9%
and $51.9 million or 44.0%, respectively, of the Companys total sales. The
Company incurred SG&A charges described above in Special Charges totaling
$0.8 million (1.8%) during the third quarter of fiscal 2003, and $1.4 million
(1.1%) and $3.5 million (2.9%) during the first nine months of fiscal 2004 and
2003, respectively. SG&A expenses have decreased from the same periods last
year primarily as a result of cost control initiatives implemented by the
Company.

Amortization of Acquired Intangible Assets and Cumulative Effect of a Change in
Accounting Principle.Effective March 1, 2002, the Company adopted Statements
of Financial Accounting Standards No. 141, Business Combinations and No. 142,
Goodwill and Other Intangible Assets (the Statements). Statement No. 141
refines the definition of what assets may be considered as separately
identified intangible assets apart from goodwill. Statement No. 142 provides
that goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized, but will be subject to impairment tests on at least an
annual basis.

In adopting the Statements in fiscal 2003, the Company first reclassified
$2.7 million of intangible assets associated with its assembled workforce (net
of related deferred taxes of $1.4 million) to goodwill because such assets did
not meet the new criteria for separate identification. The Company then
allocated its adjusted goodwill balance of $19.2 million to its then existing
Enterprise and Networks divisions and completed the transitional impairment
tests required by Statement No. 142. The fair values of the reporting units
were estimated using a combination of the expected present values of future
cash flows and an assessment of comparable market values. As a result of these
tests, the Company determined that the goodwill associated with its Networks
division was fully impaired, and, accordingly, it recognized a non-cash,
goodwill impairment charge of $15.8 million as the cumulative effect on prior
years of this change in accounting principle. This impairment resulted
primarily from the significant decline in Networks sales and profitability
during the fourth quarter of fiscal 2002 and related reduced forecasts for the
divisions sales and profitability. Effective August 1, 2002, the Company
combined its divisions into a single integrated organizational structure in
order to address changing market demands and global customer requirements.

During the fourth quarter of fiscal 2003, and as described in the
Companys Annual Report on Form 10-K/A for the year ended February 28, 2003,
the Company recognized impairment charges of $16.7 million to reduce the
carrying value of its intangible assets other than goodwill to their fair
value. As a





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result of the reduction in carrying value, amortization expense related to
these assets totaled $0.7 million and $2.1 million for the third quarter and
first nine months of fiscal 2004, down from $1.8 million and $5.3 million for
the third quarter and first nine months fiscal 2003. The estimated amortization
expense for the balance of fiscal 2004 and for each of the next four fiscal
years is as follows (in thousands):

|                                                |  |   |       | 
|----------------------------------------------- |  | - | ----- | 
|Balance of fiscal year ending February 29, 2004 |  | $ | 796   | 
|Fiscal 2005                                     |  | $ | 1,802 | 
|Fiscal 2006                                     |  | $ | 1,237 | 
|Fiscal 2007                                     |  | $ | 1,129 | 
|Fiscal 2008                                     |  | $ | 1,101 | 

Interest Expense.Interest expense was $0.5 million and $1.6 million during the
third quarter and first nine months of fiscal 2004, versus $0.8 million and
$3.8 million for the same periods of fiscal 2003. The reduction relates to two
factors. First, the Companys outstanding debt as of the beginning of fiscal
2004 totaled $19.1 million, a 36% reduction from the $30.0 million balance
outstanding at the beginning of fiscal 2003. Second, the fiscal 2003 expense
included $0.3 million relating to the final amortization of costs under certain
interest rate swap arrangements terminated by the Company during fiscal 2002
and $0.7 million for the write off of debt issuance costs associated with a
term loan and revolving credit agreement retired as part of the Companys
fiscal 2003 debt restructuring activities. There were no such expenses during
the first nine months of fiscal 2004.

Income Taxes (Benefit).For the nine months ended November 30, 2003, the
Company recognized current income tax expense on the pretax income of certain
foreign subsidiaries. The Companys regular taxable income for the nine months
ended November 30, 2003 associated with its U.S. operations, as further
described below, will be offset by net operating losses carried forward from
prior years. The Company, however, has incurred certain alternative minimum tax
expense associated with its U.S. operations for the nine-month period. Because
the Company has provided a valuation reserve against its net operating loss
carryforward benefit in prior years, the Company does not expect and has not
provided any net income tax expense or benefit for the nine months ended
November 30, 2003 related to its U.S. operations other than that associated
with the alternative minimum tax liability.

The Companys U.S. taxable income for fiscal 2003 and projected taxable
income for fiscal 2004 include significant distributions deemed to have been
made to the Company as an U.S. entity from several of its foreign subsidiaries,
including, particularly, its U.K. subsidiary. Such deemed distributions stem
from the existence of intercompany debt owed by the U.S. entity to certain of
its foreign subsidiaries and from the pledging of certain U.K. assets as
collateral for the Companys term loan and revolving credit facility. As a
result of these deemed distributions and other taxable income in fiscal 2003
and fiscal 2004, the Company expects to use virtually all tax net operating
loss carryforwards by the end of fiscal 2004. Under certain circumstances,
future tax expense may reflect benefits from tax credits attributable to
previously paid foreign taxes and benefits from the reversals of previously
provided valuation reserves against deferred tax assets. At this time,
however, there can be no assurance that such benefits will actually be realized
by the Company in future periods.

During the third quarter of fiscal 2004, the Company reached final
settlement with the Internal Revenue Service regarding previously disclosed
audits of its federal income tax returns for its fiscal years 2000 and 2001. In
the settlement, the Company lost the ability to carry back approximately $5.4
million in net operating losses generated in fiscal 2001 and agreed to repay
approximately $2.1 million of refunds previously received from the IRS plus
approximately $0.5 million in accrued interest. The final settlements had been
anticipated in the Companys fiscal 2003 net tax provision and had no material
effect on the tax provision or net income for the three and nine months ended
November 30, 2003. The Company paid all amounts due under the settlement in
December 2003.

During the third quarter of fiscal 2004, the Companys wholly owned
subsidiary, Brite Voice Systems, Inc. (Brite) reached final settlement with
the IRS regarding a disputed Notice of Deficiency relating to Brites August
1999 federal income tax return. As a result of the settlement, the Company
reversed approximately $1.2 million of taxes payable it had accrued in prior
years in response to the IRS challenge.





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During the first quarter of fiscal 2003, United States tax law was amended
to allow companies which incurred net operating losses in 2001 and 2002 to
carry such losses back a maximum of five years instead of the maximum of two
years previously allowed. As a result of this change, the Company used $21.5
million of its then existing net operating loss carryforwards and $0.4 million
of its then existing tax credit carryforwards and recognized a one-time tax
benefit of $7.9 million, of which $2.2 million was recognized as additional
capital associated with previous stock option exercises. Also during the first
quarter of fiscal 2003, and as discussed in Note B, the Company reduced its
deferred tax liabilities by $1.4 million in connection with the
reclassification of its assembled workforce intangible asset to goodwill. As a
result of this reduction in deferred tax liabilities, the Company increased the
valuation allowance associated with its net deferred tax asset by $1.4 million.
During the third quarter of fiscal 2003, the Company became aware of the audit
issues described above associated with its fiscal 2000 and 2001 U.S. tax
returns and recorded a charge of approximately $2.7 million as part of its tax
provision for the quarter.

The effects of these first and third quarter events are included in the
Companys net tax benefit of $0.2 million in the consolidated statement of
operations for the nine months ended November 30, 2002. For the quarter ended
November 30, 2002, the Company recognized a tax expense of approximately $1.2
million on the pretax profit of certain foreign subsidiaries. This tax
provision largely offset a second quarter tax benefit recorded on pretax losses
of those subsidiaries. The Company did not recognize a current benefit
associated with its domestic pretax losses, because it had exhausted its
ability to offset such losses against taxable income of prior years, and the
existence of losses prevented it from concluding that it was more likely than
not that such benefit will be realized.

Income (Loss) from Operations and Net Income (Loss).The Company generated
operating income of $4.9 million and net income of $3.6 million during the
third quarter of fiscal 2004. During the third quarter of fiscal 2003, the
Company generated an operating loss of $0.8 million and a net loss of $7.8
million. For the nine months ended November 30, 2003, the Company generated
operating income of $12.6 million and net income of $8.1 million compared to an
operating loss of $26.5 million, a loss before the cumulative effect of a
change in accounting principle of $32.8 million and a net loss of $48.6 million
for the nine month period ended November 30, 2002. As described above in
Amortization of Acquired Intangible Assets and Cumulative Effect of a Change
in Accounting Principle, the Company recorded a $15.8 million charge during
the first quarter of fiscal 2003 as the cumulative effect on prior years of a
change in accounting principle in connection with its adoption of Statements of
Financial Accounting Standards No. 141 and No. 142. The Companys improved
financial performance for the quarter and nine months ended November 30, 2003
over similar periods for fiscal 2003 reflects the significant reduction in
special charges, which in fiscal 2003 included the Companys extensive
restructuring activities, a reduction in the level of ongoing operating
expenses as a result of such restructuring, a reduction in interest and
amortization expenses as described above, and the growth in the Companys
services revenues in fiscal 2004.

Liquidity and Capital Resources.The Company had approximately $38.6 million in
cash and cash equivalents at November 30, 2003, while borrowings under the
Companys long-term debt facilities totaled $14.6 million. The Companys cash
balances increased $1.6 million during the three months ended November 30,
2003, with operating activities providing $1.7 million of cash, net investing
activities using $1.1 million of cash and financing activities using $1.8
million of cash for the repayment of debt and providing $1.5 million from the
exercise of stock options. The Companys cash balances increased approximately
$1.4 million during the quarter as a result of the effect of exchange rates on
cash.

Operating cash flow for the quarter ended November 30, 2003 was favorably
impacted by the Companys continued profitability in the quarter, including its
collection of $1.1 million from an international managed services customer for
which the Company recognizes revenue on a cash basis, and by its related
continuing focus on operating expense control and balance sheet management. The
Companys days sales outstanding (DSOs) of accounts receivable was 51 days, up
slightly from the August 31, 2003 level of 49 days. Inventories were down $0.3
million from ending second quarter balances and were $0.7 million below ending
fiscal 2003 levels. Operating cash flow for the nine months





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ended November 30, 2003 also benefited from the receipt of $2.2 million in
fiscal 2002 tax refunds relating to the Companys UK subsidiary.

For sales of certain of its more complex, customized systems (generally
ones with a sales price of $0.5 million or more), the Company recognizes
revenue based on a percentage of completion methodology. Unbilled receivables
accrued under this methodology totaled $6.7 million (28% of total net
receivables) at November 30, 2003, up $1.8 million from February 28, 2003. The
Company expects to bill and collect unbilled receivables as of November 30,
2003 within the next twelve months.

While the Company continues to focus on the level of its investment in
accounts receivable, it now generates a significant percentage of its sales,
particularly sales of enhanced telecommunications services systems, outside the
United States. Customers in certain countries are subject to significant
economic and political challenges that affect their cash flow, and many
customers outside the United States are generally accustomed to vendor
financing in the form of extended payment terms. To remain competitive in
markets outside the United States, the Company may offer selected customers
such payment terms. In all cases, however, the Company only recognizes revenue
at such time as its system or service fee is fixed or determinable,
collectibility is probable and all other criteria for revenue recognition have
been met. In some limited cases, this policy may result in the Company
recognizing revenue on a cash basis, limiting revenue recognition on certain
sales of systems and/or services to the actual cash received to date from the
customer, provided that all other revenue recognition criteria have been
satisfied.

During the third quarter of fiscal 2004, the Company reached final
settlement with the Internal Revenue Service regarding previously disclosed
audits of its federal income tax returns for its fiscal years 2000 and 2001. In
the settlement, the Company lost the ability to carry back approximately $5.4
million in net operating losses generated in fiscal 2001 and agreed to repay
approximately $2.1 million of refunds previously received from the IRS plus
approximately $0.5 million in accrued interest. The final settlements had been
anticipated in the Companys fiscal 2003 net tax provision and had no material
effect on the tax provision or net income for the three and nine months ended
November 30, 2003. The Company paid all amounts due under the settlement in
December 2003.

At November 30, 2003, the Company had $14.6 million in outstanding debt,
including $9.5 million under a mortgage loan and $5.1 million under a term note
and related revolving credit facility. The balance of outstanding debt is down
from $19.1 million and $30.0 million at February 28, 2003 and 2002,
respectively. For the quarter ended November 30, 2003, the Company used $0.8
million of cash to make scheduled principal payments under its term loan and
also used $1.0 million to make a discretionary principal payment of a portion
of the term loan. The Company is required to make periodic payments under
these financing agreements and is also subject to significant financial and
operating covenants contained in these debt agreements as further described
below.

Mortgage Loan

Interest on the Companys mortgage loan accrues at the greater of 10.5% or
the prime rate plus 2.0% and is payable monthly. The outstanding principal
under this loan is due in May 2005. The mortgage loan is secured by a first
lien on the Companys Dallas headquarters and contains a covenant requiring the
Company to have at least $5.0 million in net equity at the end of each of its
fiscal quarters beginning with the quarter ending August 31, 2004. The
mortgage loan also contains cross-default provisions with respect to the
Companys term loan and revolving credit agreement, such that a default under
the credit facility which leads to the acceleration of amounts due under the
facility and the enforcement of liens against the mortgaged property also
creates a default under the mortgage loan.

Term Loan and Revolving Credit Agreement

The Companys credit facility agreement provides for an amortizing term
loan of $10.0 million and a revolving credit commitment equal to the lesser of
$25.0 million minus the principal outstanding under the term loan and the
balance of any letters of credit ($19.9 million maximum at November 30, 2003)
or a





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defined borrowing base comprised primarily of eligible U.S. and U.K.
accounts receivable ($1.3 million maximum at November 30, 2003).

The term loan principal is due in equal monthly installments of
approximately $0.3 million through May 2005 with a final payment totaling
approximately $0.1 million due in June 2005. Interest on the term loan is also
payable monthly and accrues at a rate equal to the then prevailing prime rate
of interest plus 2.75% (6.75% as of November 30, 2003).

Any advances under the revolver loan will accrue interest at the prime
rate plus a margin of 0.5% to 1.5%, or at the London Inter-bank Offering Rate
plus a margin of 3% to 4%. The Company may request an advance under the
revolver loan at any time during the term of the revolver agreement so long as
the requested advance does not exceed the then available borrowing base. The
Company has not requested an advance under the revolver as of the date of this
filing. The term loan and the revolving credit agreement expire on August 29,
2005.

Borrowings under the credit facility are secured by first liens on the
Companys personal property and by a subordinated lien on the Companys Dallas
headquarters. The credit facility contains cross-default provisions with
respect to the Companys mortgage loan, such that an event of default under the
mortgage loan which allows the mortgage lender to accelerate the mortgage loan
or terminate the agreement creates a default under the credit facility.

The credit facility contains terms, conditions and representations that
are generally customary for asset-based credit facilities, including
requirements that the Company comply with certain significant financial and
operating covenants. In particular, the Company was required to generate
cumulative earnings before interest, taxes, depreciation and amortization,
EBITDA, (as defined in the credit facilities) of at least $15.0 million for the
12-month period ended November 30, 2003, and is required to generate minimum
cumulative EBITDA of $20 million for the 12-month period ending February 29,
2004, and $25 million for the 12-month periods ending each fiscal quarter
thereafter. The Company is also required to maintain defined levels of actual
and projected service revenues and is prohibited from declaring or paying cash
dividends, incurring additional bank or similar debt in excess of $0.5 million without lender
approval and incurring capital expenditures in excess of $4.0 million for any
fiscal year except in certain circumstances and with the lenders prior
approval. As of November 30, 2003, the Company was in compliance with all
financial and operating covenants.

The Company is considering the refinancing or early retirement of some or
all of the amounts outstanding under its mortgage loan and/or its term loan and
revolving credit agreement. Under its existing agreements, the Company must pay
a 1% prepayment fee in connection with any retirement of amounts outstanding
under its mortgage loan that occur prior to May 30, 2004. The Company may
prepay amounts outstanding under its term loan without penalty, but the Company
is subject to fees of up to $0.5 million should it terminate its revolving
credit facility prior to August 2005. The Company had $0.7 million in
unamortized debt issuance costs included in prepaid expenses and other
noncurrent assets as of November 30, 2003 which it expects to expense over the
term of the related indebtedness. Such costs were primarily associated with
the term loan and revolving credit agreement. The non-cash amortization of such
costs may be accelerated in the event the Company completes a refinancing or
early repayment of its debt. The Company is under no obligation to amend its
debt agreements.

Future Compliance with Covenants

The Company believes its cash reserves and internally generated cash flow
along with any cash availability under its revolver loan will be sufficient to
meet its operating cash requirements for the next twelve months. In order to
meet the increasing EBITDA requirements in its credit agreements as described
above, however, the Company will have to sustain the average operating results
it has achieved for the nine months ended November 30, 2003. To comply with the
minimum cumulative EBITDA covenant for the next twelve months, the Company must
generate EBITDA of at least $0.6 million for the quarter ending February 29,
2004, average EBITDA of at least $5.1 million per quarter for the two-quarter
period ending May 31, 2004, average EBITDA of at least $6.0 million per quarter
for the





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three-quarter period ending August 31, 2004, and average EBITDA of at
least $6.3 million per quarter for the four-quarter period ending November 30, 2004. The
Company generated EBITDA of $6.9 million and $19.4 million for the quarter and
nine months ended November 30, 2003, respectively. A reconciliation of net
income to EBITDA for the quarter and nine months ended November 30, 2003
follows (in thousands):

|                         |                               |   |                   |       |                   |   |        |       | 
|------------------------ | ----------------------------- | - | ----------------- | ----- | ----------------- | - | ------ | ----- | 
|                         |                               |   | Three Months      |       | Nine Months      
|                         |                               |   | Ended             |       | Ended            
|                         |                               |   | November 30, 2003 |       | November
30, 2003
|                         |                               |   |                   |       |                  
|Net income               |                               | $ | 3,588             |       |                   | $ | 8,120  |      
|Add back EBITDA elements |                               |   |                   |       |                   |   |        |      
|                         | Interest                      |   |                   | 507   |                   |   |        | 1,587 | 
|                         | Taxes                         |   |                   | 411   |                   |   |        | 2,527 | 
|                         | Depreciation and amortization |   |                   | 2,368 |                   |   |        | 7,168 | 
|                         |                               |   |                   |       |                   |   |        |      
|EBITDA                   |                               | $ | 6,874             |       |                   | $ | 19,402 |      
|                         |                               |   |                   |       |                   |   |        |      

If the Company is not able to achieve the required EBITDA levels and
maintain compliance with its other various debt covenants, the lenders have all
remedies available to them under the terms of the various loan agreements,
including, without limitation, the ability to declare all debt immediately due
and payable and to enforce security interests. Under such circumstances, the
Companys cash position and liquidity would be severely impacted.

Impact of Inflation

The Company does not expect any significant short-term impact of inflation
on its financial condition. Technological advances should continue to reduce
costs in the computer and communications industries. Further, the Company
presently is not bound by long term fixed price sales contracts. The absence of
such contracts reduces the Companys exposure to inflationary effects.




Item 3 Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risks

The Company invests cash balances in excess of operating requirements in
short-term securities that generally have maturities of 90 days or less. The
carrying value of these securities approximates market value, and there is no
long-term interest rate risk associated with this investment.

At November 30, 2003, the Companys outstanding long-term debt was
comprised of the following (in thousands):

|                                                                                                                                                                                                                                                                                                     |  |                   |        | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | 
|                                                                                                                                                                                                                                                                                                     |  | November 30, 2003
|                                                                                                                                                                                                                                                                                                     |  |                  
|Mortgage loan, bearing interest payable monthly at the greater
of 10.5% or the prime rate plus 2.0%; principal due May 28, 2005                                                                                                                                                                      |  | $                 | 9,500  | 
|Amortizing term loan, principal due in equal monthly installments of
approximately $0.3 million through May 2005 with a final payment totaling
approximately $0.1 million in June 2005; interest payable monthly,
accruing at a rate equal to the prime rate plus 2.75% (6.75% at November
30, 2003) |  |                   | 5,111  | 
|                                                                                                                                                                                                                                                                                                     |  |                   |        | 
|                                                                                                                                                                                                                                                                                                     |  | $                 | 14,611 | 
|                                                                                                                                                                                                                                                                                                     |  |                   |        | 





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##### Table of Contents



The following table provides information about the Companys credit
agreements that are sensitive to changes in interest rates. For the credit
agreements, the table presents cash flows for scheduled principal payments and
related weighted-average interest rates by expected maturity dates.
Weighted-average variable rates are based on rates in effect as of November 30,
2003.

|                                         |  |                        |     |      |  |      |       |   |  |   |        |  
|---------------------------------------- |  | ---------------------- | --- | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                         |  | Fiscal                
|                                         |  |                       
|                                         |  | 2004                   |     | 2005 |  | 2006
|                                         |  |                        |     |      |  |     
|                                         |  | (Dollars in thousands)
|Long-term debt-variable rate U.S         |  | $                      | 834 |      |  | $    | 3,333 |   |  | $ | 10,444 |  
|Projected weighted average
interest rate |  |                        | 9.3 | %    |  |      | 9.7   | % |  |   | 10.4   | %

Foreign Currency Risks

The Company transacts business in certain foreign currencies including,
particularly, the British pound and the Euro. The Companys primary software
application development, research and development and other administrative
activities are conducted from offices in the United States and the United
Kingdom, and its primary manufacturing operations are conducted in the United
States. Virtually all sales arranged through the Companys U.S. offices are
denominated in U.S. dollars, which is the functional and reporting currency of
the U.S. entity. Sales arranged through the Companys U.K. subsidiary are
denominated in various currencies, including the British pound, the U.S. dollar
and the Euro; however, the U.K. subsidiarys functional currency is the British
pound. For the fiscal year ended February 28, 2003, sales originating from the
Companys U.K. subsidiary represented approximately 34% of consolidated sales.
This percentage is expected to remain materially unchanged for fiscal 2004. As
a result of its international operations, the Company is subject to exposure
from adverse movements in certain foreign currency exchange rates. The Company
has not historically used foreign currency options or forward contracts to
hedge its currency exposures because of variability in the timing of cash flows
associated with its larger contracts where payments are tied to the achievement
of project milestones, and it did not have any such hedge instruments in place
at November 30, 2003. Rather, the Company attempts to mitigate its foreign
currency risk by transacting business in the functional currency of each of its
major subsidiaries, thus creating natural hedges by paying expenses incurred in
the local currency in which revenues will be received. For the quarter ended
November 30, 2003, the U.S. dollar weakened against the U.K. pound, falling
from 1.58 U.S. dollars per pound at August 31, 2003 to 1.72 U.S. dollars per
pound at November 30, 2003. As a result of this and other smaller movements in
exchange rates, the Company recognized a pretax foreign currency transaction
loss of approximately $0.6 million and a credit to accumulated other
comprehensive loss of approximately $0.9 million. The Companys cash position
and backlog of system orders increased by $1.4 million and $1.3 million,
respectively, as a result of the movement in exchange rates.

At November 30, 2003, the Company had an intercompany balance payable to
its U.K. subsidiary totaling approximately $32.7 million. The Company considers
such intercompany balance to be a long-term investment, as defined under the
guidance of Statement of Financial Accounting Standards No. 52, Foreign
Currency Translation, and management has no plans within the foreseeable
future to pay amounts owed to its U.K. subsidiary. Accordingly, foreign
exchange fluctuations on the balance are recorded as a component of accumulated
other comprehensive loss in the statement of stockholders equity.

As noted above, the Companys operating results are exposed to changes in
certain exchange rates including, particularly, those between the U.S. dollar,
the British pound and the Euro. When the U.S. dollar strengthens against the
other currencies, the Companys sales are negatively affected upon the
translation of U.K. operating results to the reporting currency. The effect of
these changes on the Companys operating profits varies depending on the level
of British pound denominated expenses and the U.K. subsidiarys overall
profitability. For the fiscal year ended February 28, 2003, the result of a
hypothetical, uniform 10% strengthening in the value of the U.S. dollar
relative to the British pound and the Euro would have been a decrease in sales
of approximately $3.4 million and a reduction in the net loss of approximately
$1.3 million. In addition to the direct effects of changes in exchange rates,
which are a changed dollar value of the resulting sales and/or operating
expenses, changes in exchange rates





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##### Table of Contents



also could affect the volume of sales or the foreign currency sales price
as competitors products become more or less attractive. The Companys
sensitivity analysis of the effects of changes in foreign currency exchange
rates does not factor in a potential change in sales levels or local currency
prices.




Item 4 Controls and Procedures

The Companys chief executive officer and chief financial officer have
reviewed and evaluated the effectiveness of the Companys disclosure controls
and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934) as of November 30, 2003. Based on
that review and evaluation, which included inquiries made to certain other
employees of the Company, the chief executive officer and chief financial
officer have concluded that the Companys current disclosure controls and
procedures, as designed and implemented, are reasonably adequate to ensure that
they are provided with material information relating to the Company required to
be disclosed in the reports the Company files or submits under the Securities
Exchange Act of 1934. There has been no change in the Companys internal
control over financial reporting identified in connection with that evaluation
that occurred during the Companys most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.





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##### Table of Contents






PART II. OTHER INFORMATION




Item 1 Legal Proceedings

David Barrie, et al., on Behalf of Themselves and All Others Similarly
Situated v. InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, originally filed
in the United States District Court, Northern District of Texas, Dallas
Division:

Several related class action lawsuits were filed in the United States
District Court for the Northern District of Texas on behalf of purchasers of
common stock of the Company during the period from October 12, 1999 through
June 6, 2000 (the Class Period). Plaintiffs filed claims, which were
consolidated into one proceeding, under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Securities and Exchange Commission Rule
10b-5 against the Company as well as certain named current and former officers
and directors of the Company on behalf of the alleged class members. In the
complaint, Plaintiffs claimed that the Company and the named current and former
officers and directors issued false and misleading statements during the Class
Period concerning the financial condition of the Company, the results of the
Companys merger with Brite and the alleged future business projections of the
Company. Plaintiffs asserted that these alleged statements resulted in
artificially inflated stock prices.

The Company believes that it and its officers and directors complied with
their obligations under the securities laws, and vigorously defended the
lawsuit. The Company responded to the complaint by filing a motion to dismiss
the complaint in the consolidated proceeding. The Company asserted that the
complaint lacked the degree of specificity and factual support to meet the
pleading standards applicable to federal securities litigation. On this basis,
the Company requested that the United States District Court for the Northern
District of Texas dismiss the complaint in its entirety. Plaintiffs responded
to the Companys request for dismissal. On August 8, 2002, the Court entered an
order granting the Companys motion to dismiss the class action lawsuit. In the
order dismissing the lawsuit, the Court granted plaintiffs an opportunity to
reinstate the lawsuit by filing an amended complaint.

Plaintiffs filed an amended class action complaint on September 23, 2002.
The Company filed a motion to dismiss the amended complaint, and plaintiffs
filed a response in opposition to the Companys motion to dismiss. On September
15, 2003, the Court granted the Companys motion to dismiss the amended class
action complaint. Unlike the Courts prior order dismissing the original class
action complaint, the order dismissing the amended complaint did not grant
plaintiffs an opportunity to reinstate the lawsuit by filing a new amended
complaint. On October 9, 2003, the Plaintiffs filed a notice of appeal to the
Fifth Circuit Court of Appeals from the trial courts order of dismissal
entered on September 15, 2003. The plaintiffs brief is due on or before
February 23, 2004.





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Item 6 Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------

| |  |  |      |  |  |                                                                                                              
| |  |  | ---- |  |  | -------------------------------------------------------------------------------------------------------------
| |  |  | 31.1 |  |  | Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1)
| |  |  |      |  |  |                                                                                                              
| |  |  | 31.2 |  |  | Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1)
| |  |  |      |  |  |                                                                                                              
| |  |  | 32.1 |  |  | Certification by Chief Executive Officer of Periodic Report
Pursuant to 18 U.S.C. Section 1350. (1)          
| |  |  |      |  |  |                                                                                                              
| |  |  | 32.2 |  |  | Certification by Chief Financial Officer of Periodic Report
Pursuant to 18 U.S.C. Section 1350. (1)          



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



| | 1. |  | A report on Form 8-K was filed on September 11, 2003 to
announce estimated revenues for the quarter ended August 31, 2003.                            
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | A report on Form 8-K was filed on September 18, 2003 to
announce the granting of a motion to dismiss all claims in the
amended class action complaint.
|
| | 3. |  | A report on Form 8-K was filed on October 1, 2003 to announce
the Companys second quarter fiscal 2004 earnings release.                              



---

|(1) |  | Filed herewith.
|--- |  | ---------------





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##### Table of Contents






SIGNATURES

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

|                       |  |                           
|---------------------- |  | --------------------------
|                       |  | INTERVOICE, INC.          
|                       |  |                           
|Date: January 14, 2004 |  | By: /s/ MARK C. FALKENBERG
|                       |  |                           
|                       |  | Mark C. Falkenberg        
|                       |  | Chief Accounting Officer  





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INDEX TO EXHIBITS

|         |  |                                                                                                              
|-------- |  | -------------------------------------------------------------------------------------------------------------
|EXHIBITS |  |                                                                                                              
|NO.      |  | DESCRIPTION                                                                                                  
|         |  |                                                                                                              
|31.1     |  | Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1)
|         |  |                                                                                                              
|31.2     |  | Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1)
|         |  |                                                                                                              
|32.1     |  | Certification by Chief Executive Officer of Periodic Report
Pursuant to 18 U.S.C. Section 1350. (1)          
|         |  |                                                                                                              
|32.2     |  | Certification by Chief Financial Officer of Periodic Report
Pursuant to 18 U.S.C. Section 1350. (1)          



---

|(1) |  | Filed herewith.
|--- |  | ---------------