<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One)

[x]  ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1996
                                                         OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from __________________ to ___________________

                           Commission File No. 0-18323
                               SYNTELLECT INC.(R)
             (Exact name of Registrant as specified in its charter)

          DELAWARE                                        86-0486871
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization)

         1000 Holcomb Woods Parkway, Suite 410A, Roswell, Georgia 30076
               (Address of principal executive office)        (Zip Code)
                                 (770) 587-0700
              (Registrant's telephone number, including area code)
        Securities Registered Pursuant to Section 12(b) of the Act: NONE
           Securities Registered Pursuant to Section 12(g) of the Act:

       Title or Class                       Name of exchange on which registered
Common Stock, $.01 par value                    NASDAQ National Market System

         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 if disclosure of delinquent filer pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

         At March 21, 1997, the aggregate market value of common stock held by
non-affiliates of the Registrant was $38,024,035.
              APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
         Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ] Not applicable

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)
         Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
        13,310,443 shares of Common Stock outstanding on March 21, 1997.

                       DOCUMENTS INCORPORATED BY REFERENCE
         Materials from the Registrant's Proxy Statement relating to its 1997
Annual Meeting of Shareholders (the "Proxy Statement") have been incorporated by
reference into Part III, Items 10, 11, 12 and 13.
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                                TABLE OF CONTENTS

                                                                            PAGE

PART I

         ITEM 1.  BUSINESS                                                    3

         ITEM 2.  PROPERTIES                                                 12

         ITEM 3.  LEGAL PROCEEDINGS                                          12

         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS                                                    12


PART II

         ITEM 5.  MARKET FOR THE  REGISTRANT'S COMMON EQUITY
                  AND RELATED STOCKHOLDER MATTERS                            13

         ITEM 6.  SELECTED FINANCIAL DATA                                    13

         ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS              14

         ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                19

         ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                  ON ACCOUNTING AND FINANCIAL DISCLOSURE                     44


PART III

         ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT         44

         ITEM 11. EXECUTIVE COMPENSATION                                     44

         ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                  OWNERS AND MANAGEMENT                                      44

         ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS             44


PART IV

         ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
                  REPORTS ON FORM 8-K                                        45

SIGNATURES                                                                   49

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PART I


                                ITEM 1 - BUSINESS


GENERAL

         Syntellect Inc. ( together with its subsidiaries, collectively referred
to as "Syntellect" or the "Company") develops, markets and integrates voice and
call processing systems and application software solutions worldwide. The
Company offers a diversified product line which includes both inbound voice
processing and outbound predictive dialer products, a worldwide distribution
network, and a vertical market focus on the financial services, media,
telecommunications and healthcare industries. Syntellect also provides an
interactive transaction-based service bureau for those customers who prefer to
outsource their voice processing applications, including cable and satellite
pay-per-view orders and employee benefits enrollment. The Company has installed
over 13,000 systems at more than 3,000 companies in 55 countries. Syntellect
currently employs more than 400 people, and in addition to its primary office
facilities in Atlanta and Phoenix, maintains nine sales offices in the United
States and one each in London and Munich.

         This report on Form 10-K may contain "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. These statements
include without limitation, certain statements contained in Part I, Item 1 -
"Business" under the captions "Historical Development of the Company", "Industry
and Market Background", "Products and Services", "Sales, Marketing, Service &
Support", "Product Development", "Manufacturing and Suppliers", "Backlog", and
"Proprietary Rights and Intellectual Property"; Part I, Item 3 - "Legal
Proceedings"; Part II, Item 5, "Market for the Registrant's Common Equity and
Related Stockholder Matters"; and Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations". 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. Also see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of important factors that could
affect the validity of any such forward-looking statements.

HISTORICAL DEVELOPMENT OF THE COMPANY

         Founded in 1984, Syntellect was an early pioneer in the interactive
voice response ("IVR") industry, and by 1995 had become the fourth largest
provider of IVR solutions in North America, and the largest IVR provider in
Europe. Virtually all of the Company's growth during this period was
attributable to its proprietary IVR systems (Infobot and Premier). In the early
1990's, the IVR industry experienced a major shift in product demand as the
market began to move from proprietary hardware and software applications to
advanced, open architecture products that offered increased functionality and a
wider range of options for self service - everything from telephones using
speech recognition, personal computers and the Internet, to faxes, pagers and
mobile phones. In 1993, Syntellect introduced its first open architecture
product, the VocalPoint IVR, and announced the phase out of it proprietary
lines.

         During 1995, Syntellect initiated a search within the voice processing
industry for a strategic partner relationship that could potentially provide
complementary product offerings, wider distribution channels and operating
synergies. This search culminated on March 14, 1996 with Syntellect's
acquisition of Pinnacle Investment Associates Inc. ("Pinnacle") in a transaction
that was accounted for as a pooling of interests. Pinnacle subsequently was
merged into its wholly owned subsidiary, Telecorp Systems, Inc. ("Telecorp").
Telecorp develops and distributes inbound and outbound call center systems
worldwide, primarily in the cable television, newspaper and healthcare
industries, and operates a transaction-based service bureau designed primarily
to process pay-per-view orders for the cable television industry.

         The merger provided the combined company with several distinct
marketing advantages including: (i) a more diversified product line which
includes both inbound voice processing technology and outbound predictive dialer
products; (ii) a larger sales force and distribution network together with
improved access and cross-selling opportunities in new vertical markets; and
(iii) the combination of recurring revenue from Syntellect's transaction-based
service bureau and Telecorp's Home Ticket(TM) pay-per-view service, with the
automated processing capacity

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of what the Company believes is one of the world's largest outsourced
transaction centers. In addition, the merger provided the combined company with
greater financial resources and access to a new management team with substantial
expertise in the voice processing industry. Pinnacle's Chairman and Chief
Executive Officer, J. Lawrence Bradner, and President, Steve G. Nussrallah, were
appointed to the positions of Chairman and Chief Executive Officer and
President, Chief Operating Officer and a director, respectively, of Syntellect
upon consummation of the merger. David C. Phillips, Pinnacle's Executive Vice
President - Finance and Operations, assumed the position of Syntellect's
Corporate Vice President - Operations. Jack R. Kelly, Jr., a prior Pinnacle
director, was elected to serve as a director of Syntellect in accordance with
the terms of the merger. W. Scott Coleman, Syntellect's Vice President of
Product Development was promoted to Senior Vice President and General Manager -
Call Center Systems. Neal L. Miller, Syntellect's Corporate Vice President,
Chief Financial Officer, Secretary and Treasurer, and Lindsay L. Hoopes,
Syntellect's Vice President - Controller and Assistant Secretary, remained in
their positions following the merger.


INDUSTRY AND MARKET BACKGROUND

         EVOLUTION OF THE CALL CENTER. Traditionally, consumers obtained data or
services from organizations such as banks or insurance companies, by phoning a
customer service representative or agent who then used a terminal linked to a
computer to process the data or service request. While these "call centers"
enabled a company to provide a personal touch with its customers, they also
created clearly defined inefficiencies and disadvantages as the underlying
business experienced growth including: (i) the high cost of maintaining a large
pool of agents to answer calls and provide service, (ii) the practical limits on
the amount of information and level of service that could be given to individual
callers, and (iii) the increased potential for service delays and agent error as
call volume increases or substantially varies with the time of day. As a result,
organizations have increasingly turned to various methods of automation to
process these calls, and in so doing, have redefined the role of their call
centers and expanded the definition of a "call" from a person-to-person voice
transaction to a range of transactions involving voice, data and workflow
automation. Call centers have become "customer interaction centers," linking
multiple sites and geographically-dispersed resources through wide area
networks, corporate intranets, extranets, and the Internet.

           In recent years, automated teller machines and well-implemented IVR
applications have proven that customers want the convenience of "anytime,
anywhere, anyway" customer service. The personal touch of agent-supported
services is certainly a requirement, but equally important is a company's
ability to provide its customers with automated self-service 24 hours a day, 7
days a week, over the telephone, the Internet, or any other media they may
choose. Automated self-service has become a major business requirement as
companies realize that this type of fast, friendly and cost efficient service
offers distinct competitive advantages. Automated self-service eliminates hold
times, provides increased accuracy in transaction processing, and allows for
expanded service offerings. Automated self-service applications can effectively
handle up to 60 percent of most interactive customer transactions. Many issues
still require the assistance of a customer service agent; however, technology
has helped to automate the agent's interaction with the customer through the use
of solutions such as computer telephony integration ("CTI") which integrates the
transmission of voice and data in a single telephone call. For example, an
inbound solution may involve a "screen pop" of customer information at the
agent's workstation, and an outbound solution may involve the transfer of
customer information to an agent's terminal in connection with an outbound
calling campaign for telemarketing or collections.

         Industry sources estimate that more than 70 percent of all
business-related transactions are conducted over the telephone network or via
the Internet. The use of IVR systems has allowed businesses to broaden the type
of transactions that can be conducted in this manner. These transactions now
include order entry, package tracking, home banking, customer service, hospital
patient information requests, student registration, catalog sales, benefits
enrollment, dealer locator services, airline schedule information, pay-per-view
ordering and fax-on-demand. As the market continues to evolve, the increased
emphasis on cross-industry applications will require the IVR industry to develop
solutions that will allow data to be accessible from an even wider range of
database systems. This requires multi-vendor networking and application
integration capabilities based on open architecture platforms. Standardization
and interoperability are expected to facilitate the evolution of the IVR
industry's next generation of products.

          MARKET POTENTIAL AND INDUSTRY RANK. DataQuest, a global market
research and consulting firm serving the high-technology and financial
communities, estimates in a recent forecast that the North American CTI market
will grow at a compounded annual rate of 25 percent from 1996 to the year 2000,
with revenue approaching $6.1

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billion by the year 2000. The CTI market is divided into three distinct
segments: formal call centers, typically large workgroups using an automatic
call distributor ("ACD"); informal call centers, smaller workgroups not using an
ACD; and small office/home office products targeted at small businesses and
individual knowledge workers from the office. The Company competes primarily in
the formal call center market with its VocalPoint IVR and predictive dialer
products. DataQuest also reports that there is no dominant industry leader in
the domestic voice processing market, as 50% of the market is shared by
companies which individually control less than a 1% market share. In June 1996,
DataQuest ranked Syntellect sixth in the domestic IVR market in terms of IVR
systems shipped and first in the European market. In addition, DataQuest
estimates that the predictive dialer market is currently growing at an annual
rate of nearly 50 percent.

         COMPETITION. The voice processing industry is highly competitive and
the Company believes that competition will continue to intensify in the future.
The industry is characterized by rapid technological advances, frequent
introductions of new products, options and features, constant improvement in the
performance of IVR products, and downward pressure on prices. Failure to keep
pace with technological advances could adversely affect the Company's
competitive position and results of operations. Syntellect believes that the
principal competitive factors affecting the voice processing industry are price,
functionality, service and reputation in the industry. Although management
believes that the Company competes favorably with respect to these factors,
there can be no assurance that Syntellect can maintain its competitive position
against current and potential competitors.

         Syntellect's principal domestic competitors for IVR products include
Lucent Technologies (AT&T), InterVoice Inc., Periphonics Corporation, Edify,
Brite Voice Systems Inc., and IBM Corporation. The Company's principal domestic
competitors for predictive dialer products are Davox Corporation, EIS
International, Inc., Melita International Corporation and Mosaix, Inc. (formerly
Digital). Internationally, Syntellect's primary competitors include InterVoice
Inc., Telsis, Periphonics and IBM Corporation. Many of the Company's competitors
have more extensive engineering, manufacturing, and marketing capabilities, in
addition to their substantially greater financial, technological and personnel
resources. The Company also expects new competitors to enter its markets.


PRODUCTS AND SERVICES

         PRODUCT FOCUS. Syntellect has undergone a significant transition in its
product focus over the past several years in order to meet the changing
requirements of its markets. Historically, the Company was a technology-driven
organization focused on developing proprietary IVR systems. These products were
designed primarily for the formal call system market and required customers to
develop their own application software. With the introduction of the VocalPoint
IVR in 1993, the Company moved to an open architecture platform that allowed for
improved functionality and which integrated industry-standard hardware with
application software developed by the Company. Syntellect expanded its product
focus with the March 1996 acquisition of Pinnacle. With this acquisition, the
Company added an outbound call transaction platform (VocalPoint Predictive
Dialer) and the automated processing capacity of what the Company believes is
one of the world's largest transaction service bureaus. Syntellect is currently
the only company in its industry to offer both inbound and outbound voice
processing platforms, and a transaction-based service bureau for those customers
who prefer to outsource their voice processing applications.

         NEW PRODUCT INTRODUCTIONS. The Company believes it introduced more new
products in 1996 than in any prior year. The new products are designed to add
functionality to existing products, expand the scope of the Company's product
offerings, and provide a framework for integrating the core product lines of
Syntellect and Pinnacle. The new product introductions include the following:

         VocalPoint Interactive Services Transaction Architecture(TM) ("VISTA")
is a client-server architecture which combines the inbound and outbound
VocalPoint product lines with advanced Virtual Access technology to form a
seamless system for processing customer transactions. VISTA utilizes VocalPoint
IVR systems for telephony and data terminal interfaces and VISTA software
servers to offload VocalPoint IVR processing tasks. VISTA is designed to handle
high-volume, mission critical applications of large regional or national call
centers and transaction centers.

         Virtual Access Technology allows callers to access an automated
self-service application using their choice of communication devices.
Telephones, personal computers, personal data assistants, fax machines, pagers
and screen phones can all be used to communicate with Virtual Access
applications.

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         Interactive Communications Management ("ICM") solutions automate the
callflow process in customer service departments by eliminating the need for
agents to ask customers redundant questions, by reducing call duration and by
increasing the ability of agents to solve customer problems. The heart of the
ICM solution is the VocalPoint Interaction Server. This Microsoft NT-based
server tracks, routes and manages customer calls and Web transactions using
rules-based software. VocalPoint Desktop Software then uses CTI to link the
agent's terminal with the VocalPoint Interaction Server to provide customer data
with each phone call transferred to the agent's desk. This functionality is
commonly referred to as a "ScreenPop." The SYNthesizer Graphical Application
Generator is an easy-to-use application development tool designed for
non-programmers. SYNthesizer allows users to develop applications by creating
visual diagrams with "drag-and-drop" icons. This powerful tool provides ICM
users with a simple approach to creating and modifying call center applications.
ICM also makes use of a VocalPoint Fax Server to receive fax requests from
inbound or outbound agents and IVR and Interactive Web Response ("IWR")
applications.

         VocalPoint IWR allows companies to take advantage of the Internet with
self service solutions designed exclusively for the World Wide Web. The
VocalPoint IWR can be voice-enabled for Virtual Access applications accessible
by both Web browsers and phones. The WebCallback(TM) feature allows customers
accessing a Web application to initiate a phone call with an agent, whose
terminal automatically displays a "WebPop" of the same Web page the customer is
viewing. The BankWorks IWR Application is an industry-specific application that
allows banks to offer Internet banking services to their customers.


         INBOUND PRODUCT LINES. The Company's primary inbound product lines are
the VocalPoint IVR, an open architecture IVR platform; the VocalPoint 6000 ARU,
an audio response product for the cable television industry; and the Premier and
Premier 030 proprietary IVR systems.

         VocalPoint IVR is the Company's flagship product which is designed to
meet customer needs for a fully automated system and combines voice processing,
information retrieval, caller interaction and application generation
capabilities. This open architecture platform addresses the mid-to-high end IVR
market, which ranges from 12 to several hundred ports. The VocalPoint IVR system
is built on third-party PC hardware, including Dialogic Corporation's
("Dialogic") industry-standard voice processing cards, and features key software
technology licensed from IBM's CallPath voice processing architecture. By
utilizing off-the-shelf components which leverage the research and development
of the third parties, Syntellect is able to not only price competitively, but
focus its engineering resources on value-added development.

           Syntellect markets an array of features for the VocalPoint IVR
including Speech Recognition which allows callers to use spoken words to answer
program prompts; Text-to-Speech which enables customers to "read" database
information to callers without the need to pre-record voice messages; Voice
Forms which allows callers to verbally "fill-in-the-blanks" of a form; Audio
Text which gives callers access to a range of pre-recorded information such as
locations and hours of service; Voice Messaging which allows callers to leave
voice messages for subsequent retrieval by agents; FaxPoint which allows
customers to maintain a library of information that can be faxed to callers at
any time; and VocalPage which delivers information to users via their
alphanumeric pagers or personal digital assistants. The Company has also
developed a family of industry-specific and cross-industry application packages
that run on the VocalPoint IVR platform. Called ApplicationWorks, these
ready-to-use, comprehensive applications allow organizations to adopt voice
processing capabilities without incurring the expense associated with customized
programming. The Company has developed ApplicationWorks packages for the
banking, mortgage, newspaper and cable television industries, as well as
applications for colleges and universities.


         Syntellect shipped VocalPoint IVR solutions to 58 new customers during
1996. In total, the Company shipped 6,000 lines of VocalPoint IVR product during
1996, compared to 4,500 lines in 1995 and 3,400 lines in 1994. VocalPoint IVR
sales represented 51%, 32% and 28% of the Company's total system sales for
fiscal 1996, 1995 and 1994, respectively, and 30%, 20% and 20%, respectively, of
total revenues during those years. In addition, Syntellect has sold
approximately $3.6 million of ApplicationWorks solutions since their
introduction in 1993.

          VocalPoint 6000 ARU is an audio response unit specifically designed
for the cable television industry. The VocalPoint 6000 ARU provides high
performance call processing, supporting from four to 60 ports in a single

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chassis. The system can interface directly with the public telephone network or
be installed behind a central office switch, a private branch exchange ("PBX")
telephone system, or ACD at the customer site. The VocalPoint 6000 ARU comes
with a complete range of options for cable and satellite television companies
including pay-per-view order processing which presents callers with a list of
available broadcast offerings and processes an order immediately based on the
number dialed; service changes and upgrades which enable subscribers to add or
upgrade to new or premium channel services automatically; account balance
inquiries which gives callers their current account balance and the date the
last payment was posted without operator intervention; converter reauthorization
which gives subscribers and technicians the ability to reauthorize a converter
without waiting for a live operator; and automated attendant which handles
incoming administrative calls in the same manner as a front-desk receptionist.
Syntellect shipped VocalPoint 6000 ARU solutions to 16 new customers during
1996. VocalPoint 6000 ARU sales represented 17%, 8%, and 5% of the Company's
total system sales for 1996, 1995 and 1994, respectively, and 10%, 5% and 4%,
respectively, of total revenues during those years.

         Premier 030 is a proprietary IVR system designed to work in conjunction
with sophisticated ACD or PBX telephone systems, as well as a variety of host
computers. The Premier 030 addresses the need for a powerful IVR system and is
sold as a complete voice processing platform or as an upgrade to certain of the
Company's earlier generations of IVR systems. The voice processing market
continues to move away from proprietary IVR systems. However, many organizations
have been reluctant to make a change due to their prior investment in
development of customized voice processing applications. Based on market
studies, Syntellect anticipates that demand for the Premier 030 product line
will decline significantly in 1997. The Company experienced a significant
decline in sales of this product line to new customers during 1996 as most
Premier 030 sales were add-ons to existing systems in the Company's large
install base. As a result, the Company will no longer devote significant
development resources to this product line; rather, it will actively market a
migration path from the Premier 030 to the VocalPoint IVR while continuing to
provide customer support services and software enhancements to its Premier 030
install base. Premier 030 and other proprietary product line sales represented
19%, 41% and 44% of the Company's total system sales for 1996, 1995 and 1994,
respectively, and 11%, 25% and 31%, respectively, of total revenues during those
years.

         OUTBOUND PRODUCT LINE. The Company's outbound product line is the
VocalPoint Predictive Dialer. The VocalPoint Predictive Dialer is an open
architecture system designed for targeted telemarketing, collections and
customer service applications. The system incorporates the latest in predictive
dialer technology, including call pacing, call screening, call blending, and CTI
links between telecommunication equipment and mainframe databases. The
VocalPoint Predictive Dialer maximizes the number of live contacts reached,
supports on-screen interactive scripts, instantaneously displays contact data
when the call goes through, and provides detailed management statistics and
reports on agent productivity and calling campaign results. The Company shipped
VocalPoint Predictive Dialer solutions to 17 new customers during 1996.
VocalPoint Predictive Dialer sales represented 9%, 12% and 6% of the Company's
total system sales for 1996, 1995 and 1994, respectively, and 5%, 7% and 4%,
respectively, of total revenues during those years.

         SERVICE BUREAU. The Company operates what it believes is one of the
largest outsourced transaction centers in the world through its Syntellect
Interactive Services ("SIS") subsidiary. The SIS Transaction Center
("Transaction Center") as it is known, is a service bureau with nearly 5,000
ports, which offers complete automated transaction outsourcing, system
redundancy, fault-tolerant power protection and disaster recovery services, 24
hours a day, 7 days a week. The Transaction Center is a call center that unlike
most, which are labor intensive, features an automated "lights out" facility.
The Transaction Center handles more than four million telephone calls and
Internet-based inquiries each month for its customers. The Transaction Center is
used for the Company's Home Ticket(TM) pay-per-view service. Home Ticket(TM)
combines the speed and convenience of 800 numbers, the user friendly nature of
IVR technology and real-time connectivity with cable billing host systems to
process orders for over 700 cable and satellite television operators in North
America including TCI, Time Warner, Cox Cable and Comcast. Home Ticket(TM) is
the pay-per-view service utilized by approximately 10 million households in the
United States alone. The Company has added additional features to the Home
Ticket(TM) service, including Hot Spots advertising and promotion messaging,
commercial ordering for hotels and motels, and Call Redirect which transfers an
incoming call to a second destination for enhanced customer service and
retailing options. The service bureau is also designed to handle employee
benefits enrollments and automated dealer inquiries relating to large, one-time
events such as special promotions or customer surveys for companies wishing to
automate and outsource these services. These services which generally became
available in 1995, are typically billed on a transaction-by-transaction basis.
Service bureau revenues represented 17%, 13% and 7% of the Company's total
revenues during 1996, 1995 and 1994, respectively. Home Ticket(TM) is the single
largest

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component of these revenues representing 90%, 85% and 100%, respectively of
total service bureau revenues during those years.


SALES, MARKETING, SERVICE & SUPPORT

         GENERAL. Syntellect provides voice processing solutions to customers in
a variety of industries, including banking, education, insurance, service
providers, transportation, healthcare, media, telecommunications, public
utilities, retailing, government agencies, oil and gas, financial services,
manufacturing and newspaper publishing. Syntellect has installed over
13,000 systems at more than 3,000 companies in 55 countries. Syntellect's
customer base includes eight of the largest domestic banking firms, five of the
ten largest insurance companies, most major domestic cable television providers
and numerous other Fortune 500 companies. There can be no assurance that the
Company's existing customers will continue their current buying patterns or that
changes within those industries will not adversely affect the Company's ability
to retain or attract new customers. Syntellect's products are sold through a
direct sales force and through domestic and international distributors and value
added resellers ("VARs"). The Company currently maintains nine sales offices in
the United States and one each in London and Munich.

         DOMESTIC SALES. Domestic sales including maintenance fees represented
73%, 79% and 76% of the Company's total revenues for 1996, 1995 and 1994,
respectively. During these years no single distributor or customer accounted for
more than 10% of total revenues. Syntellect's distribution network includes 58
channel distribution partners and VARs located throughout the United States and
Canada. More than 90% of the Company's 1996 sales were made by its direct sales
force. A substantial portion of these direct sales are made by a limited number
of sales representatives, the loss of whom could adversely affect future
operating results.

         INTERNATIONAL SALES. International sales including maintenance fees
represented 27%, 21% and 24% of the Company's total revenues for 1996, 1995 and
1994, respectively. For additional information regarding international
operations, see Note 19 of Notes to Consolidated Financial Statements. All of
the Company's product lines and services are sold internationally with the
exception of the service bureau which is currently limited to Canada. The
products have been modified to meet specific power, safety and telecommunication
requirements of the country of destination. The Company currently offers its
products in 30 different languages. Syntellect maintains a direct sales force in
London and Munich, and uses 20 distributors to market its systems in various
countries around the world. The Company supports its European distributors
through the London office. Sales in Canada and the United Kingdom are
denominated in Canadian dollars and pounds sterling, respectively, and are
subject to foreign currency adjustments. Sales in all other foreign countries
are denominated in United States dollars. Syntellect conducts business in
international markets in compliance with each country's applicable laws and
regulations, including safety and telecommunication laws, import duties and
quotas. Syntellect has not experienced any difficulty in obtaining export
licenses for foreign sales from the United States Department of Commerce.

         MARKETING ORGANIZATION AND VERTICAL MARKET FOCUS. Syntellect's
marketing organization is charged with (i) enhancing the Company's corporate
image; (ii) increasing demand for the Company's voice processing products; (iii)
creating market differentiation; and (iv) identifying future development
opportunities for market-driven features. The marketing organization conducts
market and competitive research, participates in industry trade shows and
conferences, creates sales literature and presentations, and maintains
relationships with key industry analysts and media contacts. Syntellect's
strategic marketing plan is focused on four vertical markets - financial
services, media (cable television and newspaper), telecommunications and
healthcare industries. Sales to these markets represented approximately 32%,
41%, 9% and 2%, respectively, of the Company's total revenues for 1996; 42%,
30%, 9% and 2%, respectively, for 1995; and 52%, 20%, 12% and 2%, respectively,
for 1994. Syntellect markets its products to industry leaders within these
vertical markets as management believes the industry leaders have the greatest
need for voice processing products, are most likely to require system expansion
and additional services, and serve as an important source of customer referrals.

         CUSTOMER SUPPORT. Syntellect provides customer support in the areas of
consulting services, project management, systems planning, application
development, installation, scripting and voice file production, database
maintenance services for cable television IVR customers, maintenance and
software support services, a 24 hour-a-day, 7 day-a-week Help Desk, on-site
technical support, remote diagnostics, classroom training and on-site
educational services. These services are generally provided as part of the
initial sale of a system. Syntellect provides warranties on its various product
lines for periods ranging from three months to one year after

                                       8
<PAGE>   9
shipment. After the initial warranty period, hardware and software maintenance
services are available on both a contractual and on-demand time and material
basis. Substantially all of the hardware maintenance and support provided to
domestic customers is performed on-site under contractual arrangements with
independent third party service providers. Internationally, the Company provides
training, service and support services through a combination of its direct
customer support function, third party service providers and distributors.


PRODUCT DEVELOPMENT

         Syntellect believes that its success is dependent upon its ability to
expand the market for its existing products, provide new options and features on
a timely basis, and develop new applications that can be incorporated into
commercially viable voice processing products. The Company believes it
introduced more new products in 1996 than in any prior year; however, there can
be no assurance that these new product lines or features will receive market
acceptance. Further, there can be no assurance that future announcements of new
products will not cause customers to defer purchases of existing products, which
could adversely affect the Company's results of operations.

         Product development consists of hardware specification, hardware
integration, third party software integration, system design and proprietary
software design and coding. All product development is performed by employees
of, and contractors managed by, the Company's research and development
organization. Syntellect performs rigorous testing prior to releasing new
products and features. Nevertheless, products as complex as those produced by
the Company often contain undetected errors, or "bugs" when first released.
These "bugs" are often discovered only after the product has been used by many
different customers and in varying applications. There can be no assurance that
errors will not be discovered in the future, causing delays in product
introductions and shipments or requiring design modifications which could
adversely affect the Company's results of operations.

         Syntellect's product development organization consisted of 73 and 78
individuals at December 31, 1996 and 1995, respectively. In addition, the
Company used a significant number of contracted developers during 1996 to assist
in the Company's development efforts. The Company spent $5.9 million, $4.9
million, and $ 4.9 million for research and development during 1996, 1995 and
1994, respectively.


MANUFACTURING AND SUPPLIERS

         Syntellect's manufacturing operation consists of in-house
configuration, product assembly, product testing and quality control. The
Company obtains hardware components from third parties for its VocalPoint family
of products, including telephony interface and voice recognition boards which
its purchases from Dialogic pursuant to a volume purchase agreement. The
agreement with Dialogic expired December 31, 1996 and the Company is currently
in the negotiation and renewal process. The Company expects to sign a new
agreement with Dialogic. However, should it become necessary or desirable to
secure telephony interface and voice recognition boards from a supplier other
than Dialogic, management believes that such a change could be made with minor
disruption of the business due to the availability of alternative vendors. The
Company has used Varian Tempe Electronics Center ("Varian") to perform printed
circuit board and system assembly and testing related to the Premier 030 product
line. Alternative high quality contract manufacturing suppliers exist, and
because Syntellect owns the engineering and source documentation, test equipment
and test software for the proprietary Premier 030 product line, a shift in
product assembly from Varian or sourcing of components from alternative
suppliers could be accomplished without serious disruption to the business. The
Company does not believe it is dependent on single source suppliers for
components used in any of its primary product lines. Syntellect is currently
able to obtain key components in a timely manner from a variety of sources;
however, any inability to secure alternate suppliers of key components or
alternate assembly sources in a timely manner could adversely affect the
Company's results of operations.

         Sprint Corporation provides telecommunication access and services to
the Transaction Center under a contractual agreement that expires June 30,
1997. The Company believes that terms and conditions of the contract are a
significant contributor to its ability to provide competitive pricing for the
Home Ticket(TM) service and other service bureau applications. Failure to renew
this contract or any significant change in the underlying terms and conditions
could adversely affect the Company's results of operations.

                                       9
<PAGE>   10
BACKLOG

         The Company's backlog at December 31, 1996 and 1995 was approximately
$8.3 million and $6.0 million, respectively. The Company believes that all
orders in backlog at December 31, 1996 are firm and will be delivered within the
next fiscal year. Because the possibility exists for customers to make changes
to their original order, to alter or significantly delay delivery schedules or
to cancel their order, the backlog total as of any particular date may not be
indicative of actual revenues for any future period.


PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY

         Syntellect owns a portfolio of computer telephony patents covering
various aspects of its technologies in the United States and throughout the
world, and has patent applications pending in the United States and in several
foreign countries. Syntellect is also licensed to use certain patents,
technology and other intellectual property rights owned by others, and,
similarly, other companies are licensed to use certain patents, technology and
intellectual rights owned by Syntellect. Syntellect considers its patent
portfolio to be a significant aspect of its technology licensing program. The
patent portfolio includes an extensive group of patents acquired in July 1992 in
connection with its acquisition of Dytel Inc., a manufacturer of equipment for
the voice messaging and call processing industry. Syntellect sold the Dytel
product line in February 1995 to a third party purchaser but retained the rights
to the Dytel patent portfolio. The Company received licensing and royalty fees
of $2.4 million, $1.2 million, and $1.4 million during 1996, 1995 and 1994,
respectively, related to the Dytel patent portfolio. All of the above patents,
patent applications and active patent license agreements will expire or
terminate over time by operation of law, in accordance with their terms or
otherwise. The expiration of such patents, patent applications and active patent
license agreements is not expected to have a material adverse affect on the
Company's financial position or results of operations.

         Syntellect establishes and protects proprietary rights in its products
and technologies through a combination of registered copyrights, trademarks,
service marks, trade secret and patent protection. The Company also enters into
confidentiality agreements with its employees, distributors and customers, and
seeks to limit access to the distribution of its software, documentation and
other proprietary information. Syntellect can provide no assurance that the
steps it has taken to protect its licensing and proprietary rights will be
adequate to deter misappropriation and/or development of its technologies and
products by independent third parties or that third parties will not assert that
Syntellect's products infringe upon the rights of others. The Company believes
that factors such as technological innovation and expertise and market
responsiveness can be as important as the legal protections described above.

         VocalPoint is a registered trademark and Vista (VocalPoint Interactive
Services Transaction Architecture), Home Ticket, Interactive Web Response,
and WebCallback are trademarks of Syntellect. All other products mentioned in
this Form 10-K are trademarks or registered trademarks of their respective
companies.

         Syntellect's strategic move from proprietary hardware platforms to
integration of its application software with industry-standard hardware, has
resulted in an increased reliance on licensed technology obtained from third
parties for use in the Company's products. The Company contracted with IBM in
1993 to obtain IBM's personal computer-based voice processing software
technology, including the key components of the CallPath architecture. Pursuant
to the terms of the licensing agreement, Syntellect obtained a worldwide
nonexclusive license to develop and sell a version, under the Company's name, of
IBM's voice processing software that runs on personal computers using IBM's OS/2
operating system. The agreement also provides the Company with the rights to all
future IBM basic and major enhancements to the software, including IBM's
language packages for foreign markets. IBM is obligated to provide backup
maintenance support for the software it provides under the agreement. The
agreement expires in June 2002, subject to certain early termination provisions.
In accordance with its obligations under the agreement, Syntellect prepaid
royalties of $1 million in June 1994 and $3 million in December 1994. As of
December 31, 1996, the Company had utilized all of the prepaid royalties and had
accrued $791,000 in additional royalty payments due IBM. The technology licensed
under the IBM agreement is the foundation of the VocalPoint family of products
and related ApplicationWorks packages. The termination or loss of this agreement
or IBM's failure to perform its obligations thereunder would adversely affect
the Company's results of operations. Upon certain events of default by IBM,
Syntellect has the right to purchase the source code currently licensed under
the agreement for $4 million.

                                       10
<PAGE>   11
EMPLOYEES

         At December 31, 1996, Syntellect employed 385 on a full-time basis: 49
in sales, 24 in marketing, 117 in customer support, 31 in manufacturing, 73 in
product development, 41 in the service bureau operation, and 50 in
administration. The Company's success depends on a number of technical
employees. Competition for highly skilled people with extensive experience in
systems and applications software and advanced electronics is intense.
Syntellect's inability to retain these employees could severely impact the
Company's ability to conduct its business. The Company has never had a work
stoppage and none of its employees are represented by a labor organization.

EXECUTIVE OFFICERS OF THE REGISTRANT

         Set forth below is information with respect to the names, ages,
positions and offices held with Syntellect by the Executive Officers as of March
21, 1997.

         J. LAWRENCE BRADNER, 45, became Syntellect's Chairman and Chief
Executive Officer upon completion of the merger with Pinnacle on March 14, 1996.
He had served as Chairman and Chief Executive Officer of Pinnacle and its wholly
owned subsidiary, Telecorp, since their formation in 1991. From 1977 to 1990,
Mr. Bradner was employed by Scientific-Atlanta, Inc. ("Scientific-Atlanta"), a
leading provider of satellite and other telecommunications products based in
Atlanta, Georgia. Mr. Bradner served as President of the Broadband
Communications Business Division of Scientific-Atlanta and as Corporate Vice
President from 1987 to 1990. Mr. Bradner holds a Bachelors Degree, with honors,
in Industrial and Systems Engineering from the Georgia Institute of Technology
and a Master of Business Administration Degree from Harvard Business School.

         STEVE G. NUSSRALLAH, 46, became Syntellect's President and Chief
Operating Officer upon completion of the merger with Pinnacle on March 14, 1996.
He had served as President of Pinnacle and Telecorp since their formation in
1991. From 1984 to 1990, Mr. Nussrallah was employed by Scientific-Atlanta. From
1988 to 1990, Mr. Nussrallah served as Vice President and General Manger of the
Subscriber Business Unit, Scientific-Atlanta's largest single business. Mr.
Nussrallah holds a Bachelors Degree, with honors, in Electrical Engineering from
the University of Cincinnati and a Masters Degree in Electrical Engineering from
the University of Michigan.

         NEAL L. MILLER, 37, has served as Syntellect's Corporate Vice
President, Chief Financial Officer, Secretary and Treasurer since December 1995.
Mr. Miller served as Division Finance Director/Controller for the Communications
Division of Tandem Computers, Inc. from 1993 to 1995. Prior to that, Mr. Miller
served as Vice President and Chief Financial Officer of American Software, Inc.
from 1990 to 1993, and in various finance and sales positions with American
Software from 1984 to 1990. Mr. Miller is a Certified Public Accountant and
holds a Bachelors Degree in Business Administration, with honors, in Accounting
from Georgia State University.

         W. SCOTT COLEMAN, 41, has served as Syntellect's Senior Vice President
and General Manager - Call Center Systems since February 1, 1996. Mr. Coleman,
together with Director Daniel D. Ross, served in Syntellect's Office of the
Chief Executive Officer from November 10, 1995 to March 14, 1996. Prior to that
time, Mr. Coleman served as Syntellect's Vice President of Product Development
from 1993 to 1995. Mr. Coleman has been involved in the voice processing
industry since 1982, serving as Vice President of American Telesystems
Corporation, where he was responsible for product strategy, business development
and product development activities. Mr. Coleman holds a Master of Science Degree
in Electrical Engineering from the Georgia Institute of Technology.

         DAVID C. PHILLIPS, 43, became Syntellect's Corporate Vice President -
Operations upon completion of the merger with Pinnacle on March 14, 1996. He had
served as Executive Vice President - Finance and Operations of Telecorp since
1991. From January 1990 to August 1990, Mr. Phillips was employed by
CableGraphix, Inc., a producer and distributor of cable-specific marketing and
promotional literature for cable subscribers, based in Phoenix, Arizona. From
1979 to 1989, Mr. Phillips was employed in various positions by
Scientific-Atlanta. Mr. Phillips, a Certified Public Accountant, received a
Bachelors Degree in Business Administration from the University of Georgia and a
Masters Degree in Professional Accountancy from Georgia State University.

         LINDSAY L. HOOPES, 39, has served as Syntellect's Vice
President-Controller and Assistant Secretary since December 1995, and as its
Corporate Controller from December 1994 to December 1995. Prior to joining
Syntellect, Mr. Hoopes served as Vice President and Chief Financial Officer of
Advanced Systems Consultants, a franchisee of MicroAge, Inc. from 1993 to 1994.
From 1991 to 1992, Mr. Hoopes served as a Regional Controller of ComputerLand
Corporation, and from 1987 to 1992 as Corporate Controller of DataPhaz, Inc., a
franchisee of

                                       11
<PAGE>   12
ComputerLand. Prior to that time, Mr. Hoopes worked for six years with the Big
Six accounting firms of Arthur Andersen and Touche Ross. Mr. Hoopes is a
Certified Public Accountant and holds a Bachelor of Science Degree in Accounting
from the University of Arizona.

                               ITEM 2 - PROPERTIES

         Syntellect's principal corporate offices are located in 49,100 square
feet of leased space in Roswell, Georgia. This facility is also used for certain
of the Company's sales, customer support, research and development and
production functions. The lease extends through 2001 and provides the Company
with options for an additional 44,000 square feet as it becomes available. In
June 1996, the Company entered into a ten year lease for a new 70,564 square
foot office facility in Phoenix, Arizona. The lease is scheduled to commence in
March 1997 concurrent with the expiration of an existing facility lease which
covered 46,000 square feet. The new facility will provide for expansion and
consolidation of the Company's systems business, and includes space for
Phoenix-based customer support, research and development, marketing, production,
training and administrative functions.

         Syntellect leases a 1,600 square foot facility in Atlanta, Georgia for
its Transaction Center. This facility is used for the Home Ticket(TM)
pay-per-view service and other service bureau applications offered through the
Company's Syntellect Interactive Services subsidiary. The Company also leases
nine sales and support offices in the United States, including a 9,600 square
foot facility in Wood Dale, Illinois, and one each in London and Munich,
Germany. Aggregate monthly rental payments for Syntellect's office facilities
are approximately $115,000.


                           ITEM 3 - LEGAL PROCEEDINGS

         Syntellect has settled a lawsuit filed by the former owners of Telecorp
in the State Court of Fulton County, Georgia in October 1995. The lawsuit
alleged that Telecorp breached certain covenants of consulting and
noncompetition agreements that had been executed in connection with Pinnacle's
acquisition of Telecorp. The Company settled the litigation in November 1996 for
an amount within the accrual that had been established for potential legal
expenses and costs relating to this litigation.

         Syntellect was a defendant in a patent infringement suit filed on May
24, 1996 in the United States District Court for the Southern District of
Florida, Miami Division, Case No. 96-1411-CIV-LENARD, entitled Elk Industries,
Inc. v. Syntellect Inc. The case charges Syntellect with infringement of U.S.
Patent No. 4,124,773 covering an "Audio Storage and Distribution System." The
Company settled this litigation in March 1997 for an amount within the accrual
that had been established for potential legal expenses and costs relating to
this litigation.

         Syntellect is from time to time involved in legal proceedings of a
character normally incident to its business, including complaints filed by the
Company against third parties for potential infringement of its patent
portfolio. The Company is actively pursuing a program to license its patents to
third parties in exchange for a one-time licensing fee and/or recurring royalty
payments. Syntellect is not currently a party to any material pending legal
proceedings other than as described below:

         Syntellect is a defendant in a discrimination suit filed by a former
employee on February 7, 1996 in United States District Court, District of
Arizona, Cause No. CIU 96-359 Phx PGR, entitled Rhonda Arnold v. Syntellect Inc.
The case charges Syntellect with discrimination in compensation and other
conditions of employment. The Company has answered the complaint, denying all
liability, and both parties have begun discovery in the matter.


          ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


         No matters were submitted to a vote of Syntellect's shareholders during
the fourth quarter of 1996.

                                       12
<PAGE>   13
PART II


         ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                               STOCKHOLDER MATTERS


         Syntellect's common stock has been traded in the over-the-counter
market and quoted through The Nasdaq Stock Market ("NASDAQ") since March 29,
1990, under the symbol "SYNL". The following table sets forth the high and low
sale prices of the common stock for the two most recent fiscal years as reported
on NASDAQ.

<TABLE>
<CAPTION>
Year Ended 1996                                      High                  Low
--------------------------------------------------------------------------------
<S>                                                <C>                   <C>
1st Quarter                                        $ 4 7/8               $ 2 7/8
2nd Quarter                                          7 7/8                 4
3rd Quarter                                          6 3/8                 4 3/8
4th Quarter                                          5 7/8                 3 3/4
</TABLE>


<TABLE>
<CAPTION>
Year Ended 1995                                      High                  Low
--------------------------------------------------------------------------------
<S>                                                <C>                   <C>
1st Quarter                                        $ 7 1/8               $ 4 1/4
2nd Quarter                                          6 1/2                 4 3/8
3rd Quarter                                          5 7/8                 3
4th Quarter                                          5                     2 3/4
</TABLE>


         On March 21, 1997, the closing sale price for Syntellect's common stock
was $3 5/8 per share. On such date, there were 248 holders of record of
Syntellect's common stock. This figure does not reflect beneficial ownership of
shares held in nominee names. Syntellect has never declared or paid a cash
dividend on its common stock. Syntellect presently intends to retain earnings
for use in its business and does not anticipate paying cash dividends on its
outstanding shares in the foreseeable future.

         As is frequently the case with stock of high technology companies, the
market price of Syntellect's common stock has been and may continue to be quite
volatile. Factors such as quarterly fluctuations in results of operations,
announcements of technological innovations or the introduction of new products
by Syntellect or its competitors, and macroeconomic conditions in the computer
hardware and software industries generally, may have a significant impact on the
market price of Syntellect's common stock. In addition, if revenue or earnings
in any quarter were to fail to meet expectations of the investment community,
there could be an immediate impact on Syntellect's stock price. Further, the
stock market has from time to time experienced extreme price and volume
fluctuations which have affected the market price for many high technology
companies and which, on occasion, have been unrelated to the operating
performance of those companies. These broad market fluctuations may adversely
affect the market price of Syntellect's common stock.


                        ITEM 6 - SELECTED FINANCIAL DATA


         The following selected consolidated financial data should be read in
conjunction with Syntellect's consolidated financial statements and related
notes and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The selected consolidated
financial data presented below under the captions "Statement of Operations Data"
and "Balance Sheet Data" for, and as of the end of, each of the years in the
five-year period ended December 31, 1996, are derived from the consolidated
financial statements of Syntellect Inc. and subsidiaries. The consolidated
financial statements as of December 31, 1996 and 1995, and for each of the years
in the three-year period ended December 31, 1996, and the report thereon, are
included elsewhere herein.

                                       13
<PAGE>   14
STATEMENT OF OPERATIONS DATA  (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                         Years Ended December 31
                                                         -----------------------
                                           1996        1995        1994      1993        1992
                                           ----        ----        ----      ----        ----
<S>                                      <C>         <C>         <C>       <C>         <C>
Net revenues                             $ 55,305    $ 49,510    $57,396   $ 51,759    $ 47,696
Cost of revenues                           27,783      26,147     28,065     24,142      20,601
                                         --------    --------    -------   --------    --------
         Gross margin                      27,522      23,363     29,331     27,617      27,095

Operating expenses:
         Selling, marketing and
           administrative                  21,383      23,026     19,263     21,506      18,786
         Product development                5,943       4,884      4,893      7,132       6,320
         Depreciation and amortization      3,229       3,079      3,401      3,560       3,030
         Special charge                      --         8,800        879      8,801        --
                                         --------    --------    -------   --------    --------

         Total operating expenses          30,555      39,789     28,436     40,999      28,136
                                         --------    --------    -------   --------    --------

Operating income (loss)                    (3,033)    (16,426)       895    (13,382)     (1,041)
Other income, net                             253         302        297        179         994
                                         --------    --------    -------   --------    --------

Income (loss) before income taxes          (2,780)    (16,124)     1,192    (13,203)        (47)
Income tax expense (benefit)                 --           134         75         80         (72)
                                         --------    --------    -------   --------    --------

Net income (loss)                        $ (2,780)   $(16,258)   $ 1,117   $(13,283)   $     25
                                         ========    ========    =======   ========    ========

Net income (loss) per common share       $  (0.21)   $  (1.24)   $   .08   $  (1.02)   $   --
                                         ========    ========    =======   ========    ========

Shares used in per share calculation       13,256      13,159     13,468     13,026      13,083
                                         ========    ========    =======   ========    ========
</TABLE>


BALANCE SHEET DATA  (in thousands)

<TABLE>
<CAPTION>
                                                         December 31,
                                                         ------------
                                         1996      1995      1994      1993      1992
                                         ----      ----      ----      ----      ----
<S>                                    <C>       <C>       <C>       <C>       <C>
Working capital                        $13,677   $17,443   $31,989   $30,304   $36,631
Total assets                            34,808    39,719    51,395    49,443    58,435
Long-term debt, less current portion       229       175       875       665       920
Shareholders' equity                    22,021    24,176    39,538    38,344    47,028
</TABLE>



    ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS
         (IN THOUSANDS, EXCEPT PERCENTAGES, SHARE AND PER SHARE AMOUNTS)


ACQUISITION OF PINNACLE INVESTMENT ASSOCIATES INC.

         On March 14, 1996, Syntellect completed its acquisition of Pinnacle
Investment Associates Inc. ("Pinnacle") in a transaction accounted for as a
pooling of interests. Pursuant to the terms of the merger, Syntellect issued
4,685,838 shares of common stock and assumed outstanding options belonging to
Pinnacle stockholders for the purchase of an additional 740,848 shares of common
stock at a weighted average exercise price of $1.04 per share. The common stock
issued in this transaction had a total value of $20.5 million based on the fair
market value of the common stock on the date of issuance. Pinnacle subsequently
merged into its wholly owned subsidiary, Telecorp Systems, Inc. ("Telecorp").
Telecorp develops and distributes inbound and outbound call center systems
worldwide, primarily in the cable television, newspaper and health care
industries, and operates a transaction-based service bureau designed primarily
to process pay-per-view orders for the cable television industry. The financial
position and results of operations of Syntellect and Pinnacle for all periods
presented have been restated to give effect to the merger.

         The merger provided the combined company with several distinct
marketing advantages including: (i) a more diversified product line which
includes both inbound voice processing technology and outbound predictive dialer
products; (ii) a larger sales force and distribution network together with
improved access into new vertical markets; (iii) the formation of the Syntellect
Interactive Services, Inc. subsidiary ("SIS") which combined Syntellect's
transaction-based service bureau with the processing capacity of Telecorp's
National Transaction

                                       14
<PAGE>   15
Center (subsequently renamed the SIS Transaction Center). In addition, the
merger provides the combined company with greater financial resources and access
to a new management team with substantial expertise in the voice processing
industry.



RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

NET REVENUES

         Net revenues for 1996 were $55.3 million, an increase of 12% over the
$49.5 million reported for 1995. Net revenues consist of SYSTEM SALES, SERVICE
BUREAU REVENUES and MAINTENANCE AND OTHER SERVICE REVENUES, which represented
57%, 17% and 26% of net revenues, respectively, for 1996 and 61%, 13% and 26% of
net revenues, respectively, for 1995.

         SYSTEM SALES for 1996 were $31.8 million, an increase of $1.7 million,
or 6%, over the $30.1 million reported for 1995. System sales include the
Company's primary inbound product lines, VocalPoint, an open architecture
Interactive Voice Response ("IVR") platform ($16.1 million); the Premier and
Premier 030 proprietary IVR systems ($6.0 million); the VocalPoint System 6000
Audio Response Unit for the cable television industry ($6.0 million); and an
outbound product, the VocalPoint Predictive Dialer ($2.8 million). VocalPoint
IVR sales increased $6.4 million, or 66% between years. Domestic and
international sales of VocalPoint increased $2.4 million, or 36%, and $4.0
million, or 129%, respectively, between the comparable periods. The increase in
international VocalPoint sales resulted primarily from sales to large
telecommunications and cable television customers in the United Kingdom. The
Company experienced a significant shift in its product mix during 1996 as more
than 60% of all system sales orders received were for VocalPoint IVR. The
VocalPoint IVR is a complex solution that requires longer lead times for
delivery than the Company's earlier product offerings. This large shift in
product sales mix, together with the timing and receipt of several large
VocalPoint orders during the final two quarters of 1996, exceeded the Company's
capacity to deliver solutions and recognize revenue. The systems backlog at the
end of 1996 was approximately $8.3 million, one of the largest in Company
history, and included more than $6.3 million in VocalPoint IVR orders. During
1996, the Company also delivered its first ICM solution which uses advanced CTI
technology. The Company recorded sales of $700 related to this new product line
during 1996.

         Sales of the Premier and Premier 030 product lines decreased $1.9
million, or 58%, and $4.4 million, or 49%, respectively, between the comparable
years. Sales of the older Premier lines continue to decrease as these product
lines are in their final phase-out stage. Premier 030 sales decreased $2.2
million in the Company's domestic install base, and by $2.2 million in its
international markets, primarily in the Far East and Latin America. The Company
introduced and actively marketed VocalPoint IVR solutions in these regions
during 1996, and reorganized the management of its international sales operation
to facilitate the transition of its product sales mix in these geographical
areas. The results of these efforts have fallen short of the Company's
expectations, as new VocalPoint IVR sales have not fully replaced the decline in
Premier 030 sales. VocalPoint System 6000 sales increased $3.0 million, or 125%,
between the comparable years. This increase results from a large call center
installation for a cable television customer in the United Kingdom. Sales of the
VocalPoint Predictive Dialer decreased $800, or 22%, between the comparable
years. Domestic orders for the VocalPoint Predictive Dialer declined during 1996
as customers delayed their purchasing decisions pending release of the product's
version 3.0 upgrade, which did not occur until the fourth quarter of 1996. This
decrease was off-set in part by an $800 installation of a VocalPoint Predictive
Dialer for a cable television customer in the United Kingdom. Sales of the
VocalPoint Predictive Dialer were significantly below the Company's plan for
1996. Management is investigating alternatives for increasing its returns in the
predictive dialer market.

         Systems sales were further impacted between the comparable years by a
$1.3 million decrease in sales of the Dytel product line and the System/2000
digital voice system manufactured by the Company's former Syntellect Network
Systems Inc. ("SNS") subsidiary. The Company sold the Dytel product line to a
third party purchaser in February 1995. The SNS subsidiary was sold to an
unrelated value added reseller in April 1996.

         SERVICE BUREAU REVENUES increased $2.8 million, or 43%, between the
comparable years. This increase reflects the continued growth of the Company's
Home Ticket(TM), a pay-per-view service for cable television

                                       15
<PAGE>   16
providers which is offered through the Company's SIS subsidiary. Revenues from
other service bureau applications were flat between the comparable periods as a
result of infrastructure changes and relocation of the Company's Chicago
facility to Atlanta. MAINTENANCE AND OTHER SERVICE REVENUES increased $1.3
million, or 10%, between the comparable years. This increase results from a $1.2
million increase in patent revenue and a $100 increase in maintenance and other
services between periods.

         DOMESTIC AND INTERNATIONAL SALES for 1996 were $40.3 million, or 73%,
and $15.0 million, or 27%, of total revenues, respectively, compared to $39.0
million, or 79%, and $10.5 million, or 21% of total revenues, for 1995. The
international sales figures for 1996 include a $3.0 million VocalPoint System
6000 call center installation and a $800 VocalPoint Predictive Dialer
installation for a cable television customer in the United Kingdom.


GROSS MARGIN

         The gross margin percentage for the year ended December 31, 1996 was
50% of net revenues, as compared with 47% for the year ended December 31, 1995.
Gross margins on SYSTEM SALES improved from 36% to 41% between years as a result
of changes in the Company's sales discounting policies, a reduction in direct
material costs and software licensing fees, and a shift in product mix to higher
margin offerings. System margins also improved with the higher mix of revenue
from direct sales versus distributor channels. Gross margins for the SERVICE
BUREAU decreased from 45% to 40% between years with the Company's decision to
increase spending on infrastructure that will facilitate continued growth of the
Home Ticket(TM) pay-per-view service and other service bureau applications.
Gross margins for MAINTENANCE AND OTHER SERVICE REVENUES increased from 74% to
75% between years. The Company includes those costs directly associated with the
generation of revenue in its computation of gross margin, including direct
labor, application development, travel, maintenance, customer support, supplies
and hardware. Gross margins will fluctuate on a year-to-year basis due to
changes in competitive pressures, sales volume, product mix, variations in the
ratio of domestic versus international sales, or changes in the mix of direct
and indirect sales activity. Accordingly, the gross margins reported for 1996
are not necessarily indicative of the results to be expected for future periods.

OPERATING EXPENSES

         Operating expenses for 1996 were $30.6 million, a decrease of $400, or
1%, from the $31 million reported for 1995, exclusive of an $8.8 million special
charge discussed below. Selling, marketing and administrative expenses decreased
$1.6 million, or 7%, between years. This decrease resulted primarily from
economies of scale related to the integration of the Company's sales function,
and a reduction in administrative salaries and benefit costs. The 1995 totals
also include $700 in direct transaction costs incurred in connection with the
acquisition of Pinnacle. Research and development expenses increased $1.1
million, or 22%, between years. The Company allocated additional resources
during 1996 for the development of market-driven features such as CTI, an
Interactive Web Response platform, and upgrades for the Company's existing
product lines, including version 3.0 of the VocalPoint Predictive Dialer.
Depreciation and amortization expense increased $150, or 5%, between years
primarily due to the Company's purchase of $2.5 million in computer and voice
processing equipment and $2.3 million in other equipment that will be used to
expand the capacity of the Service Bureau.

SPECIAL CHARGE

         Syntellect incurred an $8.8 million special charge to operations during
1995. The special charge is described in detail in the comparison of 1995
operating results to 1994. The special charge includes an allowance for
inventory obsolescence ($5.0 million), a write-down of software and equipment to
be relocated or disposed of ($1.7 million), employee severance for a reduction
in force ($1.2 million), an accounts receivable allowance ($700), and other
charges ($200).

         The allowances for accounts receivable and inventory obsolescence were
utilized during 1996 to write-off specifically identified receivable balances
and inventory disposed of during the year. The reserve for inventory
obsolescence at December 31, 1996 represents management's estimate of the
valuation allowance necessary for inventory not yet disposed of. The software
and equipment charge was utilized during 1996 to write-down the value of
specific assets that were relocated, lost or disposed of. The Company made $741
in severance payments to

                                       16
<PAGE>   17
terminated employees during 1996 in connection with its reduction in force. As
of December 31, 1996, there remained outstanding payments due on severance
transactions relating to 1995 and 1996.


NET INCOME (LOSS)

         Syntellect reported a net loss of $2.8 million, or $(0.21) per share
for 1996, compared to a net loss of $16.3 million, or $(1.24) per share for
1995. Excluding the effects of the special charge, the Company incurred a net
loss for 1995 of $7.5 million, or $(.57) per share.


YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994


NET REVENUES

         Net revenues for 1995 were $49.5 million, a decrease of $7.9 million,
or 14%, from the $57.4 million reported for 1994. Net revenues consist of SYSTEM
SALES, SERVICE BUREAU REVENUES and MAINTENANCE AND OTHER SERVICE REVENUES, which
represented 61%, 13% and 26% of net revenues, respectively for 1995 and 71%, 7%,
and 22%, respectively, for 1994.

         SYSTEMS SALES for 1995 were $30.1 million, a decrease of $10.8 million,
or 26%, from the $40.9 million reported for 1994. System Sales included the
VocalPoint IVR ($9.7 million); the Premier and Premier 030 ($12.3 million); the
VocalPoint System 6000 Audio Response Unit ($3.0 million); and the VocalPoint
Predictive Dialer ($3.6 million). VocalPoint IVR sales decreased $1.6 million,
or 14%, between years. Domestic and international sales of VocalPoint IVR
decreased $1.1 million, or 13%, and $500, or 16%, respectively, between the
comparable periods. Domestic sales of VocalPoint IVR were negatively impacted by
insufficient distribution channels, slower than expected productivity from new
direct sales representatives and channel partners, increased competition, and
the timing of awards of certain major contracts near yearend which delayed the
delivery of product and recognition of revenue. The Company also believes that
domestic sales were negatively impacted during the second half of 1995 by market
uncertainty surrounding the announcement of the pending merger with Pinnacle,
and the departure of several members of senior management. The decrease in
international VocalPoint IVR sales resulted from the temporary dedication of
resources to a major VocalPoint IVR installation in the United Kingdom. This
decrease was off-set in part by the receipt of initial orders for the VocalPoint
IVR product in the Middle East, South Africa and Australia.

         Sales of the Premier and Premier 030 product lines decreased $3.9
million, or 55%, and $1.7 million, or 16%, respectively, between the comparable
years. The Company began to experience part shortages and sharp increases in
component pricing related to the older Premier lines during late 1994 and into
1995, and as a result, the Company announced an official end-of-life for the
Premier lines. Sales of the Premier 030 line declined in all markets due to
technological changes in the IVR market and increased demand for maximum
functionality and durability which are better served by the open architecture
platform utilized in the VocalPoint IVR product. VocalPoint System 6000 sales
increased $100, or 5%, between the comparable years, primarily from sales to
international cable television customers. VocalPoint Predictive Dialer sales
increased $1.4 million, or 60%, between years, the largest portion of which
resulted from sales to customers in the domestic newspaper industry.

         System sales were also impacted between the comparable years by
decreases of $2.1 million and $3.0 million in sales of the Dytel product line
and the System/2000 digital voice system, respectively. The Company sold the
Dytel product line to a third party purchaser in February 1995. Anticipated
System/2000 orders of over $2.0 million did not materialize during 1995 due to
slowdowns and start-up of the related customers' business.

         SERVICE BUREAU REVENUES increased $2.7 million, or 71%, between the
comparable years. Revenues from the Home Ticket(TM) service offered through the
Transaction Center increased $1.7 million, or 46%, between years and the Company
realized $1.0 million in incremental revenue from the transaction-based service
bureau which was launched during 1995. MAINTENANCE AND OTHER SERVICE REVENUES
increased a modest $200, or 1%, between years. This small increase reflects the
migration in the Company's product lines and the resulting cancellation of
maintenance contracts.

         DOMESTIC AND INTERNATIONAL SALES for 1995 were $39.0 million, or 79%,
and $10.5 million, or 21%, of total revenues, respectively, compared to $43.7
million, or 76%, and $13.7 million, or 24%, for 1994.

                                       17
<PAGE>   18
GROSS MARGIN

         The gross margin percentage for the year ended December 31, 1995 was
47% of net revenues, as compared with 51% for the year ended December 31, 1994.
Gross margins on SYSTEM SALES decreased from 44% to 36% between years. This
decrease resulted from the significant overall decline in system sales between
years and the resulting inability of the Company to absorb the fixed costs
allocated to cost of revenues. Gross margins for the SERVICE BUREAU increased
from 36% to 45% between years as result of the $2.7 million, or 71%, increase in
related revenues, particularly the Home Ticket(TM) service. Gross margins for
MAINTENANCE AND OTHER SERVICE REVENUES decreased from 77% to 74% between years
as result of the Company incurring increased service costs without a
corresponding increase in these types of revenues.


OPERATING EXPENSES

         Operating expenses for 1995, exclusive of the $8.8 million special
charge, were $31 million, an increase of $3.4 million, or 12%, over the $27.6
million reported for 1994, exclusive of the $879 special charge discussed below.
The increase between years included $700 in direct transaction costs incurred
during the fourth quarter of 1995 in connection with the acquisition of
Pinnacle. Selling, marketing and administrative expenses increased $3.8 million,
or 20%, between years. This increase resulted from the Company's actions to
increase its domestic sales force, expand the marketing of the VocalPoint
Predictive Dialer, the introduction of the transaction-based service bureau and
expansion of the Transaction Center, a $600 accrual related to pending legal
matters that were subsequently settled during 1996, and $394 in non-cash
compensation expense related to stock options granted to two executive officers
in connection with the negotiation of their employment agreements. Research and
development expenses were comparable between years; however, use of the
underlying funds were reallocated to better focus on the enhancement and
functionality of existing product lines. Depreciation and amortization decreased
between years with the Company's decision to write-down the value of certain
equipment as part of the special charge.


SPECIAL CHARGES

         Syntellect initiated a plan in December 1995 designed to improve its
presence in the IVR market, regain market share, reduce expenses, focus
management and the sales force on the VocalPoint IVR product line and return the
Company to profitability. Syntellect incurred an $8.8 million special charge to
operations during the fourth quarter of 1995 related to the implementation of
this plan.

         The special charge included a $5.0 million increase in allowances for
inventory obsolescence related to (i) proprietary product lines that were
discontinued ($2.4 million); (ii) an adjustment of the net realizable value of
overstocked components for the Premier 030 and System/2000 product lines ($2.4
million); and (iii) a write-down of obsolete components from early versions of
the VocalPoint IVR product line ($200).

         During the second half of 1994, Syntellect began building an
infrastructure to further support the delivery of its whole product solutions
and facilitate future growth opportunities. This anticipated growth did not
materialize during 1995 and, accordingly, the Company began reducing its
infrastructure expenses to a level which was more in line with projected revenue
streams. As part of this plan, Syntellect initiated a reduction in force in late
1995 that affected all areas of the organization. The Company provided a special
charge of $1.2 million during the fourth quarter of 1995 related to this
reduction in force and in accordance with Syntellect's established severance
benefit plan. Concurrent with the reduction in force, the Company incurred a
special charge of $1.7 million to write-down the value of software and equipment
that was relocated or disposed of.

         A special charge of $700 was also incurred during the fourth quarter of
1995 to increase the allowance for doubtful accounts for specific receivables
that were identified in connection with the Company's review of its maintenance
revenue database and to provide specific reserves for potential contractual
penalties relating to European customers.

         The Company also incurred a special charge of $879 during 1994 in
connection with Pinnacle's write-off of intangible assets related to (i)
noncompetition agreements entered into with the former owners of Telecorp and
(ii) certain software dating back to Pinnacle's acquisition of Telecorp.
Management concluded that no remaining

                                       18
<PAGE>   19
value existed with respect to the noncompetition agreements as the threat of
competition had diminished with the former owners' involvement in activities
that were not similar to Telecorp's business. Management also determined that
certain software no longer possessed value due to significant advances in
technology since the acquisition of Telecorp. Accordingly, the value of the
consulting and noncompetition agreements and software were reduced to zero,
resulting in write-offs of $722 and $157, respectively.

NET INCOME (LOSS)

         Syntellect reported a net loss of $16.3 million, or $(1.24) per share
for 1995, compared to net income of $1.1 million, or $0.08 per share for 1994.
Excluding the effects of the 1995 and 1994 special charges, the Company reported
a net loss of $7.5 million, or $(.57) per share for 1995, and net income of $2.0
million, or $0.15 per share, for 1994.


 LIQUIDITY AND CAPITAL RESOURCES

         Syntellect had working capital of $13.7 million at December 31, 1996,
compared with $17.4 million at December 31, 1995. The current ratio at both
these dates was 2.1:1. Cash, cash equivalents and marketable securities at the
end of 1996 totaled $6.2 million , compared with the $9.4 million reported at
the end of 1995. The Company generated a $1.6 million positive cash flow from
operating activities during 1996, reduced its investment in marketable
securities by $3.0 million, received $300 in proceeds from the issuance of
common stock, and added $342 in long-term debt related to a capital lease. Cash
was used during 1996 to make $4.7 million in capital expenditures and $747 in
principal payments on long-term debt. Receivables, net of reserves were $13.7
million at December 31, 1996, a decrease of $1.2 million from the $14.9 million
reported at December 31, 1995. This decrease resulted from the Company's
improved collection efforts which lowered the average collection period for
trade receivables from 143 days at December 31, 1995 to 69 days at December 31,
1996. The allowance for doubtful accounts decreased by $295 between years.
Inventory balances decreased $1.2 million during 1996 as a result of the
Company's improved processing controls and stock reduction plan.

         Syntellect expects that its current cash, cash equivalents and
marketable securities, combined with future cash flows from operating activities
and existing credit facilities, will be sufficient to support the Company's
operations during 1997. The Company negotiated a $2.0 million revolving credit
agreement with a commercial bank during 1996 to replace an existing $500 credit
line. The new credit line, which will be used to provide working capital
financing, is collateralized by accounts receivable and accrues interest at
prime. There were no amounts outstanding on the line of credit at December 31,
1996; however, the Company has reserved $1.1 million of the available balance
for a letter of credit that will be used as a security deposit on a new lease
for a 70,564 square foot facility in Phoenix, Arizona. The new lease covers a
ten-year term and is scheduled to commence in April 1997 at an initial monthly
rate of $61.


              ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Independent Auditors' Reports of KPMG Peat Marwick LLP and Deloitte
and Touche, LLP and the consolidated financial statements of Syntellect as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, follows:

                                       19
<PAGE>   20
                          Independent Auditors' Report



The Board of Directors and Shareholders
Syntellect Inc.:


We have audited the accompanying consolidated balance sheets of Syntellect Inc.
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the 1995 and 1994 consolidated
financial statements of Pinnacle Investments Associates Inc. and subsidiary, a
wholly owned subsidiary, which statements reflect total assets constituting 25
percent and total revenues constituting 32 percent and 21 percent of the
Syntellect Inc. and subsidiaries consolidated totals as of December 31, 1995 and
for each of the years in the two-year period ended December 31, 1995,
respectively. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Pinnacle Investment Associates Inc. and subsidiary, is based solely
on the report of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, as it
relates to 1995 and 1994, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Syntellect Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.





Atlanta, Georgia                                 KPMG Peat Marwick LLP
February  5, 1997

                                       20
<PAGE>   21
                          Independent Auditors' Report



Board of Directors and Stockholders
Pinnacle Investment Associates Inc.:


We have audited the accompanying consolidated balance sheets of Pinnacle
Investment Associates Inc. and subsidiary (the "Company") as of December 31,
1995 and 1994 and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1995
and 1994 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.

As discussed in Note 20, the Company was acquired by Syntellect, Inc. on March
14, 1996 in a transaction that will be accounted for as a pooling of interests.
Pursuant to the terms of the merger, each shareholder of Pinnacle received 1.15
shares of Syntellect, Inc. common stock in exchange for each outstanding share
of Pinnacle common stock.

As discussed in Note 1, in 1994 the Company changed its method of accounting for
short-term investments to conform with Statement of Financial Accounting
Standards No. 115.




February 9, 1996, except as to Note 20               Deloitte & Touche LLP
which is dated as of March 14, 1996

                                       21
<PAGE>   22
                        SYNTELLECT INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 1996 and 1995
                      (in thousands, except share amounts)


<TABLE>
<CAPTION>
                                      Assets                               1996        1995
                                                                           ----        ----

<S>                                                                      <C>         <C>
Current assets:
         Cash and cash equivalents                                       $  4,928    $  5,125
         Marketable securities                                              1,275       4,225
         Receivables, net                                                  13,744      14,881
         Inventories                                                        4,085       5,293
         Prepaid expenses                                                   1,197       2,154
         Deferred contract costs                                            1,006       1,133
                                                                         --------    --------
                  Total current assets                                     26,235      32,811
                                                                         --------    --------

Property and equipment, net                                                 7,676       5,821
Other assets                                                                  897       1,087
                                                                         --------    --------
                                                                         $ 34,808    $ 39,719
                                                                         ========    ========

                       Liabilities and Shareholders' Equity

Current liabilities:
         Accounts payable                                                $  1,302    $  3,660
         Accrued liabilities                                                6,329       7,168
         Customer deposits                                                    699         482
         Deferred revenue                                                   3,940       3,311
         Current portion of long-term debt                                    288         747
                                                                         --------    --------
                  Total current liabilities                                12,558      15,368
                                                                         --------    --------

Long-term debt, less current portion                                          229         175
                                                                         --------    --------
                  Total liabilities                                        12,787      15,543
                                                                         --------    --------

Shareholders' equity:
         Preferred stock, $.01 par value. Authorized 2,500,000 shares;
                  no shares issued or outstanding                            --          --
         Common stock, $.01 par value. Authorized 25,000,000 shares;
                  issued 13,478,127 and 13,381,753, respectively              135         134
         Additional paid-in capital                                        60,545      60,246
         Deferred compensation                                                (52)        (91)
         Accumulated deficit                                              (37,595)    (34,815)
         Foreign currency translation adjustment                              136        (140)
         Net unrealized holding loss on marketable securities                  (7)        (17)
                                                                         --------    --------
                                                                           23,162      25,317
         Treasury stock, at cost, 175,732 shares                           (1,141)     (1,141)
                                                                         --------    --------
                  Total shareholders' equity                               22,021      24,176
                                                                         --------    --------
                                                                         $ 34,808    $ 39,719
                                                                         ========    ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       22
<PAGE>   23
                        SYNTELLECT INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations

                  Years ended December 31, 1996, 1995 and 1994
                    (in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                        1996        1995        1994
                                                        ----        ----        ----
<S>                                                   <C>         <C>         <C>
Net revenues:
         System sales                                 $ 31,811    $ 30,110    $ 40,871
         Service bureau                                  9,284       6,491       3,798
         Maintenance and other services                 14,210      12,909      12,727
                                                      --------    --------    --------
                  Total net revenues                    55,305      49,510      57,396
                                                      --------    --------    --------

Cost of revenues:
         System sales                                   18,645      19,211      22,773
         Service bureau                                  5,560       3,560       2,424
         Maintenance and other services                  3,578       3,376       2,868
                                                      --------    --------    --------
                  Total cost of revenues                27,783      26,147      28,065
                                                      --------    --------    --------

Gross margin                                            27,522      23,363      29,331
                                                      --------    --------    --------

Operating expenses:
         Selling, marketing and administrative          21,383      23,026      19,263
         Research and development                        5,943       4,884       4,893
         Depreciation and amortization                   3,229       3,079       3,401
         Special charge                                   --         8,800         879
                                                      --------    --------    --------
                  Total operating expenses              30,555      39,789      28,436
                                                      --------    --------    --------

                  Operating income (loss)               (3,033)    (16,426)        895
                                                      --------    --------    --------

Other income (expense), net:
         Interest income, net                              341         530         370
         Other expense, net                                (88)       (228)        (73)
                                                      --------    --------    --------
                  Total other income (expense), net        253         302         297
                                                      --------    --------    --------

                  Income (loss) before income taxes     (2,780)    (16,124)      1,192

Income taxes                                              --           134          75
                                                      --------    --------    --------

                  Net income (loss)                   $ (2,780)   $(16,258)   $  1,117
                                                      ========    ========    ========

Net income (loss) per common share                    $  (0.21)   $  (1.24)   $   0.08
                                                      ========    ========    ========

Shares used in per share calculation                    13,256      13,159      13,468
                                                      ========    ========    ========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       23
<PAGE>   24
                        Syntellect Inc. and Subsidiaries
                 Consolidated Statements of Shareholders' Equity
                  Years Ended December 31, 1996, 1995 and 1994
                      (In thousands, except share amounts)


<TABLE>
<CAPTION>
                                                                     Common Stock
                                                                     ------------       Additional
                                                                             $.01 Par     Paid-in     Deferred     Accumulated
                                                                Shares         Value      Capital   Compensation     Deficit
                                                                ------         -----      -------   ------------     -------
<S>                                                           <C>            <C>        <C>         <C>            <C>
Balance at January 1, 1994                                    13,239,561       $133       $59,291       $(55)       $(19,674)
Issuance of common stock upon exercise of stock options            9,396        --             33        --             --
Issuance of common stock under employee stock purchase            40,854        --            108        --             --
  plan
Issuance of stock options below fair value                          --          --             18        (18)           --
Amortization of deferred compensation related to stock              --          --           --           18            --
  options
Net income                                                          --          --           --          --            1,117
Foreign currency translation adjustment                             --          --           --          --             --
Net unrealized holding loss on marketable securities                --          --           --          --             --
                                                              ----------       ----       -------       ----        --------

         Balance at December 31, 1994                         13,289,811        133        59,450        (55)        (18,557)

Issuance of common stock upon exercise of stock options           66,719          1           247        --             --
Issuance of common stock under employee stock purchase            25,223        --             94        --             --
  plan
Issuance of stock options below fair value                          --          --             61        (61)           --
Amortization of deferred compensation related to stock              --          --           --           25            --
  options
Compensation expense related to stock options issued                --          --            394        --             --
  to officers
Net loss                                                            --          --           --          --          (16,258)
Foreign currency translation adjustment                             --          --           --          --             --
Net unrealized holding gain on marketable securities                --          --           --          --             --
                                                              ----------       ----       -------       ----        --------

         Balance at December 31, 1995                         13,381,753        134        60,246        (91)        (34,815)

Issuance of common stock upon exercise of stock options           49,533          1           143        --             --
Issuance of common stock under employee stock purchase            46,841        --            156        --             --
  plan
Amortization of deferred compensation related to stock              --          --           --           39            --
  options
Net loss                                                            --          --           --          --           (2,780)
Foreign currency translation adjustment                             --          --           --          --             --
Net unrealized holding gain on marketable securities                --          --           --          --             --
                                                              ----------       ----       -------       ----        --------

         Balance at December 31, 1996                         13,478,127       $135       $60,545       $(52)       $(37,595)
                                                              ==========       ====       =======       ====        ========
</TABLE>


<TABLE>
<CAPTION>
                                                                             Net
                                                                          Unrealized
                                                             Foreign     Holding Gain
                                                             Currency     (Loss) On                      Total
                                                           Translation    Marketable      Treasury    Shareholders'
                                                            Adjustment    Securities        Stock        Equity
                                                           -----------   ------------     --------    -------------
<S>                                                        <C>           <C>              <C>         <C>
Balance at January 1, 1994                                    $(210)         $--          $(1,141)      $ 38,344
Issuance of common stock upon exercise of stock options        --             --             --               33
Issuance of common stock under employee stock purchase         --             --             --              108
  plan
Issuance of stock options below fair value                     --             --             --             --
Amortization of deferred compensation related to stock         --             --             --               18
  options
Net income                                                     --             --             --            1,117
Foreign currency translation adjustment                          82           --             --               82
Net unrealized holding loss on marketable securities           --             (164)          --             (164)
                                                              -----          -----        -------       --------

         Balance at December 31, 1994                          (128)          (164)        (1,141)        39,538

Issuance of common stock upon exercise of stock options        --             --             --              248
Issuance of common stock under employee stock purchase         --             --             --               94
  plan
Issuance of stock options below fair value                     --             --             --             --
Amortization of deferred compensation related to stock         --             --             --               25
  options
Compensation expense related to stock options issued           --             --             --              394
  to officers
Net loss                                                       --             --             --          (16,258)
Foreign currency translation adjustment                         (12)          --             --              (12)
Net unrealized holding gain on marketable securities           --              147           --              147
                                                              -----          -----        -------       --------

         Balance at December 31, 1995                          (140)           (17)        (1,141)        24,176

Issuance of common stock upon exercise of stock options        --             --             --              144
Issuance of common stock under employee stock purchase         --             --             --              156
  plan
Amortization of deferred compensation related to stock         --             --             --               39
  options
Net loss                                                       --             --             --           (2,780)
Foreign currency translation adjustment                         276           --             --              276
Net unrealized holding gain on marketable securities           --               10           --               10
                                                              -----          -----        -------       --------

         Balance at December 31, 1996                         $ 136          $  (7)       $(1,141)      $ 22,021
                                                              =====          =====        =======       ========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       24
<PAGE>   25
                        SYNTELLECT INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1996, 1995 and 1994
                                 (in thousands)



<TABLE>
<CAPTION>
                                                                           1996        1995       1994
                                                                           ----        ----       ----
<S>                                                                     <C>         <C>         <C>
Cash flows from operating activities:
         Net income (loss)                                              $ (2,780)   $(16,258)   $ 1,117
                                                                        --------    --------    -------
         Adjustments to reconcile net income (loss) to net cash
            provided by (used in) operating activities:
                  Depreciation and amortization                            3,230       3,079      3,401
                  Write-down of software and equipment values               --         1,700       --
                  Provision for doubtful accounts                            480       1,113        922
                  Provision for inventory obsolescence                        36       5,213        336
                  Stock option compensation expense                           39         419         18
                  (Increase) decrease in receivables                       1,235       4,427     (5,811)
                  (Increase) decrease in inventories                         799      (1,578)       894
                  Increase (decrease) in accounts payable                 (2,355)      1,237     (1,809)
                  Increase (decrease) in accrued liabilities              (1,065)      2,078      2,110
                  Change in other assets and liabilities                   1,996       1,578     (2,577)
                                                                        --------    --------    -------
                           Total adjustments                               4,395      19,266     (2,516)
                                                                        --------    --------    -------

                  Net cash provided by (used in) operating activities      1,615       3,008     (1,399)
                                                                        --------    --------    -------

Cash flows from investing activities:
         Purchase of marketable securities                               (11,825)     (1,939)    (2,702)
         Sales of marketable securities                                      851         190      3,388
         Maturities of marketable securities                              13,934       1,776        550
         Purchase of property and equipment                               (4,741)     (3,479)    (2,328)
         Proceeds from sale of property and equipment                        110        --           21
         Purchase of technology and patents                                 --           (19)      (140)
         Proceeds from disposition of SNS subsidiary                          30        --         --
         Proceeds from disposition of Dytel product line                    --            39       --
                                                                        --------    --------    -------

                  Net cash used in investing activities                   (1,641)     (3,432)    (1,211)
                                                                        --------    --------    -------

Cash flows from financing activities:
         Proceeds from sale of common stock                                  300         342        141
         Payments on note payable to bank                                   --          (200)      --
         Principal payments on long-term debt                               (747)       (502)      (341)
                                                                        --------    --------    -------

                  Net cash used in financing activities                     (447)       (360)      (200)
                                                                        --------    --------    -------
</TABLE>

                                       25
<PAGE>   26
                        SYNTELLECT INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1996, 1995 and 1994
                                 (in thousands)



<TABLE>
<CAPTION>
                                                      1996       1995       1994
                                                      ----       ----       ----
<S>                                                 <C>        <C>        <C>
Effect of exchange rates on cash                    $   276    $   (12)   $    82
                                                    -------    -------    -------


Net decrease in cash and cash equivalents              (197)      (796)    (2,728)


Cash and cash equivalents at beginning of year        5,125      5,921      8,649
                                                    -------    -------    -------

Cash and cash equivalents at end of year            $ 4,928    $ 5,125    $ 5,921
                                                    =======    =======    =======

Supplemental disclosure of cash flow information:

         Cash paid for interest                     $    33    $   166    $   160
                                                    =======    =======    =======

         Cash paid for income taxes                 $   276    $   152    $  --
                                                    =======    =======    =======
</TABLE>


NONCASH INVESTING AND FINANCING ACTIVITIES:

         The Company entered into capital lease obligations of $342 during 1996
for a telephone system and $943 during 1994 for a management information system.



          See accompanying notes to consolidated financial statements.

                                       26
<PAGE>   27
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)




(1)      Summary of Significant Accounting Policies

         Nature of Business and Principles of Consolidation

         Syntellect Inc. develops, markets, and integrates voice and information
processing systems and application software worldwide. The Company offers a
diversified product line which includes both inbound voice processing and
outbound predictive dialer products, a worldwide distribution network, and a
vertical market focus on the financial services, media, telecommunications and
healthcare industries. Syntellect also provides an interactive transaction-based
service bureau for those customers who prefer to outsource their voice
processing applications, including cable and satellite pay-per-view orders and
employee benefits enrollment.

         The consolidated financial statements include the accounts of
Syntellect Inc. and its wholly-owned subsidiaries ("Syntellect" or the
"Company"), Pinnacle Investment Associates Inc. ("Pinnacle"), Syntellect Canada
Inc., Syntellect Europe Ltd., Syntellect Deutschland GmbH, Syntellect Technology
Corp. ("STC", formerly Dytel Inc.), and Syntellect Interactive Services, Inc.
("SIS"). The consolidated financial statements also include the accounts of
Syntellect Network Systems, Inc. through March 31, 1996 (See Note 3). All
significant intercompany balances and transactions have been eliminated in
consolidation.

         Use of Estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

         Revenue Recognition

         Syntellect recognizes revenue from sales of systems and services after
a contract has been signed, custom system specifications, where applicable, have
been defined and agreed upon, and the system has been shipped or services
rendered. Revenue from maintenance contracts is deferred and recognized ratably
over the terms of the agreements.

         Cash and Cash Equivalents

         Cash and cash equivalents consist of cash, money market and overnight
deposits with original maturities of three months or less.

                                       27
<PAGE>   28
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)


         Marketable Securities

         Marketable securities are classified as available-for-sale and are
available to support current operations. These securities are stated at
estimated fair value based on market quotes with any net unrealized holding gain
or loss included in the consolidated financial statements as a component of
shareholders' equity until realized.

         Inventories

         Inventories are stated primarily at the lower of weighted average cost
or market.

         Property and Equipment

         Property and equipment are stated at cost less accumulated depreciation
and amortization. Equipment held under capital lease is stated at the lower of
the present value of minimum lease payments or fair value at the inception of
the lease. Property and equipment are depreciated using the straight-line method
over estimated useful lives ranging from three to seven years. Equipment held
under capital lease and leasehold improvements are amortized on the
straight-line method over the shorter of the lease term or the estimated useful
life of the asset.

         The Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121") effective January 1, 1996. SFAS No.
121 requires that long-lived assets and certain identifiable intangibles held
and used by a company be reviewed for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company has determined that SFAS No. 121 did not have a
material impact on its financial statements upon adoption.

         Other Assets

         Other assets consist primarily of patents and purchased technology that
are being amortized over five to fifteen years using the straight-line method.
Syntellect estimates the recoverability of purchased technology by determining
whether the unamortized balance of purchased technology can be recovered over
its remaining life through future product sales. Syntellect accounts for patents
at the lower of amortized cost or net realizable value. On an ongoing basis,
Syntellect reviews the valuation and amortization of its patents. As part of
this review, Syntellect estimates the net realizable value of the patents,
taking into consideration any events and circumstances which might have
diminished their value, and assesses whether the remaining patent balance could
be recovered through expected future net cash flows over the remaining life of
the patents.


         Warranty Expense

         Syntellect generally provides customers with product warranties for
periods ranging from three months to one year after shipment. The Company has
provided a reserve for estimated warranty expense.

                                       28
<PAGE>   29
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)



         Product Development

         Development of new software products and enhancements to existing
software products are expensed as incurred until technological feasibility has
been established. After technological feasibility is established, any additional
costs would be capitalized in accordance with Statement of Financial Accounting
Standards No. 86. Because Syntellect believes its current process for developing
software is essentially completed concurrent with the establishment of
technological feasibility, no costs have been capitalized to date.

         Income Taxes

         Deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred income tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred income tax assets and
liabilities is recognized in income for the period that includes the enactment
date.

         Foreign Currency Translation

         Financial statements of international subsidiaries are translated into
U.S. dollars using the exchange rate at each balance sheet date for assets and
liabilities and an average exchange rate for the revenues and expenses reported
in each fiscal period. Foreign currency translation adjustments are recorded as
a separate component of shareholders' equity.

         Net Income (Loss) Per Common Share

         Net income (loss) per common share is based on the weighted average
number of shares of common stock and dilutive common stock equivalents
outstanding during the year. Dilutive common stock equivalents are computed
using the treasury stock method and consist of stock options. Fully diluted net
income (loss) per common share is not presented since the results of the
computation are anti-dilutive or not significantly different from the net income
(loss) per common share presented.

         Stock-Based Compensation

         Prior to January 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations
("APB No. 25"). As such, compensation expense would be recorded on the date of
grant if the current market price of the underlying stock exceeded the exercise
price. On January 1, 1996 the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
which encourages entities to recognize as expense, over the vesting period, the
fair value of all stock-based awards on the date of grant. Alternatively, SFAS.
No. 123 also allows entities to continue to apply the provisions of APB No. 25
and provide pro forma disclosure of net income (loss) and net income (loss) per
common share for employee stock option grants made in 1995 and future years as
if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB No. 25 and
provide the pro forma disclosures under the provisions of SFAS No. 123 (see Note
16).

                                       29
<PAGE>   30
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)


Reclassifications

         Certain 1995 and 1994 consolidated financial statement balances have
been reclassified to conform to the 1996 presentation.

(2)      Acquisition Of Pinnacle Investment Associates, Inc.

         On March 14, 1996, Syntellect completed its acquisition of Pinnacle in
a transaction accounted for as a pooling of interests. Pursuant to the terms of
the merger, Syntellect issued 4,685,838 shares of common stock and assumed
outstanding options belonging to Pinnacle stockholders for the purchase of an
additional 740,848 shares of common stock at a weighted average exercise price
of $1.04 per share. The common stock issued in this transaction had a total
value of $20.5 million based on the fair market value of the common stock on the
date of issuance. Pinnacle subsequently merged into its wholly owned subsidiary,
Telecorp Systems, Inc. ("Telecorp"). Telecorp develops and distributes inbound
and outbound call center systems worldwide, primarily in the cable television,
newspaper and health care industries, and operates a transaction-based service
bureau designed primarily to process pay-per-view orders for the cable
television industry.

         The consolidated financial statements included herein have been
restated to include the accounts of Pinnacle for all periods presented. The net
revenues of Syntellect and Pinnacle were $6.3 million and $6.6 million, $33.5
million and $16.0 million, and $45.4 million and $12.0 million, for the period
in 1996 prior to the merger and for the years ended December 31, 1995 and 1994,
respectively. The net income (loss) for these same periods was $(2.3) million
and $1.2 million, $(16.6) million and $308 million, and $2.1 million and $(1.0)
million, respectively.


(3)      Disposition of Syntellect Network Systems Inc. Subsidiary and Dytel
         Product Lines

         In April 1996, the Company sold its Syntellect Network Systems Inc.
subsidiary ("SNS") under a stock purchase agreement with an unrelated third
party. Under the agreement, the Company sold all of the issued and outstanding
shares of SNS common stock for $720. The Company received $30 of the sales price
in cash at closing with the remaining $690 to be received in 23 monthly
installments of $30, without interest, beginning May 1996. The completion of
this transaction did not significantly impact the Company's results of
operations for 1996.

         In February 1995, the Company disposed of its Dytel product line in a
sale to a third party purchaser for $176. As consideration, the Company received
cash of $39, a promissory note for $118, and the purchaser assumed $19 in
maintenance contract obligations. The assets, consisting primarily of inventory
and business equipment, were sold at net book value and accordingly, no gain or
loss was recognized on the transaction. Syntellect has retained the rights to
Dytel's extensive patent portfolio.

                                       30
<PAGE>   31
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)




(4)      Marketable Securities

         The Company has classified all marketable securities as
available-for-sale at December 31, 1996 and 1995. The amortized cost, gross
unrealized holding gains and losses and fair value of the available-for-sale
securities by major security type are as follows:

<TABLE>
<CAPTION>
                                                     Gross       Gross
                                                  Unrealized   Unrealized
                                      Amortized    Holding       Holding
                                         Cost       Gains        Losses      Fair Value
                                         ----       -----        ------      ----------
<S>                                   <C>         <C>          <C>           <C>
              1996
              ----

Mortgage-backed securities              $1,282       $--         $   (7)        $1,275
                                        ======       ====        ======         ======

              1995
              ----

U.S. Treasury securities                $  327       $--         $   (2)        $  325
Mortgage-backed securities               3,113        --            (22)         3,091
Corporate income fund investments          802          7          --              809
                                        ------       ----        ------         ------
                                        $4,242       $  7        $  (24)        $4,225
                                        ======       ====        ======         ======
</TABLE>


         All marketable securities held at December 31, 1996 have contractual
maturities of less than one year. Proceeds and gross realized gains from sales
of securities classified as available-for-sale for the years ended December 31,
1996 and 1995 were $851 and $0, and $190 and $29, respectively. For purposes of
determining gross realized gains and losses, the cost of securities sold is
based on specific identification.


(5)      Receivables, Net

                  Receivables consist of the following:

<TABLE>
<CAPTION>
                                                         1996            1995
                                                         ----            ----
<S>                                                    <C>             <C>
Trade receivables                                      $ 14,519        $ 16,157
Other receivables                                           458             252
                                                       --------        --------
                                                         14,977          16,409
Less allowance for doubtful accounts                     (1,233)         (1,528)
                                                       --------        --------
                                                       $ 13,744        $ 14,881
                                                       ========        ========
</TABLE>

                                       31
<PAGE>   32
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)




(6)      Inventories

                  Inventories consist of the following:

<TABLE>
<CAPTION>
                                                           1996          1995
                                                           ----          ----
<S>                                                      <C>           <C>
Finished goods                                           $  3,085      $  5,502
Purchased components                                        2,797         6,870
Repair, warranty and maintenance inventories                2,348         1,946
                                                         --------      --------
                                                            8,230        14,318
Less allowance for obsolescence                            (4,145)       (9,025)
                                                         --------      --------
                                                         $  4,085      $  5,293
                                                         ========      ========
</TABLE>

         Syntellect contracts with a third-party to perform onsite hardware
maintenance for customers in certain geographic areas. Inventories held by
Syntellect for the third-party maintenance program are included in repair,
warranty and maintenance inventories.


(7)      Prepaid Expenses

                  Prepaid expenses consist of the following:

<TABLE>
<CAPTION>
                                                          1996             1995
                                                          ----             ----
<S>                                                      <C>              <C>
Prepaid royalties                                        $ --             $1,282
Deferred income tax asset                                   620              468
Other prepaids                                              577              404
                                                         ------           ------
                                                         $1,197           $2,154
                                                         ======           ======
</TABLE>

         Prepaid royalties at December 31, 1995 represent amounts paid under a
licensing agreement with a third party for technology relating to the Company's
VocalPoint IVR product. The prepaid royalty balance was utilized during 1996 and
as of December 31, 1996, the Company has accrued $791 in royalty expense. (see
Note 12)


(8)      Deferred Contract Costs

         Deferred contract costs represent direct and indirect costs on
contracts for which the related revenue recognition has been deferred. Deferred
contract costs at December 31, 1995 relate to a single contract with a major
cable television customer. The Company received an advance cash payment of $930
in connection with this contract and reported the payment in deferred revenue at
December 31, 1995.

                                       32
<PAGE>   33
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)


(9)      Property and Equipment, net

                  Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                           1996          1995
                                                           ----          ----
<S>                                                      <C>           <C>
Furniture, fixtures and computer equipment               $ 19,256      $ 17,686
Service bureau equipment                                    4,242         1,928
Leasehold improvements                                        994           907
                                                         --------      --------
                                                           24,492        20,521
Less accumulated depreciation and amortization            (16,816)      (14,700)
                                                         --------      --------
                                                         $  7,676      $  5,821
                                                         ========      ========
</TABLE>



(10)     Other Assets

                  Other assets consist of the following:

<TABLE>
<CAPTION>
                                                          1996            1995
                                                          ----            ----
<S>                                                     <C>             <C>
Patents and purchased technology                        $ 1,509         $ 1,509
Other                                                       103              96
                                                        -------         -------
                                                          1,612           1,605
Less accumulated amortization                              (715)           (518)
                                                        -------         -------
                                                        $   897         $ 1,087
                                                        =======         =======
</TABLE>


(11)     Credit Facilities

         The Company negotiated a $2.0 million revolving credit agreement with a
commercial bank during July 1996 to replace an existing $500 line of credit. The
new credit line, which will be used to provide working capital financing, is
collateralized by accounts receivable and accrues interest at prime (8-1/4% at
December 31, 1996). The agreement is renewable annually and requires the Company
to maintain certain operating ratios with respect to working capital and net
worth. There were no amounts outstanding on these lines of credit at December
31, 1996 or 1995; however, the Company has reserved $1.1 million of the
available balance at December 31, 1996 for a letter of credit that will be used
as a security deposit on a new office facility lease (See Note 14).

                                       33
<PAGE>   34
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)


(12)     Accrued Liabilities

                  Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                            1996           1995
                                                            ----           ----
<S>                                                        <C>            <C>
Accrued compensation and benefits                          $2,982         $4,092
Accrued legal and accounting                                  381          1,108
Accrued royalties                                             791           --
Other accrued liabilities                                   2,175          1,968
                                                           ------         ------
                                                           $6,329         $7,168
                                                           ======         ======
</TABLE>

(13)     Deferred Revenue

                  Deferred revenue consists of the following:

<TABLE>
<CAPTION>
                                                          1996             1995
                                                          ----             ----
<S>                                                      <C>              <C>
Maintenance contracts                                    $3,917           $2,381
Deferred systems revenue                                     23              930
                                                         ------           ------
                                                         $3,940           $3,311
                                                         ======           ======
</TABLE>

(14)     Long-Term Debt and Lease Commitments

                  Long-term debt consists of the following:


<TABLE>
<CAPTION>
                                                                1996       1995
                                                                ----       ----
<S>                                                            <C>        <C>
Capital lease obligations with interest ranging
from 9.43% to 10%,  collateralized by equipment                $ 517      $ 501

Subordinated promissory notes with original
balances of $1,405, issued to the former owners of
Telecorp, interest at 10% payable monthly through
January 1996 (see Note 15)                                      --          421
                                                               -----      -----
                                                                 517        922
Less current portion                                            (288)      (747)
                                                               -----      -----
                                                               $ 229      $ 175
                                                               =====      =====
</TABLE>

                  Equipment held under capital lease is included in property and
equipment as follows:

<TABLE>
<CAPTION>
                                                             1996          1995
                                                             ----          ----
<S>                                                        <C>            <C>
Furniture, fixtures and computer equipment                 $ 1,285        $ 943
Less accumulated amortization                                 (828)        (471)
                                                           -------        -----
                                                           $   457        $ 472
                                                           =======        =====
</TABLE>

                                       34
<PAGE>   35
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)


         The Company leases office facilities and various equipment under
noncancellable operating leases that expire at various dates through 2007. In
June 1996, the Company entered into a ten year lease for a new 70,564 square
foot office facility in Phoenix. The lease is scheduled to commence in March
1997 at an initial monthly rate of $61. The Company is required to provide the
lessor with a $1,100 letter of credit as a security deposit until certain net
worth levels are achieved. The letter of credit will be funded from the
revolving credit agreement described in Note 11. Rental expense under operating
leases was $1,392 in 1996, $961 in 1995 and $1,011 in 1994. Future minimum lease
payments under noncancellable operating leases (with minimum or remaining lease
terms in excess of one year) and the present value of future minimum capital
lease payments at December 31, 1996 are as follows:

<TABLE>
<CAPTION>
Year                                      Capital Leases        Operating Leases
----                                      --------------        ----------------
<S>                                       <C>                   <C>
1997                                          $ 336                   $1,401
1998                                            104                    1,429
1999                                             95                    1,371
2000                                             61                    1,376
2001                                             --                    1,159
Thereafter                                       --                    4,356
                                              -----                   ------
Total minimum lease payments                    596                  $11,092
                                                                     =======
Less amounts representing interest              (79)
                                              -----
Net minimum lease payments                    $ 517
                                              =====
</TABLE>


(15)     Litigation

         Syntellect is involved in various legal proceedings and claims arising
in the ordinary course of business. Management believes that the disposition of
these matters will not have a material adverse effect on the Company's financial
position or results of operations.

         In January 1991, Pinnacle acquired substantially all the assets of
Telecorp in a business combination accounted for using the purchase method of
accounting. As part of the acquisition, Pinnacle issued two subordinated
promissory notes aggregating $1,405 to the former owners in exchange for
consulting and noncompetition agreements that extended through December 31,
1995. These agreements required Pinnacle to pay annual performance payments
during the noncompete period based on a percentage of its revenues (as defined
in the agreements). The former owners filed a claim against Pinnacle in November
1995 regarding the calculation of the performance payments and seeking in excess
of $800 in additional payments. Pinnacle recorded a charge to operations during
1995 in the amount of $600 as an estimate of the potential liability that could
be incurred in connection with this matter. Syntellect settled the litigation in
November 1996 for an amount within the accrual that has been established.

(16)     Shareholders' Equity

         Capital Stock

         Syntellect's authorized capital stock consists of 2,500,000 shares of
preferred stock, $.01 par value, and 25,000,000 shares of common stock, $.01 par
value. The preferred stock may be issued in one or more series and is
undesignated as to powers, preferences, rights, limitations or restrictions. No
shares of preferred stock were issued or outstanding at December 31, 1996 or
1995. Syntellect had 13,478,127 and 13,381,753 shares of common stock issued at
December 31, 1996 and 1995, respectively.

                                       35
<PAGE>   36
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)




         Stock Option Plans

         Syntellect maintains various stock option plans for employees,
consultants and non-employee directors as follows:

         Syntellect adopted a stock option plan in 1984 that provides for the
issuance of up to 1,590,000 shares of common stock to employees under incentive
and nonstatutory stock option grants. The plan was amended in July 1994 to
include Syntellect's consultants and advisors as eligible participants.
Incentive stock options may be granted at a price not less than the fair market
value of the common stock at the date of grant. Nonstatutory stock options may
be granted at a price not less than 50% of the fair market value of the common
stock at the date of grant. The options generally become exercisable over a 50
month period commencing at the date of grant and expire in six years. The plan
terminates in September 2004, and as of December 31, 1995, all options under
this plan have been granted.

         Syntellect adopted a long-term incentive plan effective February 1,
1995, as amended, that provides for the issuance of up to 750,000 shares of
common stock to employees, consultants and advisors under incentive stock
options, non-qualified stock options, stock appreciation rights, performance
shares, restricted stock, dividend equivalents and other stock-based awards.
Incentive and non-qualified stock options may be granted at a price not less
than the fair market value of the common stock at the date of grant, generally
become exercisable over a 50 month period commencing at the date of grant, and
expire in six years. In no case shall the term of any option issued under this
plan exceed ten years from the date of grant. The plan terminates in February
2005. On August 8, 1996, the Board of Directors approved an amendment to the
long-term incentive plan, pending shareholder approval, which increased the
number of shares authorized for issuance under the plan from 750,000 to
1,500,000.

         Syntellect adopted a non-employee directors stock option plan in 1990
that provides for the issuance of up to 60,000 shares of common stock to
eligible participants. Options may be granted at a price not less than the fair
market value of the common stock at the date of grant, generally become
exercisable over a 50 month period commencing at the date of grant, and expire
in six years. As of December 31, 1995, all options under this plan have been
granted. The plan terminates in December 1998.

         Syntellect adopted a non-employee director stock plan in 1995 that
provides for the issuance of up to 50,000 shares of common stock to eligible
participants under non-qualified stock option grants. Under the plan,
non-employee directors receive a one time grant to purchase 10,000 shares upon
appointment to the Board of Directors and an annual grant to purchase 2,000
shares from June 1995 through June 1998. Options may be granted at a price not
less than the fair market value at the date of grant, become exercisable over a
50 month period commencing at the date of grant, and expire in six years. The
plan has no scheduled termination date.

         In connection with the acquisition of Pinnacle, Syntellect assumed
outstanding options for the purchase of 740,848 shares of common stock (see Note
2). A portion of these options were granted to certain executive officers in
connection with the negotiation of their employment agreements. These options,
covering 565,702 shares, were granted fully vested and immediately exercisable.
The Company recognized compensation expense of $590 and $394 in 1993 and 1995,
respectively, related to these options and credited the same to paid-in capital.
The remaining options are accounted for as non-compensatory stock options, and
generally become exercisable over a 48 month period commencing at the date of
grant, and expire in 10 years. Unexercised options will be terminated and not
available for future grants in the event an employee holding such options
terminates his employment.

                                       36
<PAGE>   37
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)


         At December 31, 1996, 851,710 options were exercisable under the above
plans at prices ranging from $0.87 to $8.00. A summary of the combined stock
option activity for all plans during the three-year period ended December 31,
1996 is as follows:

<TABLE>
<CAPTION>
                                                               Options Outstanding
                                                               -------------------
                                          Options                             Exercise
                                         available                           price per
                                         for grant          Shares             share
                                         ---------          ------             -----
<S>                                      <C>              <C>              <C>
Balance, January 1, 1994                  149,904           766,892        $ 3.75-15.00
   Granted                               (611,210)          611,210          2.75- 4.38
   Canceled                               577,195          (577,195)         2.75- 8.70
   Exercised                                 --              (9,396)         2.88- 6.50
                                         --------         ---------        ------------
Balance, December 31, 1994                115,889           791,511        $ 2.75-15.00
   Increase in reserved shares            300,000              --                 --
   Expiration of reserved shares         (286,590)             --                 --
   Granted                               (402,000)          402,000          3.63- 6.25
   Canceled                               381,301          (381,301)         2.75- 6.25
   Exercised                                 --             (66,719)         2.75- 5.00
                                         --------         ---------        ------------
Balance, December 31, 1995                108,600           745,491        $ 2.75-15.00
   Assumption of Pinnacle options            --             740,848          0.87- 1.74
   Termination of Pinnacle options           --             (14,551)         0.87- 1.74
   Increase in reserved shares            500,000              --                 --
   Expiration of reserved shares         (277,551)             --                 --
   Granted                               (613,750)          613,750          4.63- 6.75
   Canceled                               345,241          (345,241)         3.00-15.00
   Exercised                                 --             (49,533)         1.74- 6.25
                                         --------         ---------        ------------
Balance, December 31, 1996                 62,540         1,690,764        $ 0.87- 8.00
                                         ========         =========        ============
</TABLE>


         Syntellect canceled and reissued 98,300 options to officers of
Syntellect during the year ended December 31, 1994. The options were reissued at
the fair market value of Syntellect's common stock on the date of issuance
($4.375 per share). As of December 31, 1996, all but 6,000 of these options had
been exercised or canceled.

         Syntellect has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the stock option plans
except in those instances where options were granted fully vested and
immediately exercisable, and when the quoted market price of the Company's stock
at the date of grant exceeded the amount an employee must pay to acquire the
stock. Had compensation cost for Syntellect's 1996 and 1995 stock option grants
been determined based on the fair value at the grant date, as prescribed by the
provisions of SFAS No. 123, the Company's net loss and net loss per common share
would have been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                           1996          1995
                                                           ----          ----
<S>                                                     <C>           <C>
Net loss - as reported                                  $ (2,780)     $ (16,258)
Net loss - pro forma                                    $ (3,723)     $ (16,690)
Net loss per common share - as reported                 $  (0.21)     $   (1.24)
Net loss per common share - pro forma                   $  (0.28)     $   (1.27)
</TABLE>

                                       37
<PAGE>   38
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)


         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:

           Expected dividend yield                                      0%
           Expected stock price volatility                             50%
           Risk-free interest rate                                   5.88%
           Expected life of options                                3 years

         Employee Stock Purchase Plan

         Syntellect has an employee stock purchase plan that provides for the
purchase of up to 400,000 shares of common stock. Under the plan, eligible
participants may purchase common stock semi-annually at the lower of 85% of the
fair market value on either the first day or last day of the offering period,
whichever is lower. During 1996, 11,674 and 35,167 shares were purchased at
$2.87 and $3.51 per share, respectively. During 1995, 12,938 and 12,285 shares
were purchased at $4.57 and $2.87 per share, respectively. During 1994, 40,854
shares were purchased at $2.66 per share. At December 31, 1996, 108,389 shares
of common stock were available for issuance under the plan.


(17)     Employee Benefit Plans

         Syntellect maintained two 401(k) plans during 1996; one covering
eligible employees of Syntellect (the "Syntellect 401(k) Plan") and one covering
eligible employees of Pinnacle (the "Pinnacle 401(k) Plan"). Participants could
contribute up to 15% and 6%, respectively of their total compensation under
these plans. The Company provided matching contributions under the Pinnacle
401(k) Plan equal to 50% of employee contributions, up to a maximum of 2% of the
employee's total compensation. The Company could also make discretionary
contributions to either plan in amounts determined by the Board of Directors.
Participants in the plans vest immediately in their personal contributions and
over a six year graded schedule for amounts contributed by the Company.
Syntellect made matching contributions to the Pinnacle 401(k) Plan of $91 in
1996, $49 in 1995, and $56 in 1994; however, no discretionary contributions were
made by the Company to either plan during these years.

         Effective January 1, 1997, Syntellect adopted a single 401(k) plan
covering all eligible employees of the Company. Under the new plan, participants
can contribute up to 15% of their total compensation. The Company will provide
matching contributions equal to one third of employee contributions up to a
maximum of 7% of the employee's total compensation. The matching contribution is
subject to annual review and adjustment by the Board of Directors. Additional
discretionary contributions may also be made to the plan in amounts determined
by the Board of Directors. Participants will be immediately vested in their
personal contributions and on a four year graded schedule for amounts
contributed by the Company.

         Syntellect has established a severance plan in which officers and
employees may receive severance benefits upon termination. Benefits under the
plan are provided to individuals who have been employed by Syntellect at least
six months, are involuntarily terminated and sign a document releasing
Syntellect from any liability in connection with their termination. The amount
of severance pay varies based upon the individual's length of service and
employment classification.

                                       38
<PAGE>   39
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)



(18)     Income Taxes

         The provision for income taxes includes income taxes currently payable
and those deferred because of temporary differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future and any increase or decrease in the valuation
allowance for deferred income tax assets.

         The components of income tax expense (benefit) included in the
consolidated statements of operations are as follows:


<TABLE>
<CAPTION>
                                                        1996       1995      1994
                                                        ----       ----      ----
<S>                                                    <C>        <C>        <C>
Current income tax expense (benefit):
         Federal                                       $(399)     $ 544      $ 64
         State                                           (69)        58        11
                                                       -----      -----      ----
                                                        (468)       602        75
                                                       -----      -----      ----
Deferred income tax expense (benefit):
         Federal                                         399       (430)       --
         State                                            69        (38)       --
                                                       -----      -----      ----
                                                         468       (468)       --
                                                       -----      -----      ----
                  Total income tax expense             $ --       $ 134      $ 75
                                                       =====      =====      ====
</TABLE>

         Income (loss) before income tax expense (benefit) consists of the
following:


<TABLE>
<CAPTION>
                                              1996           1995          1994
                                              ----           ----          ----
<S>                                         <C>            <C>            <C>
United States Operations                    $ (2,275)      $(13,159)      $1,192
International Operations                        (505)        (2,965)        --
                                            --------       --------       ------
                                            $ (2,780)      $ 16,124       $1,192
                                            ========       ========       ======
</TABLE>

         Income tax expense differed from the amounts computed by applying the
statutory U.S. federal income tax rate of 34% to income (loss) before income
taxes as a result of the following:

<TABLE>
<CAPTION>
                                                                         1996       1995      1994
                                                                         ----       ----      ----
<S>                                                                    <C>        <C>        <C>
Computed "expected" income tax expense                                 $  (945)   $(5,482)   $ 405
Increase (decrease) in income tax expense resulting from:
         State income tax expense, net of federal income tax benefit       (74)      (155)      36
         Increase in valuation allowance                                 1,028      4,892     --
         Other, net                                                         (9)       879     (366)
                                                                       -------    -------    -----
                  Total income tax expense                             $  --      $   134    $  75
                                                                       =======    =======    =====
</TABLE>

                                       39
<PAGE>   40
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)


         The income tax effects of temporary differences that give rise to the
Company's deferred income tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                       1996        1995
                                                                       ----        ----
<S>                                                                  <C>         <C>
Deferred income tax assets:
         Net operating loss and tax credit carryforwards             $ 11,097    $  6,264
         Warranty and inventory allowances                              1,537       3,706
         Amortization                                                     462         555
         Contract accounting                                             --           419
         Accrued expenses                                               1,121       1,455
         Allowance for doubtful accounts                                  276         496
         Other                                                           --           631
                                                                     --------    --------
                  Gross deferred income tax assets                     14,493      13,526
                                                                     --------    --------

Deferred income tax liabilities:
         Property and equipment due to differences in depreciation       (782)       (517)
         Other                                                           (168)        (26)
                                                                     --------    --------
                  Gross deferred income tax liabilities                  (950)       (543)
                                                                     --------    --------

Less valuation allowance                                             $(12,923)    (12,515)
                                                                     --------    --------

Net deferred income tax asset                                        $    620    $    468
                                                                     ========    ========
</TABLE>

         The increase (decrease) in the net deferred income tax asset for the
years ended December 31, 1996, 1995 and 1994 was $152, $468 and $0,
respectively. The increase in the valuation allowance against deferred income
tax assets for these years was $408, $4,892, and $0, respectively. Deferred
income tax assets and liabilities are recognized for differences between the
financial statement carrying amounts and the tax bases of assets and liabilities
which will result in future deductible or taxable amounts and for net operating
loss and tax credit carryforwards. A valuation allowance has been provided
because the realization of all of the deferred income tax asset is uncertain.

         As of December 31, 1996 the Company had net operating loss, investment
tax credit, minimum tax credit, and research and development tax credits
available for carryforward of approximately $25,373, $15, $18, and $1,240,
respectively, which expire at various dates through the year 2011.


(19)     Business Segments, Geographic Data and Major Customers

         Syntellect develops, markets, and integrates voice and information
processing systems and application software worldwide. The Company offers a
diversified product line which includes both inbound voice processing and
outbound dialer products, a worldwide distribution network, and a vertical
market focus on the financial services, media, telecommunications and healthcare
industries. The Company also provides an interactive transaction-based service
bureau for those customers who prefer to outsource their voice processing
applications. In addition to its primary office facilities in Atlanta and
Phoenix, the Company also maintains nine sales offices in the United States and
one each in London and Munich, Germany.

                                       40
<PAGE>   41
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)


         Net revenues, by geographic area, for the three-year period ended
December 31, 1996 are as follows:

<TABLE>
<CAPTION>
   Geographic Area                           1996           1995           1994
   ---------------                           ----           ----           ----
<S>                                        <C>            <C>            <C>
United States                              $40,296        $39,047        $43,702
International markets                       15,009         10,463         13,694
                                           -------        -------        -------
                                           $55,305        $49,510        $57,396
                                           =======        =======        =======
</TABLE>

         No single customer accounted for more than 10% of the Company's
revenues in 1996, 1995 or 1994.

         The Company conducts business with a major cable television customer
who is also a significant shareholder of the Company. Revenues from this
customer were $1,311, $1,266 and $727 for the years ended December 31, 1996,
1995 and 1994, respectively. The Company was due $163 and $222 in outstanding
accounts receivable from the customer at December 31, 1996 and 1995,
respectively.


(20)     1995 Special Charge

         Syntellect initiated a plan in December 1995 designed to improve its
presence in the Interactive Voice Response ("IVR") market, regain market share,
reduce expenses, focus management and the sales force on the VocalPoint IVR
product line and return Syntellect to profitability. Syntellect incurred a
special charge of $8,800 during the quarter ended December 31, 1995 related to
the implementation of this plan.

         The special charge included a $5,000 increase in allowances for
inventory obsolescence related to (i) proprietary product lines that are being
discontinued ($2,400); (ii) an adjustment of the net realizable value of
overstocked components for the Premier 030 and System 2000 product lines
($2,400); and (iii) a write-down of obsolete components from early versions of
the VocalPoint IVR product line ($200).

         During the second half of 1994, Syntellect began building an
infrastructure to further support the delivery of its whole product solutions
and facilitate future growth opportunities. This anticipated growth did not
materialize during 1995 and, accordingly, Syntellect began reducing its
infrastructure expenses to a level which was more in line with projected revenue
streams. As part of this plan, Syntellect initiated a reduction in force in late
1995 that affected all areas of the organization. Syntellect provided a special
charge of $1,200 during the quarter ended December 31, 1995 related to this
reduction in force and in accordance with Syntellect's established severance
benefit plan. Concurrent with the reduction in force, Syntellect has begun to
consolidate most of its administrative, manufacturing and customer support
functions, which currently reside in multiple locations. As a result, Syntellect
incurred a special charge of $1,700 during the quarter ended December 31, 1995
to write-down the value of software and equipment that will be relocated or
disposed of.

         Syntellect also incurred a special charge of $700 during the quarter
ended December 31, 1995, to increase the allowance for doubtful accounts for
specific receivables identified in connection with the Company's review of its
maintenance revenue database and to provide specific reserves for potential
contractual penalties relating to European customers.

                                       41
<PAGE>   42
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)


         A summary of the major elements of the 1995 special charge of $8,800,
or $(0.67) per share, is as follows:

<TABLE>
<S>                                                                       <C>
Allowance for inventory obsolescence                                      $5,000
Write-down of software and equipment to be
     relocated or disposed of                                              1,700
Employee severance for planned reduction in force                          1,200
Accounts receivable allowance                                                700
Other                                                                        200
                                                                          ------
                                                                          $8,800
                                                                          ======
</TABLE>

         The allowances for accounts receivable and inventory obsolescence were
utilized during 1996 to write-off specifically identified receivable balances
and inventory disposed of during the year. The reserve for inventory
obsolescence at December 31, 1996 represents management's estimate of the
valuation allowance necessary for inventory not yet disposed of. The software
and equipment charge was utilized during 1996 to write-down the value of
specified assets that were relocated, lost or disposed of. The Company made $741
in severance payments to terminated employees during 1996 in connection with its
reduction in force. As of December 31, 1996, there remained outstanding payments
due on severance transactions relating to 1995 and 1996.

(21)     1994 Special Charge

         During 1994, Pinnacle determined that the consulting and noncompetition
agreements entered into with the former owners of Telecorp had no remaining
value as the threat of competition had diminished over the original life of the
agreements (see Note 15). In addition, management determined that certain
technology purchased during the acquisition of Telecorp no longer possessed
value due to significant advances in technology since the original acquisition
date. As a result, Pinnacle wrote-off the remaining value of the consulting and
noncompetition agreements and purchased technology. The effect of this valuation
adjustment on Syntellect's reported results for 1994 was a decrease in income of
$879 or $(0.07) per share.


(22)     Fair Value of Financial Instruments

         Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires that Syntellect disclose
estimated fair values for its financial instruments. The carrying amount of cash
and cash equivalents approximates fair value because their maturity is generally
less than three months. The fair value of marketable securities classified as
available-for-sale are based on quoted market prices at the reporting date for
those or similar investments. The carrying amount of receivables, accounts
payable and accrued liabilities approximates fair value as they are expected to
be collected or paid within 90 days of year-end. The fair value of long-term
debt, which is comprised of capital lease obligations, is estimated by
discounting the future cash flows at rates currently offered to the Company for
similar debt instruments.

                                       42
<PAGE>   43
                        SYNTELLECT INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

        (in thousands, except percentages, shares and per share amounts)


(23)     Supplemental Financial Information

         A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the years ended December 31, 1996, 1995
and 1994 follows:

<TABLE>
<CAPTION>
                                       Balance at    Charged to
                                       beginning      costs and                    Balance at
                                        of year       expenses      Deductions    end of year
                                        -------       --------      ----------    -----------
<S>                                    <C>           <C>            <C>           <C>
Allowance for doubtful accounts:
          1996                           $1,528        $  480        $  (775)        $1,233
          1995                              668         1,113           (253)         1,528
          1994                            1,441           922         (1,695)           668


Allowance for inventory obsolescence:
          1996                           $9,025        $   36        $(4,916)        $4,145
          1995                            4,616         5,213           (804)         9,025
          1994                            5,535           336         (1,255)         4,616
</TABLE>


(24)     Quarterly Results (Unaudited)

         The following table presents selected unaudited quarterly operating
results for the two year period ended December 31, 1996. Syntellect believes
that all necessary adjustments have been included in the amounts stated below to
present fairly the related quarterly results.

<TABLE>
<CAPTION>
                                    First         Second          Third        Fourth
                                   Quarter        Quarter        Quarter       Quarter          Total
                                   -------        -------        -------       -------          -----
                 1996
                 ----
<S>                               <C>            <C>            <C>            <C>            <C>
Net revenues                      $ 12,946       $ 14,004       $ 12,173       $ 16,182       $ 55,305
Gross margin                         6,344          6,950          6,094          8,134         27,522
Operating income (loss)             (1,139)          (477)        (1,522)           105         (3,033)
Net income (loss)                   (1,083)          (393)        (1,465)           161         (2,780)
Net income (loss) per common
         share                    $  (0.08)      $  (0.03)      $  (0.11)      $   0.01       $  (0.21)

                 1995
                 ----

Net revenues                      $ 13,299       $ 11,164       $ 14,403       $ 10,644       $ 49,510
Gross margin                         7,178          5,203          7,037          3,945         23,363
Operating income (loss)                420         (1,869)        (1,116)       (13,861)       (16,426)
Net income (loss)                      564         (1,783)        (1,075)       (13,964)       (16,258)
Net income (loss) per common
         share                    $   0.04       $  (0.14)      $  (0.08)      $  (1.05)      $  (1.24)
</TABLE>

                                       43
<PAGE>   44
    ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                              FINANCIAL DISCLOSURE

         None.



PART III


          ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


         Information regarding continuing directors and nominees of Syntellect
is set forth under the caption "Information Concerning Directors and Nominees"
in the Registrant's Proxy Statement relating to its 1997 Annual Meeting of
Shareholders (the "1997 Proxy Statement") incorporated by reference into this
Form 10-K, which will be filed with the Securities and Exchange Commission. With
the exception of the foregoing information and other information specifically
incorporated by reference into this Form 10-K, the 1997 Proxy Statement is not
being filed as a part hereof. Information concerning executive officers of the
Registrant is set forth in Part I of this Form 10-K.


                        ITEM 11 - EXECUTIVE COMPENSATION


         Information regarding executive compensation is incorporated herein by
reference to the information furnished under the caption "Executive
Compensation" in the 1997 Proxy Statement, provided, however, that the "Board
Compensation Committee Report on Executive Compensation" and the "Stock Price
Performance Graph" contained in the 1997 Proxy Statement are not incorporated by
reference herein.


    ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


         Information regarding security ownership of certain beneficial owners
and management of Syntellect is incorporated herein by reference to the
information furnished under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 1997 Proxy Statement.


            ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


         Not applicable.

                                       44
<PAGE>   45
PART IV


    ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K


(A)  1.  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.

         The following consolidated financial statements of Syntellect Inc. and
         Subsidiaries are filed as part of this report on Form 10-K:

<TABLE>
<CAPTION>
                                                                                                          Page or Method of Filing
<S>                                                                                                       <C>
         Independent Auditors' Report - KPMG Peat Marwick LLP                                                      Page 20

         Independent Auditors' Report - Deloitte & Touche LLP                                                      Page 21

         Consolidated Balance Sheets - December 31, 1996 and 1995                                                  Page 22

         Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994                      Page 23

         Consolidated Statements of Shareholders' Equity - Years ended December 31, 1996, 1995 and 1994            Page 24

         Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994                      Page 25

         Notes to Consolidated Financial Statements                                                                Page 27
</TABLE>

     2.  CONSOLIDATED SUPPLEMENTAL SCHEDULES

         All schedules have been omitted because the information required to be
         set forth therein is not applicable or is included in the Consolidated
         Financial Statements or notes thereto.

                                       45
<PAGE>   46
(B)  EXHIBITS.

<TABLE>
<CAPTION>
  Exhibit No                     Description                                    Page or Method of Filing
  ----------                     -----------                                    ------------------------
<S>             <C>                                                  <C>
2               Agreement and Plan of Reorganization as of           Incorporated by reference to Exhibit No. 2 to
                December 6, 1995, between Syntellect Inc.,           Syntellect's Registration Statement on Form S-4
                Syntellect Acquisition Co., and Pinnacle             dated February 9, 1996 (the "S-4")
                Investment Associates Inc.

3.1(a)          Restated Certificate of Incorporation of Registrant  Incorporated by reference to Exhibit No. 3-A to
                                                                     Syntellect's Registration Statement on Form S-1
                                                                     dated February 23, 1995 (the "S-1")

3.1(b)          Certificate of Amendment to Restated Certificate     Incorporated by reference to Exhibit No. 3.1(b)
                of Incorporation of Registrant, filed with the       to Syntellect's S-4
                Delaware Secretary of State on May 18, 1993

3.1(c)          Certificate of Amendment to Restated Certificate     Incorporated by reference to Exhibit 3.1(c) to
                of Incorporation of Registrant filed with the        Syntellect's Annual Report on Form 10-K dated
                Delaware Secretary of State on March 14, 1996        March 29, 1996.

3.2             Amended and Restated Bylaws of Registrant            Incorporated by reference to Exhibit No. 3-B to
                                                                     Syntellect's S-1

4               Specimen Certificate representing Common Stock       Incorporated by reference to Exhibit No. 4 to
                                                                     Amendment No. 1 of Syntellect's S-1

10.1            Restated Stock Option Plan, as amended through May   Incorporated by reference to Exhibit 10.1 to
                23, 1995                                             Syntellect's Annual Report on form 10-K dated
                                                                     March 29, 1996.

10.2            Employee Stock Purchase Plan                         Incorporated by reference to Exhibit No. 10-B
                                                                     to Amendment No. 1 of Syntellect's S-1

10.3            1997 Management Incentive Program                    Page 50

10.4            Long-Term Incentive Plan, as amended August 8, 1996  Page 57


10.5            Nonemployee Director Stock Plan                      Incorporated by reference to Exhibit B to
                                                                     Syntellect's Proxy Statement for the 1995
                                                                     Annual Meeting of Stockholders

10.6(a)         Lease Agreement and Addendum dated October 13,       Incorporated by reference to Exhibit No. 10-E
                1987 with Estes Property Management Company for      to Syntellect's S-1
                Syntellect's corporate headquarters

10.6(b)         First Amendment to Lease Agreement dated August      Incorporated by reference to Exhibit 10-D(2) of
                31, 1992 between Estes-Samuelson                     Form 10-K for the fiscal year Syntellect ended
                Partnership and Syntellect                           December 31, 1992 ("1992 Form 10-K")

10.6(c)         Lease Agreement dated June 28, 1996, together with   Page 67
                first amendment to lease dated October 6, 1996,
                between Opus Southwest Corporation and
                Syntellect for an office facility in Phoenix,
                Arizona

10.7            Form of Indemnification Agreement between            Incorporated by reference to Exhibit No. 10-L
                Syntellect and its directors and officers            to Syntellect's S-1
</TABLE>

                               46
<PAGE>   47
<TABLE>
<S>             <C>                                                  <C>
10.8(a)         Agreement for Licensing of IBM Software Technology   Incorporated reference to Exhibit 10-I of
                dated February 3, 1993 between Syntellect and IBM    Syntellect's 1992 Form 10-K


10.8(b)         Amendment Number One (1) to Agreement for the        Incorporated by reference to Exhibit No.
                Licensing of IBM Technology, Agreement Number        10.8(b) to Syntellect's S-4
                JWQ9308, dated March 25, 1993

10.8(c)         Amendment Number Two (2)  to Agreement for the       Incorporated by reference to Exhibit No.
                Licensing of IBM Technology, Agreement Number        10.8(c) to Syntellect's S-4
                JWQ9308, dated June 8, 1993

10.8(d)         Amendment Number Three (3) to Agreement for the      Incorporated by reference to Exhibit No.
                Licensing of IBM Technology, Agreement Number        10.8(d) to Syntellect's S-4
                JWQ9308, dated December 16, 1993

10.8(e)         Amendment Number Four (4) to Agreement for the       Incorporated by reference to Exhibit No.
                Licensing of IBM Technology, Agreement Number        10.8(e) to Syntellect's S-4
                JWQ9308, dated October 4, 1994

10.8(f)         Amendment Number Five (5) to Agreement for the       Page 125
                licensing of IBM Technology, Agreement Number
                JWQ9308, dated February 13, 1995

10.8(g)         Amendment Number Six (6) to Agreement for the        Page 129
                Licensing of IBM Technology, Agreement number
                JWQ9308, dated June 6, 1995

10.8(h)         Amendment Number Seven (7) to Agreement for the      Page 130
                Licensing of IBM Technology, Agreement Number
                JWQ9308, dated September 9, 1996

10.8(i)         Amendment Number Eight (8) to Agreement for          Page 133
                Licensing of IBM Technology, Agreement Number
                JWQ9308, dated March 11, 1997

10.9            Asset Purchase Agreement dated February 21, 1995     Incorporated by reference to Exhibit 10-K of
                between Syntellect Technology Corp. (formerly        Syntellect's 1994 Form 10-K
                known as Dytel Inc.) and Dytel Incorporated

10.10           Form of Affiliate Agreement between Syntellect       Incorporated by reference to Exhibit No.10.10
                Inc. and affiliates of Pinnacle Investment           to Syntellect's S-4
                Associates Inc.

10.11           Employment Agreement between J. Lawrence Bradner     Incorporated by reference to Exhibit No. 10.11
                and Syntellect Inc. dated March 14, 1996             to Syntellect's S-4

10.12           Employment Agreement between Steve Nussrallah and    Incorporated by reference to Exhibit No. 10.12
                Syntellect Inc. dated March 14, 1996                 to Syntellect's S-4

10.13           Form of Registration Rights Agreement                Incorporated by reference to Exhibit 10.13 to
                                                                     Syntellect's S-4

10.14           Stock Purchase Agreement, dated April 1, 1996,       Incorporated by reference to Exhibit 10.14 to
                between Syntellect Inc. and Atlas Telecom, Inc.      Syntellect's quarterly report on Form 10-Q,
                                                                     dated May 13, 1996.
</TABLE>

                               47
<PAGE>   48
<TABLE>
<S>             <C>                                                  <C>
10.15(a)        Loan agreement, dated July 25, 1996, between         Page 134
                NationsBank, N.A. (South) and Syntellect Inc. for
                a $2,000,000 revolving credit line

10.15(b)        $1,100,000 Letter of Credit dated February 7,        Page 145
                1997, issued against the $2,000,000 revolving
                credit line, to be used as security deposit on
                lease with Opus Southwest Corporation

11              Statement re computation of per share earnings       Page 146

21              Subsidiaries of Registrant                           Page 147

23              Independent Auditors' Consents                       Page 148

27              Financial Data Schedule                              Page 150
</TABLE>



(C)  REPORTS ON FORM 8-K.

         There were no Current Reports on Form 8-K filed during the three months
ended December 31, 1996.

                               48
<PAGE>   49
         Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, Syntellect has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Phoenix, State of
Arizona, on March 28, 1997.

                         SYNTELLECT INC.

                     By:    /s/ Neal L. Miller
                         ------------------------
                              Neal L. Miller
                              Vice President,
                         Chief Financial Officer,
                         Secretary and Treasurer


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities of
the dated indicated.

<TABLE>
<CAPTION>
Name and Signature                       Title                                           Date
------------------                       -----                                           ----
<S>                                      <C>                                             <C>
/s/ J. Lawrence Bradner                  Chairman of the Board,
---------------------------------        Chief Executive Officer
J. Lawrence Bradner                      (Principal Executive Officer)                   March 28, 1997


/s/ Neal L. Miller                       Vice President, Chief Financial Officer,
---------------------------------        Secretary & Treasurer (Principal Financial
Neal L. Miller                           and Accounting Officer)                         March 28, 1997


/s/ William P. Conlin                    Director                                        March 28, 1997
---------------------------------
William P. Conlin


/s/ A. LeRoy Ellison                     Director                                        March 28, 1997
---------------------------------
A. LeRoy Ellison


/s/ Jack R. Kelly, Jr.                   Director                                        March 28, 1997
---------------------------------
Jack R. Kelly, Jr.


/s/ Steve G. Nussrallah                  Director                                        March 28, 1997
---------------------------------
Steve G. Nussrallah


/s/ Daniel D. Ross                       Director                                        March 28, 1997
---------------------------------
Daniel D. Ross
</TABLE>

                               49