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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
(Mark One)

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

                  For the fiscal year ended December 31, 2000

                                       OR

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

              For the transition period from __________to _________

                         Commission file number: 0-18323

                               SYNTELLECT(R) INC.
             (Exact name of Registrant as specified in its charter)

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



          16610 North Black Canyon Highway
                     Suite 100,
                     Phoenix, AZ                                         85053
      (Address of principal executive offices)                        (Zip Code)
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                                 (602) 789-2800
              (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:

                          Common Stock, $.01 par value
                                (Title of Class)

     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 filers 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. [ ]

     The aggregate market value of common stock held by non-affiliates of the
Registrant, computed by reference to the closing price at which the Common Stock
was sold as of March 20, 2001, was $23,649,031.

                   (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:

       11,204,546 shares of Common Stock outstanding as of March 20, 2001.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Materials from the Registrant's Proxy Statement relating to its 2001 Annual
Meeting of Stockholders (the "Proxy Statement") have been incorporated by
reference into Part III, Items 10, 11, 12 and 13.
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                                               TABLE OF CONTENTS

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PART I

   ITEM 1.       BUSINESS...............................................................................       1
                 General
                 Historical Development of the Company
                 Industry and Market Background
                 Products
                 Sales and Marketing
                 Product Development
                 Manufacturing and Suppliers
                 Backlog
                 Proprietary Rights and Intellectual Property
                 Employees
                 Executive Officers of the Registrant
   ITEM 2.       PROPERTIES.............................................................................      11
   ITEM 3.       LEGAL PROCEEDINGS......................................................................      11
   ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................      11

PART II

   ITEM 5.       MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                 STOCKHOLDER MATTERS....................................................................      11
   ITEM 6.       SELECTED FINANCIAL DATA................................................................      12
   ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                 AND RESULTS OF OPERATIONS..............................................................      13
    ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................      17
                 Interest Rate Risk
                 Foreign Currency Exchange Rate Risk
                 Additional Cautionary Factors That May Affect Future Results
   ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................      22
   ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                 ACCOUNTING AND FINANCIAL DISCLOSURE....................................................      41

PART III

   ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................................      41
   ITEM 11.      EXECUTIVE COMPENSATION.................................................................      41
   ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                 MANAGEMENT.............................................................................      41
   ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................      41

PART IV

   ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
                 FORM 8-K...............................................................................      41

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                                     PART I

ITEM 1 -- BUSINESS

GENERAL

      Syntellect Inc. (together with its subsidiaries, collectively, the
"Company," which may also be referred to as the "Registrant," "we," "us," or
"our") develops, markets and implements voice, Internet and call processing
software and services to large and mid-sized commercial, industrial and
government entities through a worldwide direct and indirect distribution
network. Through our flagship product, Vista, a client-server, open,
standards-based, NT-Java software platform, we offer customizable software
applications including Interactive Voice Response ("IVR"), Automatic Speech
Recognition ("ASR"), Vocalpoint Interactive Web Response(R) ("IWR"), and
Computer Telephony Integration ("CTI"). With the foundation of these products
and capabilities, collectively known as Vista Interactive Media Response
("IMR"), we create enterprise-wide voice portals. These voice portals harness
the power of the Internet as well as of wired and wireless telephones, using
natural language voice commands, for unassisted, self-service access to
applications, information, and transactions between an enterprise and its
customers, employees, suppliers, partners and investors.

      We also own and operate an interactive transaction-based Hosted Services
center for our customers who prefer to outsource their voice processing or web
transaction-based applications completely or in conjunction with their
premises-based installation. Our Hosted Services include, for example, cable and
satellite pay-per-view orders, employee benefits enrollment, and utility outage
applications. This combination of hosted and on-premises voice portals, built
upon a single software platform, gives us a unique market position. We also
provide a single source for system implementation and on-going system lifecycle
support through our professional services organization including consulting
services in the areas of speech recognition, speech application design, analysis
and development, as well as installation, integration, and after-sale support.
As of February 28, 2001, we employed a total of 294 individuals. In addition to
our primary office facilities in Phoenix, we maintain five sales and support
offices in the United States and one each in London, Amsterdam and Stockholm.


HISTORICAL DEVELOPMENT OF THE COMPANY

     We were founded in 1984, and became an early pioneer in the Interactive
Voice Response industry. By 1995 we had become the fourth largest provider of
IVR technologies in North America and the largest IVR provider in Europe.
Virtually all of our growth during this period was attributable to our
proprietary IVR systems (known as Infobot(R) 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. These products increased functionality with a wider range
of options for self-service including telephones using speech recognition,
personal computers linked to the Internet, faxes, pagers and mobile phones. In
1993, we introduced our first open architecture product, the VocalPoint(R) IVR,
and announced the phase-out of our older proprietary systems.

     On March 14, 1996, we acquired Pinnacle Investment Associates Inc.
("Pinnacle") in a transaction accounted for as a pooling of interests
transaction. Pinnacle subsequently merged into its wholly-owned subsidiary,
Telecorp Systems, Inc. ("Telecorp"). Telecorp developed and distributed inbound
and outbound call center systems worldwide, primarily in the cable television,
newspaper and healthcare industries. Telecorp also operated a transaction-based
hosted application center designed primarily to process pay-per-view orders for
the cable television industry. Subsequent to the merger, we assumed all of
Telecorp's systems functions in Syntellect Inc. and consolidated all hosted
application center functions into Syntellect Interactive Services, Inc. ("SIS"),
Telecorp's wholly-owned subsidiary. Telecorp was dissolved as of December 27,
2000, and SIS became Syntellect Inc.'s wholly-owned subsidiary.

     In 1998, we introduced our VocalPoint Interactive Services Transaction
Architecture ("Vista"). Vista combines call center technologies with a
distributed client-server architecture, powerful open standards components, a
web-based management system and a graphical application development tool. This
combination provides customers with flexibility, scalability, efficiency,
redundancy, and excellent processing performance. With the


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introduction of Vista, we implemented our strategy of moving from a
hardware-based company to a software-based company.

     We sold our predictive dialer product line to Nobel Systems Corporation in
1999. In 1999 and 2000, we significantly enhanced our Vista product line by
adding new functionality to the core product and integrating advanced, natural
language speech recognition and text-to-speech capabilities. We continue to
expand the Java application framework contained in Vista as well as its
application development and management tools. Additionally, we continue to
enhance Vista for our international markets with new telephony protocols and
languages.


INDUSTRY AND MARKET BACKGROUND

IVR VALUE PROPOSITION STRONG AND GROWING

      The Interactive Voice Response market continued to grow during 2000 at a
compounded annual growth rate of approximately 13%, according to the Gartner
Group, an industry analyst. Also, according to the Gartner Group, the average
cost of an IVR-completed call is $.45, compared to $7.60 for a call handled by a
call center agent.

      IVR systems first gained market acceptance through customer reaction to
reduced hold times, cost savings resulting from automating low value-added
customer interactions, and freeing contact center agents to concentrate on high
value-added customer interactions. Much of the value of IVRs comes from our
enabling the Computer Telephony Integration of our customer's systems and
back-offices. Information about a caller or customer can be retrieved from a
company's PBX or automatic call distributor ("ACD") or from a caller personally
entering account information. In either case, the information is instantly
available on an agent's screen. According to Datamonitor, another industry
analyst, CTI-enabled IVR systems decrease the length of a call by 18%, on
average, further enhancing cost savings and service improvements. Datamonitor
research has also shown that when IVR platforms are available, customers also
use Internet technology more frequently to access back-end information and
existing databases. Our Interactive Web Response technology also enhances
contact center customer management by linking the speed and convenience of
Internet access to call center agents.

      Datamonitor estimates the size of the IVR market at $761 million for the
year ended 1999 and expects this market to grow to $1.3 billion by the end of
2004, representing an 11.1% compounded annual growth rate. Datamonitor also
expects market growth to be highest outside of North America with rates of
growth approaching 15% per annum. Our major markets in Europe, one of the
markets where growth rates are expected to be highest, include the United
Kingdom, France, the Netherlands, Germany, Italy and Spain.

SPEECH RECOGNITION WILL ENABLE IVR GROWTH AND MARKET EXPANSION

      Touchtone telephone, Automatic Speech Recognition ("ASR") and
Text-to-Speech ("TTS") applications are replacing touchtone input and
pre-recorded speech output for IVR applications. Speech recognition is more
popular with customers than is touchtone, and ASR allows more sophisticated
interactions to be automated, thereby creating more potential applications.
Speech recognition is emerging as a critical technology for new IVR development.
Industry experts expect speech recognition to revolutionize the way individuals
interact with machines whether from home, in the car, on the street or at the
office. The Internet can now be accessed by personal computers, mobile
telephones, interactive television, and traditional telephones.

      We believe that voice access to the World Wide Web can potentially add two
billion new points of access, in addition to the more than 250 million personal
computers which can access the Internet today. We also anticipate that voice
access will be particularly important in regions with lower personal computer
penetration such as Asia, the Middle East and Africa, Eastern Europe and Latin
America. We further believe that new classes of portable, wireless devices
(Personal Digital Assistants ("PDA") and handhelds) with multiple input and
output methods will play a major role and become standard Internet terminals.

      Datamonitor expects telephony-based speech recognition revenue to grow
rapidly at a projected compounded annual rate of 57.9% from $133 million in 1999
to $1.9 billion by the end of 2004. We expect improved speech recognition


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technology will drive this growth with enhanced comprehension of natural
language and increased reliability. These improvements will lower costs through
shortened calls, increase customer acceptance of automation and self-service,
and stimulate demand for information access around the clock, independent of
location or device.

SPEECH RECOGNITION CREATES A NEW CLASS OF VOICE PORTAL PRODUCTS AND SERVICES

      Other developments in the industry, including voice portals and
voice-enabled websites, may offer even greater promise. A voice portal uses
advanced speech recognition technology to access information available on
websites or in other databases. Although Interactive Voice Response platforms
and voice portals use the same underlying technology, they are distinguished by
usage rather than technology. IVR platforms are associated with database
applications and consist of a closed coupling between a few database servers
with hierarchical menus that may use speech recognition, but more frequently
touchtone input, for access. Voice portals generally rely on speech recognition,
use wide-ranging flat menus, and focus on Internet-based information access and
protocols. Voice portals also support a broad range of applications in addition
to simple database information access. These voice portals include broad-based
Internet information, messaging access and collaborative applications such as
calendars. The distinction is blurred when IVR platforms add VoiceXML, an
emerging standard which enables voice applications to communicate in a
vendor-independent way, or add other gateway functionality, and access
information and applications across the Internet. In that case, the system
becomes a hybrid IVR/voice portal. In this context, we believe that we are
uniquely positioned to aggressively pursue the voice portal products and
services markets.

      A voice portal used in an enterprise setting is referred to as an
Enterprise Voice Portal ("EVP"). An EVP permits convenient increased access to
company-wide information for customers, suppliers, partners and employees,
increasing operating effectiveness for each. EVP companies will need to design
their voice portals so that all methods of enterprise access flow through a
single server strategy. The primary benefit for such companies will likely come
as the applications and web servers supporting graphical access are also able to
support access devices such as the telephone. Not only will security and
reliability be central to the success of any EVP strategy, but the EVP's ability
to integrate with existing applications and call centers will prove to be the
most important component, especially if access to call center agents is
available.

      The most probable EVP applications will be speech-enabled telephone access
to company applications such as sales force, customer relationship management,
and logistics and supply chain management, according to a report by Dain
Rauscher Wessels, a securities firm. Also according to that report, the ability
to voice-enable an e-commerce website to make it voice accessible may stimulate
a new class of Business to Business and Business to Consumer transactions. The
market for EVP platforms is predicted to materialize in 2002.

COMPETITION IS STRONG AND INCREASING

      The voice processing industry is highly competitive, and we believe
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. We believe the principal competitive
factors which affect the voice processing industry are price, functionality,
service and industry reputation. In this regard, we also believe our years of
experience in the IVR industry provide an excellent foundation with which to
meet competition. Our capabilities and operating assets include our installed
base of customers, proven product functionality, existing distribution networks,
contact center brand, and skill at designing and implementing speech-enabled IVR
applications which compete effectively in the voice technology and contact
center marketplace, as well as our ongoing professional services to customers.

      Our principal competitors for IVR and web products include Periphonics
Corporation (a division of Nortel Networks Corporation); Avaya Inc. (a spin-off
of Lucent Technologies Inc.); InterVoice-Brite, Inc.; Edify Corporation, and IBM
Corporation. Many of these and other competitors have more extensive
engineering, manufacturing, and marketing capabilities than we do, in addition
to their substantially greater financial, technological and personnel resources.
We also expect new entities to enter our markets to compete with us.


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PRODUCTS

      Our products are divided into three business segments: Licenses and
Hardware, Services and Hosted Services. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Operating Business
Segments," for another description of these business segments.

LICENSES AND HARDWARE

      In 1998, the Company introduced its third generation software platform,
Vista, which uses a Windows NT operating system and Java programming language
for customer application development. Vista comprises a broad suite of
communications features designed for automating customer transactions. It
provides a multitude of applications on one platform including, for example,
Interactive Voice Response, Interactive Web Response, Computer Telephony
Integration, fax on demand, and advanced speech recognition. With this software
platform, transactions can be processed from callers using almost any
communication device including wired and wireless telephones, web browsers, fax
machines, pagers and PDAs.

      Vista is built on an open, scalable, standards-based framework forming an
integrated foundation for various customer transactions. It allows our customers
to deliver powerful new capabilities to their contact centers using their
existing telecommunications and information technology infrastructure. Vista
supports inbound and outbound telephone (whether touchtone, voice, or fax),
hosted, and web transactions. It also interfaces with other technologies,
supports a range of reporting options, and incorporates a standard set of
application development, administration and management tools. Vista also
accommodates an extensive range of object-orientated applications for specific
business needs related to multimedia contact centers.

      We can configure Vista for virtually every company, from small,
single-premises contact centers to multi-site global enterprise networks.
Because of Vista's open, standards-based design, our customers receive the
information technology ("IT") flexibility necessary to adapt quickly to changing
business and technological requirements. While this flexibility is important to
virtually any company, it is particularly important to those without dedicated
in-house developers who must rely on local and regional systems integrators or
independent applications developers for their IT support.

      The standards used in the Vista framework include: Windows NT operating
system, Java application development language, Intel Dialogic voice boards,
Sybase relational database, and Intel-based computer hardware. The Vista
components themselves are sold as software-centric products. We provide the base
software along with connections to a customer's PBX or ACD host environment. We
have also established partnerships with third party suppliers who provide high
quality, cost effective, industry standard platform components for Vista
customers.

      Vista's components include Interactive Voice Response ("IVR"), Interactive
Web Response ("IWR"), Advanced Speech Recognition, Proactive Outbound
Notification, a Speech Enabled Directory ("SPEED"), Fax Server, Computer
Telephony Integration ("CTI"), and Vista Tools.

      Vista IVR automates customer self-service inquiries and is sometimes
considered the "voice" of an automated customer contact center. As part of the
Vista software architecture, Vista IVR is designed to be highly scalable and to
be integrated into existing telecommunication and data processing environments.
The same software and hardware components are utilized for all system or
networked configurations, facilitating modular growth. Vista is also designed to
be particularly effective in environments supporting multiple applications.

      Vista IWR allows companies to take advantage of the Internet with
self-service options designed exclusively for the World Wide Web. Just as IVR
allows a customer to conduct self-service transactions by telephone, IWR makes
the same options available to customers through the Internet. Rather than
providing voice prompts, IWR presents visual instructions on the customer's
computer screen. The Vista IWR component incorporates all the features a
customer needs to perform transaction processing on the Internet including
scalability, performance, security, access to enterprise data, and an ability to
integrate with other Vista features.

      Our Advanced Speech Recognition and speaker authentication components
provide the recognition accuracy, scalability, and robustness required to make
successful natural language and large vocabulary speech applications


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available. We have partnered with Nuance Communications to create those
applications by utilizing Nuance's SpeechObjects along with Vista's Java
application framework.

      Our Vista Proactive Outbound Notification component is used to create,
configure, and manage completely automated outbound calling campaigns and
generate operational progress reports. Proactive Outbound Notification
applications can range from simple campaigns that deliver straightforward
messages to more complex, self-service applications that involve questions to
and answers from respondents.

      In January 2000, we announced SPEED. SPEED automates call routing tasks by
allowing callers to speak the name of a specific individual or department they
wish to reach rather than speaking to an operator or entering an extension
number through the touchtone keypad. SPEED relies on advanced speech recognition
algorithms to recognize a spoken name as well as advanced voice-processing
capabilities to transfer the call appropriately. When multiple employees have
the same name, SPEED prompts the caller for additional information, such as the
individual's department, and then makes the appropriate routing decision. SPEED
can be configured as a stand-alone product residing on the Vista platform, or it
can be configured as part of a Vista IVR application.

      The Vista Fax Server component receives fax requests from IVR and IWR
applications. Customers are able to use our Fax Server to obtain a facsimile of
the information they want using a Vista system. Data from a host screen or
database that callers access during a transaction can be programmed to also
merge with forms, graphics, or logos stored on the IVR system before being faxed
to the caller. Callers can then efficiently retrieve pre-defined documents such
as product brochures, catalog information, or stock reports.

      Our Vista Computer Telephony Integration ("CTI") component optimizes
contact center agents' productivity by allowing them to handle telephone calls
more intelligently and efficiently. For example, by using CTI technology,
customer data collected by the IVR at the initiation of a customer contact
session can be delivered to an agent's workstation at the same time as the
telephone connection is transferred to that agent's telephone. The simultaneous
transfer of a caller's voice and account data results in increased agent
productivity, greater effectiveness in resolving customer inquiries, and
efficiencies in providing what consumers perceive to be personalized, integrated
support.

      The Vista Tools component includes both our VistaView(TM) and
VistaGen(R) Application Generator. VistaView allows users to monitor their Vista
servers and applications. Using VistaView, system administrators can examine all
aspects of their functioning system, whether the data resides on a single
platform or at numerous locations. VistaView can also act as a single point of
access for both consolidated and itemized system information. It also supports
all Vista system components. VistaGen Application Generator is an
object-oriented application development tool for Vista, which simplifies the
customer's process of building simple IVR applications into a sophisticated
application that integrates natural language speech recognition, IWR and CTI
technologies.

      We believe the market is poised for a renaissance of IVR spurred by the
need for Enterprise Voice Portals. In preparation, we introduced a new level of
functionality we call IMR, Interactive Media Response. IMR consists of current
and evolving interactive, data access, and communication technologies that
provide the functionalities necessary to support rapidly evolving Enterprise
Voice Portal requirements. Our Vista platform offers a number of IMR elements
today and plans are in place to enhance its functionality over the next 18
months through two additional phases of development.

      The Vista software platform incorporates the following four key components
to our new IMR functionality and to the successful deployment of an Enterprise
Voice Portal:

         1.  Separate the request medium from the response medium.

                  The Vista platform allows callers to choose how they want to
                  receive the information they have requested. For example, the
                  system may prompt a caller requesting an account statement to
                  request that it be delivered by fax or email. Being able to
                  independently structure the front-end (request) media from the
                  back-end (response) media is critical to the flexibility
                  required to meet users' demands.


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         2.  Use Java, the software language of the Internet.

                  As the volume of Internet data continues to grow exponentially
                  year after year, it becomes imperative to write applications,
                  integrate third-party components, call third-party services,
                  and absorb third-party software objects using the software
                  language of the World Wide Web, Java. By using Java, we
                  eliminate the need to write artificial bridges from
                  proprietary IVR environments to open third-party applications
                  and data sources.

         3.  Enable customers to access existing data, application, and
             transaction services from anywhere.

                  Even though web-hosted data is exploding in size, existing
                  non-web systems still hold a large percentage of corporate
                  data. Nevertheless, corporate servers, databases, and
                  non-web-enabled applications all contain data that companies
                  may want to access through voice commands. The Vista IMR
                  platform is designed to make that access possible.

         4.  Connect instantly to a live agent during a telephone call or Web
             interaction.

                  The experience of early e-commerce sites established the
                  absolute necessity of live agent access during a telephone
                  call or web interaction. Moving a caller from unassisted
                  interactions to a live agent is complex. Our IMR is capable
                  of connecting the telephone user to a live agent who has been
                  informed of the caller's identity, what the caller has done or
                  was attempting to do, and who has the appropriate application
                  screen open to provide help immediately.

      We believe IMR is beneficial to more than the call center. It also serves
as a powerful tool for supporting other users such as business prospects,
employees, suppliers, partners and investors. Our IMR platform is designed to
help our customers be responsive to their customers and does this by providing
access to the information and services they want, when and how they want it,
whether the platform is located on the customer's premises or at our Hosted
Services centers.

      Our IMR platform was designed to permit flexible transfer of work loads
between applications located on a customer's premises and those located at our
Hosted Service center or at other locations. For example, our IMR platform
permits the caller's contact to begin on our customer's premises (whether via
telephone or Internet), flow seamlessly to our hosted facility for a particular
purpose, move to a third-party data source for additional processing, and return
to the originating customer's premises for completion. Not only does this
flexibility improve the caller's experience in contacting our customer, it
permits our customer to marshal its resources in the most cost-effective way. We
expect that new opportunities for the flexibility of the IMR platform will
surface as powerful new products are introduced to the market, such as Hewlett
Packard's network product called eSpeak.

SERVICES

      We support our customers with consulting and education services, help line
warranty and maintenance, regular adjustments in their system data bases such as
for moves, adds and changes, scripting and voice file production, and database
maintenance services. We focus particularly on developing improved consulting
services in the areas of design analysis, specification development, project
management, application development, installation and integration as each is
related to speech recognition. Our services are generally sold as part of the
initial sale of a system. In some cases, however, they are added after
installation.

      Creating a robust, yet user-friendly, speech recognition application
requires experience in software design, telephony, networking, client-server
systems, databases, linguistics, human factors, and speech recognition
technology. We have years of experience in designing voice user interfaces from
dialog design to grammar development and the intricacies of data base access. We
have assembled and continue to expand a dedicated speech recognition
implementation team to address this significant opportunity. The individuals
comprising that team have been specifically trained and have experience from
many successful speech recognition implementations of varying degrees of
complexity. We believe our speech recognition expertise, built on our IVR
history, is a critical skill necessary to bring effective speech-enabled IVR,
voice portal and voice-enabled websites to market. We also believe our skill is
highly valued in the market and provides us with a competitive advantage.


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      We provide warranties on our products for periods ranging from three to
six months commencing with the installation of each system. After the initial
warranty period ends, our hardware and software maintenance services are
available on both a contract basis and on an on-demand, time and materials,
basis. Domestically and internationally, hardware and software maintenance and
support provided to customers are performed on-site by us or under contractual
arrangements with independent third party service providers.

HOSTED SERVICES

      Our wholly-owned subsidiary, Syntellect Interactive Services, Inc.
("SIS"), operates our Hosted Services transaction center in Roswell and Atlanta,
Georgia. Our Hosted Services center has IVR, database, and web server capacity
to handle over 5,000 telephone and Internet transactions simultaneously. It
offers contract-based telephony and Internet automated transaction services and
is designed with full system redundancy and fault-tolerant power protection for
24-hours a day, 7-days a week operation. We believe we are the only provider of
speech-enabled technology that offers our customers both on-premises capability
and outsourced Hosted Services using a consistent, internally-developed software
platform.

      Companies focusing on their core business, rather than on managing their
infrastructures, capitalize on hosted service offerings. Hosted Services offers
benefits such as reduced time to market, limited capital expenditure, and less
exposure to technology obsolescence. Hosted Services is also ideal for
enterprises having limited IT or inadequate in-house expertise to handle complex
applications.

      We utilize our own Vista platform for speech recognition and voice portal
applications in our Hosted Services transaction center. This allows our
customers to select the option best suited to their needs and provides them with
the ability to seamlessly move an application between their premises and our
Hosted Services facility. Many customers begin by using our Hosted Services and
migrate to bringing their own capability in-house, while continuing to use our
capacity to support them in overtime settings. Others use our services in
overflow situations. A hosted service environment is ideal for processing
overflow inbound call traffic from our customer's on-premises facilities during
peak call volumes. It is also ideal for high volume automated outbound message
delivery campaigns, as an alternative to an on-premises IVR or voice portal for
smaller enterprises, for internal campaigns, customer service surveys and
speaker verification applications, and for accessing special features such as
credit card processing, on-line demographic services, or utilizing fax-on-demand
or fax broadcast campaigns.

      We have supplied Hosted Services to the cable industry for more than eight
years. New ordering technologies for pay-per-view in the cable and satellite
industries, however, have resulted in a decline in the overall utilization of
800 number services for ordering, which, in turn, has resulted in a decline in
our pay-preview revenues. In response to this decline, we have focused our sales
and marketing efforts on new applications in vertical markets such as in the
utility industry and on direct-to-consumer marketing, financial services, and
Internet-based applications. As a result, our non-cable revenues exceeded our
cable revenues for the first time in the fourth quarter of 2000.

      We offer the following four IVR Hosted Services products:

                1. DIALEXPRESS(TM) - - high volume outbound calling technology
                used for promotional messaging and other proactive customer
                contacts;

                2. LEAD CAPTURE - - automated, telephone-delivered, custom
                questionnaire initiated and completed by sales prospects to
                capture critical sales leads;

                3. SPEECH ENABLED DIRECTORY ("SPEED") - - voice-enabled,
                company-wide call routing and directory functionality that
                empowers callers to self-direct their calls by speaking the name
                of the person, the functional area or the department they wish
                to reach; and

                4. SITE LOCATOR - - a locate-by-phone service that helps
                potential customers find the nearest location or distributor for
                their desired product or service. This product is an extremely
                cost-effective tool for building store traffic, determining
                market segmentation, and measuring marketing media
                effectiveness.


                                       7
<PAGE>   10
Each of these products is typically billed on a per minute and per transaction
basis.

      We also offer a full range of professional services including project
management, application development, and ongoing customer service which allows
customers to specify fully-customized applications. In addition, we offer
CyberStats(TM), an online reporting tool for our Hosted Services customers.
CyberStats provides real-time reports on transaction details through our Hosted
Services center. Users can access CyberStats on the Internet and elect to have
reports delivered to them via their PC, email or fax.

      On September 15, 1999, we sold our predictive dialer product line to Nobel
Systems Corporation. That sale contributed other income of $509,000, as
reported on our financial statements. See Item 8, "Financial Statements and
Supplementary Data," for more details regarding that sale.


SALES AND MARKETING

     General. We have sold over 6,000 systems to customers in 55 countries. We
     --------
provide technological solutions to companies in a variety of industries,
including banking, insurance, financial services, media, public utilities,
healthcare, service providers, transportation, telecommunications, retailing,
government agencies, oil and gas, manufacturing, education and newspaper
publishing. Our customer base includes some of the largest domestic banking
firms, some of the largest insurance companies and numerous Fortune 500
companies. Our products are sold through a direct sales force, domestic and
international distributors, and value added resellers. We believe we will
continue to rely on direct distribution because of the increasing complexity of
our applications which is largely due to the requirements of speech recognition
technology. We will continue to do this at least until industry open standards
are agreed upon and speech recognition development tools are improved.

     Even though direct distribution may be mandated by the complexity of
applications, customers prefer to purchase contact center technologies as part
of a total system. Automated call handling technologies, however, appear to be
sold increasingly as one element of a contact center portfolio by system
integrators, telecommunications companies and switch vendors. As a result, we
believe we must develop strong distribution partnerships in many markets to
ensure that our products are represented in the markets where they can be sold.
Consequently, we are actively adding and soliciting distribution partners in a
number of important regions. We currently maintain five sales offices in the
United States as well as one in each of London, Amsterdam and Stockholm.

     Domestic Sales. The percentage of our total revenue represented by domestic
     ---------------
sales, including maintenance fees, for the last three fiscal years is as
follows: 69% in 2000, 81% in 1999, and 78% in 1998. During those years, no
single distributor or customer accounted for more than 10% of our total
revenues. Our direct sales force closed more than 94% of our domestic sales
(excluding maintenance, patents, and Hosted Services) in 2000.

     International Sales. The percentage of our total revenues represented by
     --------------------
international sales, including maintenance fees, for the last three fiscal years
is as follows: 31% in 2000, 19% in 1999, and 22% in 1998. See Note 12 of the
"Notes to Consolidated Financial Statements" for additional information
regarding international operations. All of our product lines and services are
sold worldwide and are offered in 15 different languages. We maintain a direct
sales force in London to market our systems in various countries around the
world and have opened offices in Amsterdam and Stockholm. Sales in the United
Kingdom are denominated in pounds sterling and are subject to foreign currency
adjustments. Sales in all other foreign countries are denominated in United
States dollars. We attempt to conduct business in international markets in
compliance with each country's applicable laws and regulations, including safety
and telecommunication laws, import duties and quotas. We have not experienced
any difficulty in obtaining export licenses for foreign sales from the United
States Department of Commerce.

      Marketing Organization and Vertical Market Focus. Our marketing
      -------------------------------------------------
organization is charged with (i) enhancing our corporate image; (ii) increasing
demand for our 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 marketing
communications materials, advertising and public relations campaigns; and
maintains relationships with key industry analysts and media contacts. Our
strategic marketing plan is focused on the following four vertical


                                       8
<PAGE>   11
markets: financial services, media (cable and satellite television and
newspaper), utilities, and healthcare. Sales to these markets represented
approximately 73% of our total revenues for 2000; 79% for 1999; and 84% for
1998. We market our products to industry leaders within these vertical markets
as management believes industry leaders have the greatest need for self-service
and transaction processing technologies, are most likely to require system
expansion and additional services, and serve as an important source of customer
referrals.


PRODUCT DEVELOPMENT

     Our product development consists of system and software specification,
software design and coding, and third party software integration. Employees of,
and contractors managed by, our research and development department perform all
product development. We continually strive to identify and develop new products
and new features for existing products to expand our market. Furthermore, we
perform rigorous testing prior to releasing new products and features.
Nevertheless, products as complex as those we produce 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.

     Our product development organization consisted of the following numbers of
individuals for the years indicated: 33 in 2000, 41 in 1999, and 55 in 1998. We
spent $3.2 million for research and development in 2000, $4.4 million in 1999,
and $5.6 million in 1998.


MANUFACTURING AND SUPPLIERS

     Our manufacturing operation consists of limited in-house configuration,
product assembly, product testing and quality and revision control of our
products. We may obtain hardware components from third parties for our products,
including telephony interface and voice recognition boards. We do not believe we
are dependent on a single source to supply the components we use in our
products. We are also currently able to obtain key components in a timely manner
from a variety of sources.


BACKLOG

     Our year end 2000 backlog was approximately $9.9 million and $9.3 million
for year end 1999. We believe that all orders in backlog at December 31, 2000
are firm and will be delivered within the next fiscal year. Because the
possibility exists for customers to make changes to their original orders, to
alter or significantly delay delivery schedules or to cancel their orders, the
backlog total as of any particular date may not be indicative of actual revenues
for any future period.


PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY

     We establish and protect our proprietary rights in our products and
technologies through a combination of registered copyrights, trademarks, service
marks, trade secret and patent protection. We also enter into confidentiality
agreements with our employees, distributors and customers, and seek to limit
access to the distribution of our software, documentation and other proprietary
information. We currently hold 65 registered trademarks in 15 countries and a
total of 14 pending trademark and patent registrations as well as seven
copyrights. We believe, however, that technological innovation, expertise, and
market responsiveness can be as important to us as those legal protections.

     VocalPoint is a registered trademark, the rights to which we sold in the
third quarter of 2000. As part of the agreement for that sale, we maintain the
unrestricted right to full use of the trademark until such time as the product
enters "end-of life" and service commitments have expired. Syntellect, Infobot,
VocalPoint, VocalPoint Interactive Web Response, Cyberstats, VistaGen,
VistaView, DialExpress and Home Ticket are our current or pending trademarks.
All other products mentioned in this Annual Report to the Securities and
Exchange Commission (this "Annual Report") are trademarks or pending trademarks
of their respective owners.


                                       9
<PAGE>   12
     Our Vista product line uses a licensed third party software, which provides
a portion of the architectural foundation for the product. We have secured a
permanent, perpetual, world-wide, non-exclusive, non-revocable license to this
software which allows us to use, copy, modify, distribute, and license the
source code in connection with our Vista product.


EMPLOYEES

     As of December 31, 2000, we employed a total of 286 individuals, 280 on a
full-time basis and 6 on a part-time basis. Of those employees, 53 are in sales,
19 in marketing, 61 in customer support, 57 in application services, 33 in
product development, 30 in Hosted Services and 33 in administration.


EXECUTIVE OFFICERS OF THE REGISTRANT

     Set forth below is information with respect to our officers, including such
information as their names, ages, positions and offices held with us as of March
20, 2001.

     Anthony V. Carollo, Jr., 59, became our Chairman and Chief Executive
Officer ("CEO") on November 4, 1999 after serving as Chairman and interim CEO
since May 14, 1999. He has served as a director since August 1998. Mr. Carollo
was the President of Xantel Corporation from April 1998 to November 1999.
Previously, Mr. Carollo was the President and Chief Operating Officer of Fujitsu
Business Communication Systems and a former Vice President and General Manager
of ROLM Corporation. He has also held numerous financial positions, both at
ROLM, Arcata Communications and Arthur Andersen & Company. Mr. Carollo currently
also serves as a director of Marshall & Ilsley Trust Company of Arizona and
Spectralink Corporation. Mr. Carollo holds a BS degree from the University of
Santa Clara and an MBA degree from UCLA.

     Timothy P. Vatuone, 51, became our Vice President and Chief Financial
Officer on February 14, 2000. Before working with us, he served as Vice
President and Chief Financial Officer of Vivid Semiconductor, Inc., a venture
backed, LCD panel technology start-up, where he raised over $70 million in
equity, lease and bank financing. Previously, Mr. Vatuone was Vice President and
Chief Financial Officer of Capetronic International Holdings, Ltd., an
Asian-based manufacturer of computer CRT displays. He has also held numerous
other financial management positions in technology companies such as
Hewlett-Packard, Convergent Technologies and Roche. Mr. Vatuone received a BS
degree in economics and an MBA degree from the University of Santa Clara.

     Charles F. Sonneborn, 40, became our Vice President and Controller on
February 13, 2001. Previously, Mr. Sonneborn was our Controller, Financial
Operations from June 13, 2000. Prior to joining us, he was the Controller for
Xantel Corporation, a computer telephone software developer. Previously, he was
General Manager and Chief Financial Officer for Prochem, a Phoenix based
manufacturer of cleaning equipment and chemicals. He has held other financial
and operational management positions in privately held direct marketing and
manufacturing companies such as The Eastwood Company and Group Dekko Companies.
Mr. Sonneborn received a BS degree in accounting from Indiana University and an
MBA degree from Indiana Wesleyan University.

      W. Scott Coleman, 45, currently serves as our Chief Technology Officer and
Vice President of Operations. Previously, Mr. Coleman has served in various
capacities since 1993 as our President of Call Center Systems, Senior Vice
President and General Manager of Call Center Systems, and Vice President of
Product Development. He 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 BS degree in electrical engineering
from Mississippi State University and an MS degree in electrical engineering
from the Georgia Institute of Technology.

     Carol E. Reid, 49 became our Vice President of Marketing on June 12, 2000
and also serves as interim Vice President of Sales. Prior to joining us, she was
the Chief Executive Officer and the Vice President of Sales and Marketing for
Xantel Corporation, a computer telephone software developer. Earlier, she served
as Global Account Manager for Calico Commerce, Region Manager for Chordiant, and
Eastern Region Sales Manager for Aspect Telecommunications where she built their
initial sales teams from Boston to Washington D.C.


                                       10
<PAGE>   13
     Peter K. Trompetter, 46, became Vice President of Global Development on May
15, 2000. Before joining us, he worked for software companies such as NAS, KPN,
Sequent and TechForce in various international senior management positions and
began his senior management career in 1976 at N.C.M. N.V. in the Netherlands.
Mr. Trompetter is multi-lingual and is responsible for implementing a strategy
of global product and account development including product related marketing
alliances and after-sales customer support.


ITEM 2 -- PROPERTIES

     Our corporate headquarters is located in a 37,301 square foot facility in
Phoenix, Arizona. Our lease for this facility commenced in July 2000 and
continues through October 2005. The facility houses our core business and
includes space for customer support, research and development, sales, marketing,
production, training and administrative functions.

     We also lease a 38,904 square foot facility in Roswell, Georgia and a 1,619
square foot facility in Atlanta, Georgia. These facilities house our Hosted
Services, including our Home Ticket pay-per-view service and other applications
offered through our subsidiary, SIS. As of December 31, 2000, in addition to the
sales office in Roswell, Georgia, we leased four other sales and support offices
in the United States and one in London. As of that date, the aggregate monthly
rental payment for our office facilities was approximately $119,000. We leased
two additional offices, one in Amsterdam and one in Stockholm, in January 2001.


ITEM 3 -- LEGAL PROCEEDINGS

     From time to time we are involved in legal proceedings of a character
incident to our normal business operations. We are not currently a party to any
material pending legal proceedings.


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

     No matters were submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of 2000.



                                     PART II

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

     Our 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 2000                   HIGH                           LOW
            ---------------                 ---------                      --------
<S>                                      <C>                            <C>
            1st Quarter....                 $ 7 1/16                       $2 15/16
            2nd Quarter....                  6 11/16                        3
            3rd Quarter....                  9 3/16                         5 11/16
            4th Quarter....                  8 3/16                         3 1/4
</TABLE>

<TABLE>
<CAPTION>
            YEAR ENDED 1999                    HIGH                          LOW
            ---------------                 ---------                      --------
<S>                                      <C>                            <C>
            1st Quarter....                  $ 3 5/8                       $  1 1/8
            2nd Quarter....                    1 27/32                        1 1/8
            3rd Quarter....                    2 5/8                          1
            4th Quarter....                    3 3/8                          1 5/16
</TABLE>


                                       11
<PAGE>   14
     On March 20, 2001, the closing sale price for our common stock was $2.44
per share. On that date there were 184 holders of record of our common stock.
This figure does not reflect beneficial ownership of shares held in nominee
names. We have never declared or paid a cash dividend on our common stock. We
presently intend to retain earnings for use in our business and do not
anticipate paying cash dividends on outstanding shares in the foreseeable
future.


ITEM 6 -- SELECTED FINANCIAL DATA

     The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report. 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, 2000, are derived from our consolidated
financial statements, which financial statements have been audited by KPMG LLP,
independent certified public accountants. The consolidated financial statements
as of December 31, 2000 and 1999, and for each of the years in the three-year
period ended December 31, 2000, and the report thereon, are included elsewhere
in this Annual Report.

STATEMENT OF OPERATIONS DATA (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                -----------------------------------------------------------------------
                                                  2000           1999            1998            1997            1996
                                                --------       --------        --------        --------        --------
<S>                                             <C>            <C>             <C>             <C>             <C>
 Net revenues ...........................       $ 48,032       $ 47,831        $ 47,953        $ 48,182        $ 55,305
 Cost of revenues .......................         19,737         24,712          22,658          25,678          27,783
                                                --------       --------        --------        --------        --------
           Gross margin .................         28,295         23,119          25,295          22,504          27,522
 Operating expenses:
    Selling, marketing and administrative         21,007         18,854          20,386          19,463          21,383
    Product development .................          3,230          4,448           5,573           5,874           5,943
    Depreciation and amortization .......          1,817          2,489           2,538           3,908           3,229
    Fixed asset write-down ..............             --             --              --           1,303              --
                                                --------       --------        --------        --------        --------
           Total operating expenses .....         26,054         25,791          28,497          30,548          30,555
                                                --------       --------        --------        --------        --------
 Operating income (loss) ................          2,241         (2,672)         (3,202)         (8,044)         (3,033)
 Gain on sale of patent portfolio .......             --             --              --           7,860              --
 Other income, net ......................            256            806             584             304             253
                                                --------       --------        --------        --------        --------
 Income (loss) before income taxes ......          2,497         (1,866)         (2,618)            120          (2,780)
 Income tax expense (benefit) ...........            255             --              --             (21)             --
                                                --------       --------        --------        --------        --------
 Net income (loss) ......................       $  2,242       $ (1,866)       $ (2,618)       $    141        $ (2,780)
                                                ========       ========        ========        ========        ========
 Earnings (loss) per share - diluted ....       $    .18       $   (.14)       $   (.19)       $    .01        $   (.21)
                                                --------       --------        --------        --------        --------
 Shares used in per share calculation ...         12,699         13,034          13,441          13,788          13,256
                                                ========       ========        ========        ========        ========
</TABLE>

BALANCE SHEET DATA (in thousands)

<TABLE>
<CAPTION>
                                                                   AS OF DECEMBER 31,
                                            ---------------------------------------------------------------
                                             2000          1999          1998          1997          1996
                                            -------       -------       -------       -------       -------

<S>                                         <C>           <C>           <C>           <C>           <C>
 Working capital ....................       $ 6,416       $ 9,867       $14,797       $13,488       $13,677
 Total assets .......................        27,101        26,224        32,133        34,808        34,808
 Long-term debt, less current portion           316           293           445           530           229
 Shareholders' equity ...............        11,177        14,390        19,813        22,186        22,021
</TABLE>


                                       12
<PAGE>   15
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS


RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

NET REVENUES

     Net revenues for 2000 were $48.0 million compared to $47.8 million reported
for 1999. These annual revenues were derived from our three operating business
segments of Licenses and Hardware, Services and Hosted Services which
represented 43%, 45% and 12% of net revenues, respectively, for 2000, and 36%,
48% and 16% of net revenues, respectively, for 1999.

     Our core product is Vista, an open standards-based Interactive
Communications Management ("ICM") software platform for enterprise customer call
centers. Vista combines several call center technologies with a distributed
client-server architecture, open standard components, web-based management
system and a graphical application development tool. We believe Vista provides
customers with flexibility, scalability and efficiency, high degrees of
redundancy, and superior processing performance. Vista Interactive Voice
Response ("IVR"), Vista Computer Telephony Integration ("CTI"), Interactive Web
Response ("IWR") and voice recognition are currently available. Non-core or
legacy products include VocalPoint, an IVR platform; and VocalPoint Interactive
Services, providing CTI functionality, IWR, and Premier and Premier 030
proprietary IVR systems.

     In late 1998, we began the transition of becoming a software-based company
from a hardware/software-based company. In 2000, we began to change the
reporting of business segments to Licenses and Hardware, Services, and Hosted
Services from the previous structure of Systems, Hosted Services (SIS), and
Patents. System sales and Maintenance and other services as reported in the 1999
and 1998 Annual Reports have been restated as Licenses and Hardware and Services
for the 2000 Annual Report.

      Licenses and Hardware revenues for 2000 were $20.9 million, an increase of
$3.8 million, or 22%, compared to the $17.1 million for 1999. The increase in
2000 was due to the strength of the Vista product line which has shown increased
sales in every quarter since revenues commenced in the third quarter of 1998. In
2000, the Vista product line accounted for 84% of Licenses and Hardware sales.
VocalPoint systems sales declined 41% in 2000 as the Vista product line more
than replaced the declining sales.

     Services revenues for 2000 were $21.4 million compared to $23.0 million for
1999, a decrease of $1.6 million, or 7%. The components of Services revenues
consist of patent infringement lawsuits, $1.6 million decrease; maintenance
revenues, $0.9 million decrease but showed an upward trend in the second half of
2000 due to the increased number of installations in late 1999 and early 2000;
application services, $0.8 million increase; project management, $0.6 million
increase; installation, $0.7 million decrease; and other services, $0.2 million
increase.

     Hosted Services revenues for 2000 were $5.7 million compared to $7.7
million for 1999. This is a decrease of $2.0 million, or 26%. The primary reason
for the decline was due to Home Ticket, a pay-per-view service for cable
television providers which is offered through our SIS subsidiary. The cable TV
industry has been deploying new order entry technologies for consumer purchases
of pay-per-view events which do not utilize toll free 800 numbers. This has
resulted in a downward trend in transaction processing fees; a trend which is
expected to continue. To offset the decline in pay-per-view services, Hosted
Services has offered other outsourced electronic capabilities including
DialExpress (message delivery), Lead Capture, Speech Enabled Directory, Site
Locators, broadcast faxing, call center processing, and audiotext.

     Domestic and International Sales for 2000 were $33.2 million, or 69%, and
$14.8 million, or 31%, of total revenues, respectively, compared to $38.9
million, or 81%, and $8.9 million, or 19% of total revenues, respectively, for
1999.


                                       13
<PAGE>   16
GROSS MARGIN

     The gross margin percentage for the year ended December 31, 2000 was 59% of
net revenues, as compared with 48% for the year ended December 31, 1999. Gross
margins on License and Hardware revenues in 2000 were $15.4 million compared to
$10.9 million in 1999, representing a 41% increase in margins. Margin
percentages were 74% and 64% of sales for 2000 and 1999, respectively. This
increase is primarily due to our ongoing transition from a
hardware/software-based company to a software-based company. Additionally, gross
margin was positively affected by decreases in the inventory reserve of $0.7
million and $1.4 million in the years 2000 and 1999, respectively, due to a
higher than expected usage of inventory from discontinued product lines. Gross
margins on Services revenues in 2000 were $11.2 million, or 52%, compared to
$9.6 million, or 42% in 1999, an increase of $1.6 million primarily due to the
reduction in third party contractor expense. Gross margins on Hosted Services
decreased by $0.9 million from $2.6 million, or 34%, to $1.7 million, or 30%, in
2000 as compared to 1999 primarily caused by the relatively fixed nature of
Hosted Services costs. We include 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 2000
are not necessarily indicative of the results to be expected for future periods.

OPERATING EXPENSES

     Operating expenses for 2000 were $26.1 million, an increase of $0.3
million, or 1%, from the $25.8 million reported for 1999. Selling, marketing,
and administrative expenses (including depreciation and amortization) increased
$1.5 million, or 7%, primarily due to an increase in the number of employees in
domestic sales and administration, employee incentives, desktop software, and
occupancy costs related to the move of our headquarters to a new facility. In
2000, research and development costs decreased $1.2 million, or 27%. The
spending decreases are primarily the result of our transition from a
hardware/software-based company to a software-based company. However, we
anticipate that research and development spending will increase in future years.
Operating expenses decreased due to reductions of the accounts receivable
reserves by $0.6 million and $0.1 million in the years 2000 and 1999,
respectively. The change in 2000 was primarily due to an increased effort and
control of collections and a decrease in aged accounts receivables.

NET INCOME (LOSS)

     We reported a net income of $2.2 million, or $.18 per diluted share, for
2000, compared to a net loss of $1.9 million, or $(.14) per share for 1999,
representing a $4.1 million increase over the prior year.


YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

NET REVENUES

     Net revenues for 1999 remained constant at $47.8 million as compared to
$48.0 million reported for 1998. Net revenues consisted of Licenses and
Hardware, Services and Hosted Services, which represented 36%, 48% and 16% of
net revenues, respectively, for 1999, and 41%, 40% and 19% of net revenues,
respectively, for 1998.

      Licenses and Hardware revenues for 1999 were $17.1 million, a decrease of
$2.5 million, or 13%, as compared to $19.6 million for 1998. This decrease was
primarily due to the decline in hardware sales as we transitioned to a
software-based company.

      Services revenues for 1999 were $23.0 million, an increase of $3.6
million, or 19%, as compared to $19.4 million for 1998. The increase in revenues
was primarily due to an enhanced product offering with the Vista product
creating the need for more application development, project management and
consulting services. This increase was offset by a decline of $2.2 million in
maintenance revenue which was consistent with our expectations as we had earlier
advised customers that certain products were not Year 2000 compliant and would
not be made so, causing some maintenance contracts not to be renewed.


                                       14
<PAGE>   17
     Hosted Services revenues were $7.7 million for 1999, a decrease of $1.2
million, or 13%, from the $8.9 million reported in 1998. The primary reason for
the decline was due to our Home Ticket service. The cable TV industry has been
deploying new order entry technologies for consumer purchases of pay-per-view
events which do not utilize toll free 800 numbers. This change resulted in a
downward trend in transaction processing fees; a trend that was is expected to
continue. To offset the decline in pay-per-view services, Hosted Services has
offered other outsourced electronic capabilities including DialExpress, Lead
Capture, Speech Enabled Directory, Site Locators as well as benefits enrollment,
broadcast faxing, call center processing, and audiotext.

     Domestic and International Sales for 1999 were $38.9 million, or 81%, and
$8.9 million, or 19%, of total revenues, respectively, compared to $37.5
million, or 78%, and $10.5 million, or 22% of total revenues, respectively, for
1998.

GROSS MARGIN

     The gross margin percentage for the year ended December 31, 1999 was 48% of
net revenues, as compared with 53% for the year ended December 31, 1998. The
gross margin on Licenses and Hardware remained flat at $10.9 million, yet the
gross margin percentage increased to 64% for 1999 compared to 59% for 1998. The
increase in 1999 was due to the decline in hardware sales which has a lower
gross margin percentage. Gross margin was positively affected by decreases in
the inventory reserve of $1.4 million and $1.1 million in the years 1999 and
1998, respectively, due to a higher than expected usage of inventory from
discontinued product lines. The gross margin on Services for 1999 was $9.6
million as compared to $10.5 million in 1998, or 42% and 51%, respectively. This
decline was primarily due to the increase in third party contractor expense in
1999 as we transitioned to a software-based company. Gross margin on Hosted
Services decreased by $1.3 million from $3.9 million, or 44%, to $2.6 million,
or 34%, in 1999 as compared to 1998 primarily caused by the relatively fixed
nature of Hosted Services costs.

OPERATING EXPENSES

     Operating expenses for 1999 were $25.8 million, a decrease of $2.7 million,
or 9%, from the $28.5 million reported for 1998. Selling, marketing, and
administrative expenses (including depreciation and amortization) decreased $1.5
million, or 7%, primarily due to the consolidation of the corporate structure
and general cost reductions which started during the second quarter of 1999.
Research and development costs decreased $1.1 million, or 20%. 1998 was impacted
by the development of the Vista product which was released in May of 1998.
Operating expenses decreased due to reductions of the accounts receivable
reserves of $0.1 million and $0.3 million in the years 1999 and 1998,
respectively. The 1999 decrease was primarily due to a lower reserve coverage
needed for aged account receivables at December 31, 1999 as compared to
December 31, 1998.

NET INCOME (LOSS)

     We reported a net loss of $1.9 million, or $(.14) per share, for 1999,
compared to a net loss of $2.6 million, or $(.19) per share for 1998.


LIQUIDITY AND CAPITAL RESOURCES

     We had working capital of $6.4 million at December 31, 2000, compared to
$9.9 million at December 31, 1999, and the current ratio was 1.4:1 and 1.9:1 on
such dates, respectively. Cash, cash equivalents, short-term investments and
marketable securities available-for-sale at the end of 2000 was $7.3 million as
compared to $6.2 million at December 31, 1999.

     Cash provided by operating activities during 2000 was $6.8 million.
Deferred revenue increased by $3.5 million due to fourth quarter payments and
orders that are expected to be recognized in 2001.

     Cash provided from investing during 2000 was $0.3 million due to proceeds
of $0.3 million received from the sale of property and equipment from our
previous headquarters location, the purchase of $1.0 million in property and
equipment, and $1.0 million in maturities of marketable securities.


                                       15
<PAGE>   18
     Cash used in financing activities during 2000 was $5.8 million primarily
due to the $6.5 million purchase of treasury stock and $1.1 million in proceeds
from the issuance of common stock.

     We use a letter of credit, secured by a $75,000 certificate of deposit, to
secure the lease on our Chicago facility. Accordingly, the disposal of the
certificate of deposit is restricted by the letter of credit agreement. On
October 11, 2000, we entered into a $4 million revolving line of credit
agreement with a financial institution. The purpose for this line of credit is
to fund general operations with all of our assets as collateral. The loan
agreement contains various restrictions on us, including limitations on the
incurrence of additional debt, and restrictions on our ability to repurchase our
stock, make acquisitions, or consolidate or merge into any other entity. In
addition, the loan agreement contains certain financial covenants, including a
minimum interest coverage ratio, a minimum liquidity ratio, and a maximum funded
senior debt to EBITDA ratio. We violated certain restricted covenants pertaining
to the line of credit agreement. However, the financial institution waived these
violations. At December 31, 2000, we had no outstanding borrowings under this
line of credit.

     We expect that our current cash and cash equivalents combined with future
cash flows from operating activities and the line of credit will be sufficient
to support our operations during 2001.

     On November 13, 1998, the Board of Directors approved a stock buyback plan
to purchase up to 1.5 million shares of our common stock over the following two
years. We completed the buyback plan during the third quarter of 1999. On
November 5, 1999, we announced a new buyback plan pursuant to which we were
authorized to acquire up to 1 million shares over a one-year period. On August
8, 2000 the Board of Directors revised this plan by approving the buyback of an
additional 500,000 shares and extending the buyback period to August 8, 2001. On
November 10, 2000, the Board of Directors authorized an additional 500,000 share
buyback with no time limitation. As of March 20, 2001, we have repurchased a
total of 3,135,000 shares under these plans since November 13, 1998 and are
authorized to repurchase 365,000 additional shares.

OPERATING BUSINESS SEGMENTS

      An operating business segment is defined as a component of an enterprise
that engages in business activities which may earn revenues and incur expenses,
whose results are regularly reviewed by a chief operating decision maker, and
for which discrete financial information is available. We have three operating
business segments which are organized around differences in products and
services: Licenses and Hardware, Services, and Hosted Services. See Note 12 of
the "Notes to Consolidated Financial Statements" for additional information
regarding our business segments.

      Licenses and Hardware is our operating business segment that includes our
contact center software platform called Vista. Vista is an all-in-one solution
for interactive voice response, interactive web response, computer telephony
interaction, fax on demand, automatic speech recognition, and other
applications.

      Services is our operating business segment that includes customer support
in the areas of consulting services, project management, application
development, installation, education services, and maintenance. We generally
sell these services as part of the initial sale or in some cases as post
implementation add-ons. This segment also includes patent litigation against
third parties.

      Hosted Services is our operating business segment which provides products
and services including Home Ticket Pay-Per-View, DialExpress, Lead Capture,
Speech Enabled Directory, Site Locator, Cyberstats, and a variety of out-sourced
electronic capabilities such as benefits enrollment and broadcast faxing which
we offer through our subsidiary, SIS.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138 require
that all derivative instruments be recorded on the balance sheet at their
respective fair values. We have adopted the provisions of both SFAS No. 133 and
No. 138


                                       16
<PAGE>   19
as of January 1, 2001, and believe that such adoption will not have a material
effect on our consolidated financial statements.


ITEM 7A. -- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK

     Our exposure to market risk for changes in interest rates relates to our
cash investment portfolio. Our general policy is to limit the risk of principal
loss and to ensure the safety of invested funds by limiting market and interest
rate risk. We place our investments in instruments with high credit quality
issuers. We classify all liquid investments with a maturity date of three months
or less as cash equivalents. We classify investments with a maturity date
between three and twelve months as either short-term investments or marketable
securities. The average interest rate on short-term investments is 4.65%. We do
not expect any material loss with respect to our cash investment portfolio since
marketable securities have generally been held until maturity and unrealized
gains and losses are negligible.

      Our only long-term liabilities are capital lease obligations at a fixed
rate. Therefore, we do not believe there is any material exposure to market risk
changes in interest rates as it relates to our current or long-term liabilities.

FOREIGN CURRENCY EXCHANGE RATE RISK

     We invoice all international customers in U.S. dollars except for the
customers of our United Kingdom ("U.K.") subsidiary, which are invoiced in
pounds sterling. Our U.K. subsidiary's financials including balance sheet,
revenue, and operating expenses are recorded in pounds sterling. Therefore, our
exposure to foreign currency exchange rate risk occurs when we translate the
financial results of that subsidiary to U.S. dollars in consolidation. At this
time, we do not use instruments to hedge our foreign exchange exposure in the
U.K. because the effects of foreign exchange rate fluctuations are not material
for us.

ADDITIONAL CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

     Our disclosure and analysis in this Annual Report contain some
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify such statements by
the fact that they do not relate strictly to historical or current facts. These
statements may include words such as "anticipate," "likely," "expect," "intend,"
"believe," and other words and phrases of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these
forward-looking statements include, for example, statements relating to future
actions, prospective products, future performance, results of current and
anticipated products, sales efforts, and operating expenses. From time to time,
we also may provide oral or written forward-looking statements in other
materials we release to the public.

      We reasonably believe that any or all of our forward-looking statements in
this Annual Report and in any other public statements we make are true at the
time they are made. However, such statements may turn out to be wrong. They can
be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Consequently, no forward-looking statement can be guaranteed,
and actual future results may vary materially. We undertake no obligation to
publicly update forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised, however, to review any
and all further disclosures we make on related subjects in our 10-Q and 8-K
filings with the SEC and in other materials we publicly release.

      Also note that below is a cautionary discussion of risks, uncertainties
and possibly inaccurate assumptions relevant to our business. These are just
some factors that we think could cause our actual results to differ materially
from expected and historical results. Other factors besides those discussed
below and throughout this Annual Report could also adversely affect us. This
discussion is provided as permitted by Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934.


                                       17
<PAGE>   20
Our markets are characterized by rapid technological changes which may cause us
--------------------------------------------------------------------------------
to incur significant development costs and prevent us from attracting new
--------------------------------------------------------------------------------
customers.
--------------------------------------------------------------------------------

      The market for our products is characterized by rapid technological
change, frequent new product introductions and enhancements, uncertain product
life cycles and changing end-user customer demands. The introduction of products
embodying new technologies and the emergence of new industry standards could
render existing products and services obsolete or unmarketable and cause us to
incur significant costs to develop new or enhanced products to meet the
competition of such new technologies or industry standards. If we are unable to
develop new products and services or if we are unable to develop such products
fast enough to meet this competition, we could be prevented from attracting new
customers and from retaining the installed base of customers we currently have.
Such events could have a material adverse effect on our business, financial or
market performance.

Our future business prospects depend in part on our ability to maintain and
--------------------------------------------------------------------------------
improve our current products and services and develop new ones.
--------------------------------------------------------------------------------

      We believe that our future business prospects depend in large part on our
ability to maintain and improve our current products and services and to develop
new products and services on a timely basis. Our products will have to achieve
market acceptance, maintain technological competitiveness and meet an expanding
range of end-user customer requirements. As a result of the complexities
inherent in our products, major new products and product enhancements require
long development and testing periods. We may not be successful in developing and
marketing, on a timely and cost effective basis, product enhancements or new
products that respond to technological change, evolving industry standards or
end-user customer requirements. We may also experience difficulties that could
delay or prevent a successful development, introduction or marketing of product
enhancements, and our new products and product enhancements may not achieve
market acceptance. Significant delays in the general availability of new
releases of our products or significant problems in the installation or
implementation of new releases of our products could have a material adverse
effect on our business, financial or market performance. In addition, we cannot
assure you that any new product or feature we introduce will receive market
acceptance. Future announcements we make of new products may cause customers to
defer purchases of our existing products, which could also adversely affect our
business, financial or market performance.

If the technology we license from others for embedding in our products does not
--------------------------------------------------------------------------------
continue to be available, we could be forced to modify our products or eliminate
--------------------------------------------------------------------------------
product functions.
--------------------------------------------------------------------------------

      We license technology from others which we embed in some of our products.
If one or more of these licenses terminates or cannot be renewed on satisfactory
terms, we could be forced to modify the affected products to use alternative
technology or we may be required to eliminate the affected product function,
either of which alternatives could have a material adverse effect on us. In
addition, should the licensors of our embedded technology cease operations or
should their technology contain defects or be subject to adverse intellectual
property claims, we could be adversely and materially affected.

We obtain hardware components from third parties
--------------------------------------------------------------------------------

      We obtain hardware components from third parties for our products,
including, without limitation, telephony interface and voice recognition boards.
We do not believe that we are dependent on a single source to supply the
components we use in our product. We are currently able to obtain key components
in a timely manner from a variety of sources. However, if we are unable to
secure alternate suppliers of key components or alternate assembly sources in a
timely manner when we needed them, our results of operations could be affected
adversely.

We depend on key personnel and on our ability to recruit additional skilled
--------------------------------------------------------------------------------
personnel, in a very competitive recruiting environment, to conduct and grow our
--------------------------------------------------------------------------------
business effectively.
--------------------------------------------------------------------------------

      Our future success also depends upon our ability to attract, train,
assimilate and retain qualified personnel. Competition for individuals with
skills in the computer telephony software industry is intense, particularly for
those with relevant technical and/or sales experience. We cannot assure you that
we will be able to retain our key employees or that we can attract, train,
assimilate or retain other qualified personnel in the future in the numbers we


                                       18
<PAGE>   21
will require. Our inability to attract and retain qualified personnel in the
future could have material adverse effects on our business, financial or market
performance.

      We have never had a work stoppage and none of our employees are
represented by labor unions. However, a limited number of sales representatives
are responsible for a substantial portion of our direct sales. The loss of these
representatives could adversely affect our future operating results.

We face competitive pressures which may have a materially adverse effect on us.
-------------------------------------------------------------------------------

      The market for our computer telephony software products is highly
competitive and, because there are relatively low barriers to entry in certain
parts of this market, we expect competition to increase in the future. In
addition, because our industry is relatively new and evolving and characterized
by rapid technological change, it is difficult for us to predict whether, when
and by whom new competing technologies or new competitors may be introduced into
our markets. Currently, our competition comes from several different market
segments, including computer telephony platform developers, computer telephony
applications software developers and telecommunications equipment vendors. We
cannot assure you that we will be able to compete effectively against current
and future competitors.

      In addition, increased competition or other competitive pressures may
result in price reductions, reduced margins or loss of market share, any of
which could have material adverse effects on our business, financial condition
or results of operations. Many of our current and potential competitors have
longer operating histories, significantly greater financial, technical,
marketing, customer service and other resources, greater name recognition and a
larger installed base of customers than we do. As a result, these competitors
may be able to respond to new or emerging technologies and changes in customer
requirements faster and more effectively than we can, or to devote greater
resources to the development, promotion and sale of products than we can.

      Current and potential competitors have established, and may in the future
establish, cooperative relationships among themselves or with third parties,
including mergers or acquisitions, to increase the ability of their products to
address the needs of our current or prospective end-user customers. Some of
these competitors also currently have a larger market share than we do and, were
they to increase their market share through such cooperative relationships,
mergers or acquisitions or through product development, promotion and sale, such
developments could have material adverse effects on our business, financial or
market performance.

Because of the competitive, rapidly changing nature of the computer telephony
--------------------------------------------------------------------------------
software industry, we must continually identify the most effective means for
--------------------------------------------------------------------------------
selling and marketing our products.
--------------------------------------------------------------------------------

      The computer telephony software industry is very competitive and rapidly
changing. Information technology purchasers can be reluctant to believe that new
technology is ready for mass implementation. As a result, we must continually
identify markets for our products and services and apply the most effective
means for addressing those markets, both internationally and domestically. We
are required to have a thorough understanding of the industry's direction and an
appreciation for the end-user's demands for functionality. We are also required
to effectively balance both direct and indirect sales channels and to train our
sales force to find new customers and further develop our installed customer
base while keeping thoroughly familiar with our products and product mix. If we
are unable to generate increasing revenues through focused attention on these
sales and marketing elements, we could cause material adverse effects on our
business, financial or market performance.

We may not be able to protect our proprietary rights adequately, which could
--------------------------------------------------------------------------------
allow third parties to copy or otherwise obtain and use our technology without
--------------------------------------------------------------------------------
authorization.
--------------------------------------------------------------------------------

     We consider our computer telephony software products to be proprietary. In
an effort to protect our proprietary rights, we rely primarily on a combination
of patent, copyright, trademark and trade secret laws, as well as licensing and
other agreements with others including our end-user customers, consultants,
suppliers, and resellers and on employee and third-party non-disclosure
agreements. These laws and agreements provide only limited protection of our
proprietary rights, and the protection they provide varies and may not provide
us with adequate protection in all circumstances. We have filed a patent
application directed to several inventions embodied in our


                                       19
<PAGE>   22
computer telephony software products. We also hold 65 registered trademarks in
15 countries and 13 pending registrations. We also hold seven registered
copyrights.

      Because our means of protecting our proprietary rights may not be
adequate, it may be possible for a third party to copy or otherwise obtain and
use our technology without authorization. A third party could also develop
similar technology independently. Also, even though we hold patents and other
proprietary rights in our products, the development and sale of our products
could violate the proprietary rights of others, including the patent rights of
others. Should this be or become the case, we could be required to redesign our
products to avoid violating such proprietary rights, or we could be forced to
acquire or license those proprietary rights. Any of such alternatives could
materially increase the cost of our products and, consequently, their
attractiveness to our customers. In addition, the laws of some countries in
which we sell our products do not protect our software and intellectual property
rights to the same extent as the laws of the United States. Unauthorized
copying, use or reverse engineering of our products or the redesign of our
products to avoid proprietary rights held by others or the cost of obtaining
necessary technology rights could all materially adversely affect our business,
financial or market performance.

Comparisons of our period-to-period operating results are not necessarily
-------------------------------------------------------------------------------
meaningful.
-------------------------------------------------------------------------------

      We believe that period-to-period comparisons of our operating results are
not necessarily meaningful, and you should not rely on them as an indication of
our future performance. In addition, our operating results in a future quarter
or quarters may fall below expectations of securities analysts or investors and,
as a result, the price of our common stock may fluctuate. Because we cannot
predict when our potential end-user customers will place orders and finalize
contracts, we cannot accurately forecast our revenues and operating results for
future quarters. We recognize revenues upon satisfaction of the requirements of
AICPA Statement of Position 97-2, which generally occurs in the same quarter
that the order is received. As a result, our quarterly revenues and operating
results depend primarily on the size, quantity and timing of orders received for
our products during each quarter. If a large number of orders or several large
orders do not occur or are deferred or delayed, our revenues in a quarter could
be substantially reduced.

Our customers could change their minds about our products, and backlog totals as
-------------------------------------------------------------------------------
of a certain date may not be indicative of actual revenues.
-------------------------------------------------------------------------------

      We can give no assurance that our existing customers will continue their
current buying patterns or that changes within their industries will not
adversely affect our ability to retain or attract new customers. In addition,
although we believe that all orders in our backlog at December 31, 2000 are firm
and will be delivered within the fiscal year, customers can make changes in
their orders, or they may alter or significantly delay their delivery schedules
or they may even cancel their orders. Therefore, our total backlog as of any
particular date may not be indicative of actual revenues for any future period.

If our end-user customers do not perceive our products to be effective or high
-------------------------------------------------------------------------------
quality, our brand and name recognition will suffer.
-------------------------------------------------------------------------------

      We believe that establishing and maintaining brand and name recognition is
critical for attracting, retaining and expanding end-user customers in our
target markets. We also believe that the importance of reputation and name
recognition will increase as competition in our market increases. Promotion and
enhancement of our name will depend on the effectiveness of our marketing and
advertising efforts and on our success in providing high-quality products and
related services and on the performance of our resellers, none of which can be
assured. If our end-user customers do not perceive our product or related
services or those of our resellers to be effective or of high quality, our brand
and name recognition would suffer which could have a material adverse effect on
our business, financial or market performance.

Our products could have defects for which we are potentially liable and which
-------------------------------------------------------------------------------
could result in loss of revenue, increased costs or loss of credibility or such
-------------------------------------------------------------------------------
defects could delay acceptance of our products in the market.
-------------------------------------------------------------------------------

      Our products, including components supplied by others, may contain errors
or defects, especially when first introduced or when new versions are released.
Despite internal product testing, errors in our new products or


                                       20
<PAGE>   23
releases could be found after commencement of commercial shipments. This could
result in additional development costs, diversion of technical and other
resources from our other development efforts, or the loss of credibility with
current or future end-user customers. This could also result in a loss of
revenue or a delay in market acceptance of our products, which, in turn, could
have a material adverse effect upon our business, financial, or market
performance. Our license agreements with our end-user customers typically
contain provisions designed to limit our exposure to potential product liability
and some contract claims. However, not all of these agreements contain these
types of provisions but even when they do, these provisions vary as to their
terms and may not be effective under the laws of some jurisdictions. A product
liability, warranty, or other claim brought against us could have a material
effect on our business, financial, or market performance.

We may need to license third-party technologies and may be unable to do so on
-----------------------------------------------------------------------------
acceptable or any terms.
-----------------------------------------------------------------------------

      To the extent we need to license third-party technologies, we may be
unable to do so on commercially reasonable terms or at all. In addition, we may
fail to successfully integrate licensed technology into our products or
services. Third-party licenses may expose us to increased risks, including risks
associated with the integration of new technology, the diversion of resources
from the development of our own proprietary technology, and our inability to
generate revenue from new technology sufficient to offset associated
acquisition, development and maintenance costs. Our inability to obtain any of
such licenses could delay our product and service development until equivalent
technology can be identified, licensed and integrated. This, in turn, could
adversely affect our business, financial and market performance.

Pay-per-view revenues have declined and our other outsourced electronic
----------------------------------------------------------------------------
capabilities may not supplant those lost revenues
----------------------------------------------------------------------------

      The cable TV industry has been introducing new ordering technologies for
consumer purchases of pay-per-view events which do not utilize toll free 800
numbers. Consequently, we are experiencing a downward trend in transaction
processing fees; a trend which we expect to continue. To offset this decline in
pay-per-view services, Hosted Services is offering other, outsourced electronic
capabilities including DialExpress, Lead Capture, Speech Enabled Directory, and
Site Locators as well as benefits enrollment, broadcast faxing, call center
processing, and audiotext. We cannot give any assurance, however, as to when, if
ever, our efforts will completely supplant these declining pay-per-view
revenues.

Our stock price has been and could continue to be volatile.
----------------------------------------------------------------------------

      Our stock price has been and could continue to be volatile due to a number
of factors including, without limitation:

            a.    actual or anticipated fluctuations in our operating results;

            b.    announcements by us, our competitors or our end-user
                  customers;

            c.    changes in financial estimates of securities analysts or
                  investors regarding us, our industry, our competitors or our
                  end-user customers;

            d.    technological innovations or the introduction of new products
                  by us or others;

            e.    the operating and stock price performance of other comparable
                  companies or of our competitors or end-user customers;

            f.    revenue or earnings in any quarter fail to meet expectations
                  of the investment community;

            g.    the volume of our shares typically traded in any trading
                  session;

            h.    our purchases in the market of our own shares;


                                       21
<PAGE>   24
            i.    purchases and sales by our officers, directors, employees and
                  affiliates; and

            j.    general market or economic conditions.



ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Independent Auditors' Report of KPMG LLP and the Consolidated Financial
Statements of Syntellect Inc. and subsidiaries as of December 31, 2000 and 1999,
and for each of the years in the three-year period ended December 31, 2000,
follow:


                                       22
<PAGE>   25
                          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, 2000 and 1999, and the related
consolidated statements of operations and comprehensive income, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2000. 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 conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 provide a
reasonable basis for our opinion.

     In our opinion, 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.



                                                        /S/ KPMG LLP

Phoenix, Arizona
February 7, 2001


                                       23
<PAGE>   26
                        SYNTELLECT INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2000 AND 1999
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                    2000            1999
                                                                                                  --------        --------
<S>                                                                                               <C>             <C>
                                            ASSETS
 Current assets:
    Cash and cash equivalents .............................................................       $  7,334        $  6,184
    Short-term investments ($75 restricted at December 31, 2000 and $100 restricted
      at December 31, 1999) ................................................................             75             100
    Marketable securities ($1,001 restricted at December 31, 1999) ........................             --           1,001
    Trade receivables, net of allowance for doubtful accounts of $225 and $784 at
      December 31, 2000 and 1999, respectively ............................................         12,423           9,999
    Other receivables .....................................................................              9           1,406
    Note receivable .......................................................................             57              --
    Inventories ...........................................................................          1,415           2,041
    Prepaid expenses ......................................................................            711             677
                                                                                                  --------        --------
           Total current assets ...........................................................         22,024          21,408
                                                                                                  --------        --------
 Property and equipment, net ..............................................................          3,814           4,787
 Note receivable, non-current portion .....................................................            270              --
 Other assets .............................................................................            993              29
                                                                                                  --------        --------
                Total assets ..............................................................       $ 27,101        $ 26,224
                                                                                                  ========        ========

                             LIABILITIES AND SHAREHOLDERS' EQUITY
 Current liabilities:
    Accounts payable ......................................................................       $  2,934        $  1,873
    Accrued liabilities ...................................................................          3,186           3,268
    Customer deposits .....................................................................          2,916           3,238
    Deferred revenue ......................................................................          6,421           2,914
    Capital lease obligations .............................................................            151             248
                                                                                                  --------        --------
           Total current liabilities ......................................................         15,608          11,541
                                                                                                  --------        --------
 Capital lease obligations, less current portion ..........................................            316             293
                                                                                                  --------        --------
           Total liabilities ..............................................................         15,924          11,834
                                                                                                  --------        --------
 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 14,505,298 and
      13,899,487, respectively ............................................................            145             139
    Additional paid-in capital ............................................................         62,311          61,177
    Accumulated deficit ...................................................................        (39,696)        (41,938)
    Accumulated other comprehensive loss ..................................................           (169)            (32)
                                                                                                  --------        --------
                                                                                                    22,591          19,346
 Treasury stock, at cost, 3,332,432 and 1,885,732 shares, respectively ....................        (11,414)         (4,956)
                                                                                                  --------        --------
           Total shareholders' equity .....................................................         11,177          14,390
                                                                                                  --------        --------
 Commitments and contingencies (Notes 7 and 8)

 Total liabilities and shareholders' equity ...............................................       $ 27,101        $ 26,224
                                                                                                  ========        ========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       24
<PAGE>   27
                        SYNTELLECT INC. AND SUBSIDIARIES

         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                             2000            1999            1998
                                                           --------        --------        --------
<S>                                                        <C>             <C>             <C>
 Net revenues:
    Licenses and hardware .............................    $ 20,906        $ 17,092        $ 18,395
    Services ..........................................      21,412          23,007          20,633
    Hosted services ...................................       5,714           7,732           8,925
                                                           --------        --------        --------
           Total net revenues .........................      48,032          47,831          47,953
                                                           --------        --------        --------
 Cost of revenues:
    Licenses and hardware .............................       5,509           6,188           7,506
    Services ..........................................      10,226          13,441          10,127
    Hosted services ...................................       4,002           5,083           5,025
                                                           --------        --------        --------
           Total cost of revenues .....................      19,737          24,712          22,658
                                                           --------        --------        --------
 Gross margin .........................................      28,295          23,119          25,295
                                                           --------        --------        --------
 Operating expenses:
    Selling, marketing and administrative .............      22,824          21,343          22,924
    Research and development ..........................       3,230           4,448           5,573
                                                           --------        --------        --------
           Total operating expenses ...................      26,054          25,791          28,497
                                                           --------        --------        --------
           Operating income (loss) ....................       2,241          (2,672)         (3,202)
                                                           --------        --------        --------
 Other income (expense), net:
    Interest income, net ..............................         278             264             629
    Gain on sale of Dialer product line ...............          --             509              --
    Other income (expense), net .......................         (22)             33             (45)
                                                           --------        --------        --------
           Total other income, net ....................         256             806             584
                                                           --------        --------        --------
           Income (loss) before income taxes ..........       2,497          (1,866)         (2,618)

 Income tax expense ...................................         255              --              --
                                                           --------        --------        --------
           Net income (loss) ..........................    $  2,242        $ (1,866)       $ (2,618)
                                                           ========        ========        ========
 Earnings (loss) per common share -- basic ............    $   0.19        $   (.14)       $   (.19)
                                                           ========        ========        ========
 Earnings (loss) per common share -- diluted ..........    $   0.18        $   (.14)       $   (.19)
                                                           ========        ========        ========
 Weighted average shares -- basic .....................      11,742          13,034          13,441
                                                           ========        ========        ========
 Weighted average shares -- diluted ...................      12,699          13,034          13,441
                                                           ========        ========        ========
 Other comprehensive income (loss), net of tax:
     Foreign currency translation adjustment ..........        (137)             (5)             16
     Unrealized gain (loss) on marketable securities ..          --              (6)             12
                                                           --------        --------        --------

 Other comprehensive income (loss) ....................        (137)            (11)             28
                                                           --------        --------        --------
 Comprehensive income (loss) ..........................    $  2,105        $ (1,877)       $ (2,590)
                                                           ========        ========        ========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       25
<PAGE>   28
                        SYNTELLECT INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                      (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, 1998 ...........................   13,576,761        $136       $60,727       $(33)       $(37,454)
 Issuance of common stock upon exercise of stock options ......        31,193         --            33         --              --
 Issuance of common stock under employee stock purchase plan ..        91,141          1           157         --              --
 Amortization of deferred compensation related to stock options            --         --            --         33              --
 Net loss .....................................................            --         --            --         --          (2,618)
 Foreign currency translation adjustment ......................            --         --            --         --              --
 Net unrealized holding gain on marketable securities .........            --         --            --         --              --
 Purchase of 3,500 shares of treasury stock ...................            --         --            --         --              --
                                                                   ----------       ----       -------       ----        --------
         Balance at December 31, 1998 .........................    13,699,095       $137       $60,917       $ --        $(40,072)
 Issuance of common stock upon exercise of stock options ......        97,825          1           158         --              --
 Issuance of common stock under employee stock purchase
     plan .....................................................       102,567          1           102         --              --
 Net loss .....................................................            --         --            --         --          (1,866)
 Foreign currency translation adjustment ......................            --         --            --         --              --
 Net unrealized holding loss on marketable securities .........            --         --            --         --              --
 Purchase of 1,706,500 shares of treasury stock ...............            --         --            --         --              --
                                                                   ----------       ----       -------       ----        --------
         Balance at December 31, 1999 .........................    13,899,487       $139       $61,177       $ --        $(41,938)
 Issuance of common stock upon exercise of stock options ......       494,942          5           820         --              --
 Issuance of common stock under employee stock purchase
     plan .....................................................       110,869          1           314         --              --
 Net income ...................................................            --         --            --         --           2,242
 Foreign currency translation adjustment ......................            --         --            --         --              --
 Purchase of 1,425,000 shares of treasury stock ...............            --         --            --         --              --
                                                                   ----------       ----       -------       ----        --------
         Balance at December 31, 2000 .........................    14,505,298       $145       $62,311       $ --        $(39,696)
                                                                   ==========       ====       =======       ====        ========
</TABLE>


<TABLE>
<CAPTION>
                                                                         ACCUMULATED                        TOTAL
                                                                       COMPREHENSIVE      TREASURY       SHAREHOLDERS'
                                                                       INCOME (LOSS)       STOCK           EQUITY
                                                                       -------------     ----------      -------------
<S>                                                                    <C>               <C>               <C>
         Balance at January 1, 1998 ...........................        $     (49)        $   (1,141)       $   22,186
 Issuance of common stock upon exercise of stock options ......                --                --                33
 Issuance of common stock under employee stock purchase plan ..                --                --               158
 Amortization of deferred compensation related to stock options                --                --                33
 Net loss .....................................................                --                --            (2,618)
 Foreign currency translation adjustment ......................                16                --                16
 Net unrealized holding gain on marketable securities .........                12                --                12
 Purchase of 3,500 shares of treasury stock ...................                --                (7)               (7)
                                                                       ----------        ----------        ----------
         Balance at December 31, 1998 .........................        $      (21)       $   (1,148)       $   19,813
 Issuance of common stock upon exercise of stock options ......                --                --               159
 Issuance of common stock under employee stock purchase
     plan .....................................................                --                --               103
 Net loss .....................................................                --                --            (1,866)
 Foreign currency translation adjustment ......................                (5)               --                (5)
 Net unrealized holding loss on marketable securities .........                (6)               --                (6)
 Purchase of 1,706,500 shares of treasury stock ...............                --            (3,808)           (3,808)
                                                                       ----------        ----------        ----------
         Balance at December 31, 1999 .........................        $      (32)       $   (4,956)       $   14,390
 Issuance of common stock upon exercise of stock options ......                --                --               825
 Issuance of common stock under employee stock purchase
     plan .....................................................                --                --               315
 Net income ...................................................                --                --             2,242
 Foreign currency translation adjustment ......................              (137)                               (137)
 Purchase of 1,425,000 shares of treasury stock ...............                --            (6,458)           (6,458)
                                                                       ----------        ----------        ----------
         Balance at December 31, 2000 .........................        $     (169)       $  (11,414)       $   11,177
                                                                       ==========        ==========        ==========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       26
<PAGE>   29
                        SYNTELLECT INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                               2000            1999            1998
                                                                             --------        --------        --------
<S>                                                                          <C>             <C>             <C>
 Cash flows from operating activities:
    Net income (loss) ................................................       $  2,242        $ (1,866)       $ (2,618)
    Adjustments to reconcile net income (loss) to net cash provided by
        (used in) operating activities:
         Loss on sale of property, plant, and equipment ..............             49              --              --
         Depreciation and amortization ...............................          1,817           2,489           2,538
         Provision for doubtful accounts .............................            318           1,806             597
         Stock option compensation expense ...........................             --              --              33
         Increase in accounts receivable .............................         (1,847)         (2,009)           (905)
         (Increase) decrease in inventories ..........................            626             932            (380)
         Increase (decrease) in accounts payable .....................          1,061            (687)            400
         Decrease in accrued liabilities .............................            (82)            (10)         (2,193)
         Increase (decrease) in deferred revenue .....................          3,507             197            (480)
         Change in other assets and liabilities ......................           (916)            447           1,772
                                                                             --------        --------        --------
         Net cash provided by (used in) operating activities .........          6,775           1,299          (1,236)
                                                                             --------        --------        --------
 Cash flows from investing activities:
    Purchase of marketable securities ................................             --         (14,190)        (23,289)
    Maturities of marketable securities ..............................          1,026          21,381          23,236
    Purchase of property and equipment ...............................         (1,015)         (1,713)         (1,988)
    Proceeds from notes receivable ...................................             --              --           4,217
    Proceeds from sale of property and equipment .....................            254              --              --
                                                                             --------        --------        --------
         Net cash provided by investing activities ...................            265           5,478           2,176
                                                                             --------        --------        --------
 Cash flows from financing activities:
    Proceeds from sale of common stock ...............................          1,140             262             191
    Purchase of treasury stock .......................................         (6,458)         (3,808)             (7)
    Payments on capital lease obligations ............................           (435)           (278)           (194)
                                                                             --------        --------        --------
         Net cash used in financing activities .......................         (5,753)         (3,824)            (10)
 Effect of exchange rates on cash ....................................           (137)             (5)             16
                                                                             --------        --------        --------
 Net increase in cash and cash equivalents ...........................          1,150           2,948             946
 Cash and cash equivalents at beginning of year ......................          6,184           3,236           2,290
                                                                             --------        --------        --------
 Cash and cash equivalents at end of year ............................       $  7,334        $  6,184        $  3,236
                                                                             ========        ========        ========
 Supplemental disclosure of cash flow information:
         Cash paid for interest ......................................       $     57        $     47        $     68
                                                                             ========        ========        ========

         Cash paid for income taxes ..................................       $     20        $     29        $      2
                                                                             ========        ========        ========


NON-CASH INVESTING AND FINANCING ACTIVITIES:

Property and equipment acquired under capital leases:                        $    362        $    134        $    166
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       27
<PAGE>   30
                        SYNTELLECT INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 2000, 1999 AND 1998


(1) Summary of Significant Accounting Policies

   Nature of Business and Principles of Consolidation

     Syntellect Inc. and its wholly-owned subsidiaries ("Syntellect" or the
"Company") develops, markets, and integrates voice and information processing
software and application software worldwide. The Company offers an inbound voice
processing product line, a worldwide distribution network, and a vertical market
focus in the financial services, media, telecommunications and healthcare
industries. Syntellect also provides interactive transaction-based Hosted
Services for those customers who prefer to outsource their voice processing
applications, including cable and satellite pay-per-view orders, dial express,
site locator, call redirect, and lead capture.

     The consolidated financial statements include the accounts of Syntellect
Inc. and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.

   Use of Estimates

     Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues, expenses and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.

   Revenue Recognition

     Syntellect recognizes revenue from sales of Licenses and Hardware, and
Services in accordance with Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), Statement of Position 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions," and
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." Revenues from Hosted Services are recognized in accordance with SAB
No. 101. These statements require that revenue be recognized when each of the
following four conditions has been met: 1) persuasive evidence of an
arrangement exists, 2) delivery has occurred or services have been rendered, 3)
the seller's price to the buyer is fixed or determinable, and 4) collectibility
is reasonably assured.

   Cash Equivalents

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

   Short-term Investments

     Short-term investments are comprised of certificate of deposits with
maturity dates between three and twelve months. These certificate of deposits
are restricted as of December 31, 2000 and 1999.

   Marketable Securities

     Marketable securities are classified as available-for-sale. 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.


                                       28
<PAGE>   31
                        SYNTELLECT INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 2000, 1999 AND 1998


   Inventories

     Inventories are stated at the lower of cost or market. Cost is primarily
determined using the weighted average method.

   Property and Equipment

     Property and equipment are stated at cost. Equipment held under capital
leases 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 leases and leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful life of the asset.

     The Company accounts for impairment of long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of." This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.

   Warranty Expense

     Syntellect generally provides customers with product warranties for periods
ranging from one month to six months after shipment. The Company has provided a
reserve for estimated warranty expense at time of sale.

   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 SFAS No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." 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

     Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.


                                       29
<PAGE>   32
                        SYNTELLECT INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                        DECEMBER 31, 2000, 1999 AND 1998


   Stock Based Compensation

     In accordance with the provisions of Accounting Principals Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," the Company measures
stock based compensation expense as the excess of the market price at the grant
date over the amount the employee must pay for the stock. The Company's policy
is to grant stock options at fair market value at the date of grant;
accordingly, no compensation expense is recognized. As permitted, the Company
has elected to adopt the pro forma disclosure provisions of SFAS No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123").

     In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation (an interpretation of APB 25)." This interpretation clarifies the
application of APB. No. 25 by clarifying the definition of an employee, the
determination of non-compensatory plans and the effect of modifications to stock
options. This interpretation was effective July 1, 2000 and did not have a
material effect on the Company's consolidated financial statements.

   Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In June 2000,
the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment of SFAS 133." SFAS No. 133 and SFAS No.
138 require that all derivative instruments be recorded on the balance sheet at
their respective fair values. The Company has adopted the provision of both SFAS
No. 133 and No. 138 as of January 1, 2001, and believes that such adoption will
not have a material effect on the Company's consolidated financial statements

   Reclassifications

     Certain 1998 and 1999 balances have been reclassified to conform to 2000
presentation.


 (2) Disposition of Syntellect Network Systems Inc. Subsidiary

     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 $720,000. The Company received $30,000 of the
sales price in cash at closing with the remaining $690,000 to be received in 23
monthly installments of $30,000, without interest, beginning May 1996. The
Company recognized the gain on this transaction on a cash collected basis. In
1998, the third party filed bankruptcy and the Company was unable to collect and
recognize the balance of $180,000 in deferred gain on sale.

(3) Marketable Securities

     The Company has classified all marketable securities as available-for-sale
at December 31, 1999. 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:


                                       30
<PAGE>   33
                        SYNTELLECT INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                        DECEMBER 31, 2000, 1999 AND 1998


<TABLE>
<CAPTION>
                                                       (IN THOUSANDS)
                                                      GROSS       GROSS
                                                      UNREALIZED  UNREALIZED
                                          AMORTIZED   HOLDING     HOLDING     FAIR
                                            COST      GAINS       LOSSES      VALUE
<S>                                       <C>         <C>         <C>         <C>
     As of December 31, 1999
Mortgage-backed securities: restricted       $1,001   $     --    $      --   $ 1,001
                                             ======   ========    =========   =======
</TABLE>

     All marketable securities held at December 31, 1999 have contractual
maturities of one year or less.


 (4) Inventories

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                                        (IN THOUSANDS)
                                                         DECEMBER 31,
                                                      2000           1999
                                                    -------        -------
<S>                                                 <C>            <C>
 Finished goods .............................       $   507        $   705
 Purchased components .......................           460            611
 Repair, warranty and maintenance inventories           621          1,600
                                                    -------        -------
                                                      1,588          2,916
 Less reserve for obsolescence ..............          (173)          (875)
                                                    -------        -------
                                                    $ 1,415        $ 2,041
                                                    =======        =======
</TABLE>

      The Company contracts with several third parties to perform on-site
hardware maintenance for customers in certain geographic areas. Inventory held
by the Company for the third party maintenance program is included in repair,
warranty and maintenance inventory.


 (5) Property and Equipment

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                            (IN THOUSANDS)
                                                             DECEMBER 31,
                                                          2000            1999
                                                      --------        --------
<S>                                                   <C>             <C>
 Furniture, fixtures and computer equipment ...       $  6,184        $  6,141
 Hosted Services equipment ....................          6,430           6,246
 Leasehold improvements .......................            475             528
                                                      --------        --------
                                                        13,089          12,915
 Less accumulated depreciation and amortization         (9,275)         (8,128)
                                                      --------        --------
                                                      $  3,814        $  4,787
                                                      ========        ========
</TABLE>

     During 2000 and 1999, the Company wrote off certain fully depreciated
property and equipment.


                                       31
<PAGE>   34
                        SYNTELLECT INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                        DECEMBER 31, 2000, 1999 AND 1998


(6) Accrued Liabilities

     Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                          (IN THOUSANDS)
                                            DECEMBER 31,
                                         2000         1999
                                         ------       ------
<S>                                      <C>          <C>
 Accrued compensation and benefits       $1,914       $2,299
 Accrued legal and accounting ....          154          226
 Accrued royalties ...............          120          138
 Other accrued liabilities .......          998          605
                                         ------       ------
                                         $3,186       $3,268
                                         ======       ======
</TABLE>


 (7) Credit Facilities and Lease Commitments

     Credit facilities:

      On October 11, 2000, the Company entered into a $4 million revolving line
of credit agreement with a financial institution. The purpose for this line of
credit is to fund general operations. At December 31, 2000, the Company violated
certain restricted covenants pertaining to the line of credit agreement.
However, the financial institution waived these violations. At December 31,
2000, the Company had no outstanding borrowings under the line of credit. The
Company also uses a letter of credit, secured by a $75,000 certificate of
deposit, to secure the lease on its Chicago facility.

     Capital leases consist of the following:

<TABLE>
<CAPTION>
                                                                                 (IN THOUSANDS)
                                                                                   DECEMBER 31,
                                                                                2000         1999
                                                                                ----         ----
<S> <C>                                                                         <C>          <C>
 Capital lease obligations with interest ranging from 9% to
    10%, collateralized by equipment ....................................       $ 467        $ 541
 Less current portion ...................................................        (151)        (248)
                                                                                -----        -----
                                                                                $ 316        $ 293
                                                                                =====        =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                     (IN THOUSANDS)
                                                       DECEMBER 31,
                                                   2000           1999
                                                  -------        -------
<S>                                               <C>            <C>
 Furniture, fixtures and computer equipment       $   664        $ 1,203
 Less accumulated amortization ............          (183)          (716)
                                                  =======        =======
                                                  $   481        $   487
                                                  =======        =======
</TABLE>

      The Company leases office facilities and various equipment under
non-cancelable operating leases that expire at various dates through 2005. In
March 2000, the Company entered into a five year lease for a new 37,301 square
foot office facility in Phoenix. The lease commenced in July 2000 at an initial
monthly rate of $63,500. Rental expense under operating leases was $1.2 million
in 2000, $1.6 million in 1999, and $1.8 million in 1998. Future minimum lease
payments under non-cancelable operating leases (with initial or remaining lease
terms in excess of one year) and the present value of future minimum capital
lease payments at December 31, 2000 are as follows:


                                       32
<PAGE>   35
                        SYNTELLECT INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                        DECEMBER 31, 2000, 1999 AND 1998


<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
                         YEAR                         CAPITAL LEASES    OPERATING LEASES
                         ----                         --------------    ----------------
<S>                                                   <C>               <C>
               2001.................................       $   188           $1,228
               2002.................................           134            1,258
               2003.................................            93            1,152
               2004.................................            93            1,152
               2005.................................            54            1,152
                                                           -------         --------
               Total minimum lease payments.........       $   562         $  5,942
                                                           -------         ========
               Less amounts representing interest...           (95)
                                                           --------
               Net minimum lease payments...........       $   467
                                                           =======
</TABLE>


(8) Litigation

     Syntellect is involved in various legal proceedings and claims arising in
the ordinary course of business. The Company is not currently a party to any
material pending legal proceedings.


(9) Shareholders' Equity

   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 non-statutory 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. Non-statutory stock options may
be granted with an exercise 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 ten years.
The plan was amended on February 17, 1998 to accelerate the vesting of
outstanding options in the event of a change in control and to delete certain
other language. As of December 31, 1995, all options under this plan have been
granted.

     Syntellect adopted a long-term incentive plan effective February 1, 1995,
which has been amended through June 1, 2000. The plan originally provided 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. On May 20, 1997, the number of shares authorized
for issuance under the plan increased from 750,000 to 1,500,000, and on June 1,
2000 increased to 2,100,000. Incentive stock options may be granted with an
exercise price to be determined by the Board of Directors, that is not less than
the fair market value of the common stock at the date of grant and their terms
may not exceed ten years from the date of grant. Options generally become
exercisable over a 50 month period commencing at the date of grant and expire in
ten years. The plan terminates in February 2005.

     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. On May 21, 1998, the number of shares
authorized for issuance under the plan increased from 50,000 to 150,000. Under
the plan, non-employee directors are granted a one-time option to purchase
10,000 shares upon election or appointment to the Board of Directors and an
annual option to purchase a specified number of additional shares. On June 1,
2000, the


                                       33
<PAGE>   36
                        SYNTELLECT INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                        DECEMBER 31, 2000, 1999 AND 1998


number of additional shares specified for the annual option grant was increased
from 2,000 shares per year to 5,000 shares. Options may be granted with an
exercise price not less than the fair market value on the date of grant and
expire six years from the date of grant. The one time grant to purchase 10,000
shares vests as follows: 24% one year after the date of grant with the remainder
vesting at the rate of 2% per month over the following 38 months. The annual
option grants to purchase 5,000 shares vest in full one year after the date of
grant. The plan has no scheduled termination date.

     At December 31, 2000, 902,147 options with a weighted average exercise
price of $2.45 were exercisable under the above plans at prices ranging from
$0.87 to $7.00. A summary of the combined stock option activity for all plans
during the three-year period ended December 31, 2000 is as follows:

<TABLE>
<CAPTION>
                                                          OPTIONS
                                             ------------------------------------------------
                                                                             WEIGHTED AVERAGE
                                                                              EXERCISE PRICE
                                             AVAILABLE   OUTSTANDING                PER
                                              FOR GRANT   OPTIONS                  OPTION
                                             ----------  -----------         ----------------
<S>                                          <C>         <C>                 <C>
Balance, December 31, 1997..............       708,547   1,745,584               $ 2.92
     Increase in reserved shares........       100,000          --                   --
     Granted............................      (729,300)    729,300                 1.77
     Canceled...........................       405,219    (405,219)                3.48
     Exercised..........................            --     (31,193)                1.73
     Plan shares expired................       (36,788)         --                   --
                                               -------   ---------
Balance, December 31, 1998..............       447,678   2,038,472               $ 2.42
     Granted............................      (740,500)    740,500                 1.95
     Canceled...........................       656,733    (656,733)                3.01
     Exercised..........................          -  -     (97,825)                1.63
     Plan shares expired................        (4,420)         --                   --
                                               -------   ---------
Balance, December 31, 1999..............       359,491   2,024,414               $ 2.09
     Increase in reserved shares........       600,000          --                   --
     Granted............................      (804,400)    804,400                 4.95
     Canceled...........................       221,475    (221,475)                2.99
     Exercised..........................            --    (494,942)                1.67
     Plan shares expired................       (92,986)         --                   --
                                               -------   ---------
Balance, December 31, 2000..............       283,580   2,112,397               $ 3.19
                                               =======   =========
</TABLE>


<TABLE>
<CAPTION>
                                                                      2000        1999         1998
                                                                      ----        ----         ----

<S>                                                                   <C>        <C>          <C>
 Options exercisable at year-end (in thousands) ..................       902      1,135        1,156
 Weighted average fair value of options granted during the year...      3.74     $ 1.21       $ 1.23
</TABLE>

      The following table summarizes information about stock options outstanding
at December 31, 2000:


<TABLE>
<CAPTION>
                                        Weighted Average
                                            Remaining          Weighted                           Weighted
 Range of Exercise        Options       Contractual Life        Average          Options          Average
       Prices           Outstanding         in Years        Exercise Price     Exercisable     Exercise Price
------------------      -----------     -----------------   --------------     -----------     --------------
<S>                     <C>             <C>                 <C>                <C>             <C>
$ 0.87  --  $ 1.94            941,137          7.1              $ 1.46               531,337       $ 1.26
$ 2.25  --  $ 3.75            263,760          6.3              $ 2.90               194,288       $ 3.01
$ 4.38  --  $ 5.13            558,700          8.9              $ 4.69                88,389       $ 4.57
$ 5.25  --  $ 7.00            348,800          8.1              $ 5.64                88,133       $ 6.26
                            ---------          ---              ------               -------       ------
$ 0.87  --  $ 7.00          2,112,397          7.6              $ 3.19               902,147       $ 2.45
                            =========          ===              ======               =======       ======
</TABLE>


                                       34
<PAGE>   37
                        SYNTELLECT INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                        DECEMBER 31, 2000, 1999 AND 1998


     Syntellect has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation cost for Syntellect's stock option grants and stock purchase plan
discussed below been determined based on the fair value at the grant date, as
prescribed by the provisions of SFAS No. 123, the Company's net income (loss)
and net income (loss) per common share would have been:

<TABLE>
<CAPTION>
                                                                                    (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                                                                     2000            1999             1998
                                                                                   ---------       ---------        ---------
<S>                                                                                <C>             <C>              <C>
 Net income (loss) -- as reported ..........................................       $   2,242       $  (1,866)       $  (2,618)
 Net income (loss) -- pro forma ............................................       $     970       $  (2,092)       $  (3,143)
 Net income (loss) per common share -- basic as reported ...................       $    0.19       $   (0.14)       $   (0.19)
 Net income (loss) per common share -- pro forma ...........................       $    0.08       $   (0.16)       $   (0.23)
</TABLE>

     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:

<TABLE>
<S>                                                                      <C>          <C>        <C>
     Expected dividend yield..................................                0%           0%            0%
     Expected stock price volatility..........................               95%          87%           87%
     Risk-free interest rate..................................             6.17%        5.98%          5.7%
     Expected life of options.................................           5 years      5 years    2.35 years
</TABLE>


   Employee Stock Purchase Plan

     Syntellect has an employee stock purchase plan that provides for the
purchase of up to 800,000 shares of common stock. The number of shares was
increased by 400,000 as approved by the shareholders on May 21, 1998. 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 2000, 52,087 and 58,782 shares were
purchased at $2.55 and $3.08 per share, respectively. During 1999, 57,101 and
45,466 shares were purchased at $0.96 and $1.06 per share, respectively. During
1998, 49,825 and 41,316 shares were purchased at $1.59 and $1.91 per share,
respectively. At December 31, 2000, 123,360 shares of common stock were
available for issuance under the plan. Amounts that would be expensed under SFAS
No. 123 are included in pro forma net income (loss) above.


(10) Employee Benefit Plans

Effective January 1, 1997, Syntellect adopted a 401(k) plan covering all
eligible employees of the Company. Under the plan, participants may contribute
up to 15% of their total compensation, subject to certain limitations. For the
years ended December 31, 1999 and 1998, the Company provided matching
contributions equal to one third of employee contributions up to a maximum of 7%
of the employee's total compensation. In November 1999, the Board of Directors
moved to amend the plan so as to qualify it as a 401(k) Safe Harbor Plan,
effective January 1, 2000. Per the amendment, the Company matched each
employee's elective deferral up to 4% of compensation, subject to Internal
Revenue Service limitations, for the year 2000 and will continue to do so. All
such qualified matchings are immediately 100% vested. Syntellect made matching
contributions to the 401(k) plan of $451,000 in 2000, $260,000 in 1999, and
$249,000 in 1998. 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.


                                       35
<PAGE>   38
                        SYNTELLECT INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                        DECEMBER 31, 2000, 1999 AND 1998


(11) Income Taxes

     The provision for income taxes includes income taxes currently payable
(receivable) 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.

     Income (loss) before income tax expense for the years ended December 31,
2000, 1999 and 1998 consists of the following:

<TABLE>
<CAPTION>
                                            (IN THOUSANDS)
                                 2000           1999           1998
                                -------        -------        -------
<S>                             <C>            <C>            <C>
 U.S. operations ........       $ 1,270        $(2,938)       $(3,603)
 International operations           972          1,072            985
                                -------        -------        -------
                                $ 2,242        $(1,866)       $(2,618)
                                =======        =======        =======
</TABLE>

     The components of income tax expense are as follows:

<TABLE>
<CAPTION>
                                       (IN THOUSANDS)
                             2000           1999           1998
                           ------       --------       --------
<S>                        <C>          <C>            <C>
  Federal................    $ 69       $     --       $     --
  Foreign................     186             --             --
  State..................      --             --             --
                           ------       --------       --------
                           $  255       $     --       $     --
                           ======       ========       ========

 Current.................    $255             --             --
 Deferred................      --             --             --
                           ------       --------       --------
                           $  255       $     --       $     --
                           ======       ========       ========
</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>
                                                                                                 (IN THOUSANDS)
                                                                                      2000           1999           1998
                                                                                     -------        -------        -------
<S>                                                                                  <C>            <C>            <C>
 Computed "expected" income tax expense (benefit) ............................       $   849        $  (634)       $  (890)
 Increase (decrease) in income tax expense resulting from:
      State income tax benefit net of federal income tax effect ..............            --             --           (146)
      Increase (decrease) in valuation allowance .............................          (675)           916          1,349
      Utilization of foreign net operating losses not previously recognized ..            --           (364)          (306)
      Other, net .............................................................            81             82             (7)
                                                                                     -------        -------        -------

           Total income tax expense ..........................................       $   255        $    --        $    --
                                                                                     =======        =======        =======
</TABLE>


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


                                       36
<PAGE>   39
                        SYNTELLECT INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                        DECEMBER 31, 2000, 1999 AND 1998


<TABLE>
<CAPTION>
                                                                      (IN THOUSANDS)
                                                                   2000            1999
                                                                 --------        --------
<S>                                                              <C>             <C>
 Deferred income tax assets:
 Net operating loss and tax credit carry-forwards ........       $ 13,863        $ 13,402
 Warranty and inventory allowances .......................            104           1,086
 Accrued expenses ........................................            810             747
 Allowance for doubtful accounts .........................             82             321
 Property and equipment due to differences in depreciation             28              --
                                                                 --------        --------
 Gross deferred income tax assets ........................         14,887          15,556
                                                                 --------        --------
 Less valuation allowance ................................        (14,887)        (15,556)
                                                                 --------        --------
 Net deferred income tax asset ...........................       $     --        $     --
                                                                 ========        ========
</TABLE>

      The decrease and increase in the valuation allowance for the net deferred
income tax asset for the years ended December 31, 2000 and 1999 were $ 669,000
and $916,000 respectively. Under SFAS No. 109, 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 carry-forwards. A valuation allowance is then established to reduce the
deferred income tax assets to the level at which it is "more likely than not"
that the income tax benefits will be realized. Realization of income tax
benefits of deductible temporary differences and operating loss and tax credit
carry-forwards depends on having sufficient taxable income within the carry-back
and carry-forward periods. Sources of taxable income that may allow for
realization of income tax benefits include (1) taxable income in the current
year or prior years that is available through carry-back, (2) future taxable
income that will result from the reversal of existing taxable temporary
differences, and (3) future taxable income generated by future operations.

     As of December 31, 2000 the Company had net operating loss, investment tax
credit, alternative minimum tax credit and research and development tax credit
carry-forwards of approximately $31.2 million, $15,000, $152,000, and $1.2
million, respectively, which expire at various dates through the year 2019.


(12) 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 inbound voice processing, a worldwide
distribution network, and a vertical market focus on the financial services,
media, telecommunications and healthcare industries. The Company also provides
Hosted Services for those customers who prefer to outsource their voice
processing applications. In addition to its primary office facility in Phoenix,
the Company also maintains five sales offices in the United States and one in
London.

     Effective for financial statements for fiscal periods beginning after
December 15, 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," requires
that an enterprise disclose certain information about operating business
segments. The Company evaluates its business and allocates resources based on
revenues and income (loss) by segment. An operating business segment is defined
as a component of an enterprise that engages in business activities which may
earn revenues and incur expenses, whose results are regularly reviewed by a
chief operating decision maker, and for which discrete financial information is
available. The Company has three operating business segments in 2000, 1999 and
1998 which are organized around differences in products and services: Licenses
and Hardware; Services; and Hosted Services.


                                       37

<PAGE>   40
                        SYNTELLECT INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                        DECEMBER 31, 2000, 1999 AND 1998



<TABLE>
<CAPTION>
                                                            (IN THOUSANDS)
                                        LICENSES &                      HOSTED
YEAR ENDED DECEMBER 31, 2000            HARDWARE        SERVICES        SERVICES          TOTAL
----------------------------            --------        --------        --------          -----
<S>                                     <C>             <C>             <C>             <C>
  Revenues from customers               $ 20,906        $ 21,412        $  5,714        $ 48,032
  Depreciation and amortization              811             406             600           1,817
  Segment income (loss) before
     income taxes                          2,343             742            (588)          2,497
  Expenditures for segment assets            557             274             184           1,015

 AS OF DECEMBER 31, 2000
  Segment assets                        $ 13,566        $ 10,316        $  3,219        $ 27,101
  Capital lease obligation                   312             155              --             467

 YEAR ENDED DECEMBER 31, 1999
  Revenues from customers               $ 17,092        $ 23,007        $  7,732        $ 47,831
  Depreciation and amortization            1,311             656             522           2,489
  Segment loss before income taxes        (1,540)            (42)           (284)         (1,866)
  Expenditures for segment assets            561             276             876           1,713

 AS OF DECEMBER 31, 1999
  Segment assets                        $ 11,956        $ 10,542        $  3,726        $ 26,224
  Capital lease obligation                   362             179              --             541

 YEAR ENDED DECEMBER 31, 1998
  Revenues from customers               $ 18,395        $ 20,633        $  8,925        $ 47,953
  Depreciation and amortization            1,268             625             645           2,538
  Segment income (loss) before
     income taxes                         (3,829)            311             900          (2,618)
  Expenditures for segment assets            719             354             915           1,988

 AS OF DECEMBER 31, 1998
  Segment assets                        $ 16,208        $ 12,094        $  3,831        $ 32,133
  Capital lease obligation                   459             226              --             685
</TABLE>

   Net revenues, by geographic area, for the three-year period ended December
31, 2000 are as follows:

<TABLE>
<CAPTION>
                                  (IN THOUSANDS)
 Geographic Area         2000          1999          1998
 ---------------       -------       -------       -------

<S>                    <C>           <C>           <C>
 United States         $33,257       $38,885       $37,471
 United Kingdom         13,901         8,335         8,448
 Other                     874           611         2,034
                       -------       -------       -------
                       $48,032       $47,831       $47,953
                       =======       =======       =======
</TABLE>

     No single customer accounted for more than 10% of the Company's revenues in
2000, 1999 or 1998.


                                       38
<PAGE>   41
                        SYNTELLECT INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                        DECEMBER 31, 2000, 1999 AND 1998


      Long lived assets, by geographic area, for the two-year period ended
December 31, 2000 are as follows:

<TABLE>
<CAPTION>
                           (IN THOUSANDS)
 Geographic Area        2000         1999
 ---------------       ------       ------
<S>                    <C>          <C>
 United States         $3,692       $4,579
 United Kingdom           122          208
                       ------       ------
                       $3,814       $4,787
                       ======       ======
</TABLE>

     The Company conducted business with a major media company who was also a
significant shareholder of the Company during the year ended 1998. Revenues from
this customer in 1998 were $1.4 million, $0.8 million in 1999, and $0.1 million
in 2000.


(13) 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 carrying amount of short-term investments
approximates fair value due to the liquidity of the investments and their
maturities which are less than or equal to twelve months. The fair value of
marketable securities classified as available-for-sale is based on quoted market
prices at the reporting date for those or similar investments. The carrying
amount of accounts receivable, accounts payable and accrued liabilities
approximates fair value as they are expected to be collected or paid within 90
days of year-end.


(14) Supplemental Financial Information

     A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the years ended December 31, 2000, 1999
and 1998 follows:

<TABLE>
<CAPTION>
                                                         (IN THOUSANDS)
                                                          CHARGED
                                            BALANCE AT    TO COSTS                      BALANCE
                                            BEGINNING       AND                         AT END
                                            OF YEAR       EXPENSES      DEDUCTIONS     OF YEAR
                                            ----------    --------      ----------     -------
<S>                                         <C>           <C>            <C>            <C>
Allowance for doubtful accounts:
    2000                                    $   784       $   318        $  (877)       $   225
    1999                                    $   932       $ 1,806        $(1,954)       $   784
    1998                                    $ 1,199       $   597        $  (864)       $   932


</TABLE>


                                       39
<PAGE>   42
                        SYNTELLECT INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                        DECEMBER 31, 2000, 1999 AND 1998


(15) Quarterly Results of Operations (Unaudited)


<TABLE>
<CAPTION>
Year ended December 31, 2000
                                                                  (in thousands)

                                        First Quarter     Second Quarter     Third Quarter     Fourth Quarter
-------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>                 <C>               <C>
Net revenues                                  $12,718          $  12,061       $  11,695           $  11,558
Gross profit                                    6,867              7,490           7,065               6,873
Operating income (loss)                         1,210                833             394                (196)
Net income (loss)                               1,197              1,001             476                (432)
Basic net income (loss) per share                 .10                .08             .04                (.04)
Diluted net income (loss) per share               .09                .08             .04                (.04)
</TABLE>



<TABLE>
<CAPTION>
Year ended December 31, 1999
                                        First Quarter      Second Quarter     Third Quarter    Fourth Quarter
-------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>                 <C>               <C>
Net revenues                                $  11,248          $  11,012       $  14,057           $  11,514
Gross profit                                    5,098              4,507           7,639               5,875
Operating income (loss)                        (1,669)            (2,838)          1,586                 249
Net income (loss)                              (1,589)            (2,739)          2,133                 329
Basic net income (loss) per share                (.12)              (.20)            .16                 .03
Diluted net income (loss) per share              (.12)              (.20)            .16                 .03
</TABLE>

      Net revenues for the quarter ended September 30, 2000 as originally filed
on Form 10-Q were $12,424 and are hereby restated to $11,695. This is to reflect
accounting standards guidelines governing revenue recognition from the sale of
licensing of software that require $654 to be recognized in the fourth quarter
of 2000 and $75 in 2001 or when earned.


                                       40
<PAGE>   43
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 our continuing directors and nominees is set forth
under the caption "Information Concerning Directors and Nominees" in our Proxy
Statement for our 2001 Annual Meeting of Stockholders (the "2001 Proxy
Statement") which we are incorporating by reference into this Annual Report. We
have set forth information concerning our executive officers in Part I of this
Annual Report and information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in our 2001 Proxy Statement. With the exception
of the foregoing information and other information specifically incorporated by
reference into this Annual Report, we are not filing the 2001 Proxy Statement as
a part of this Annual Report.

ITEM 11 -- EXECUTIVE COMPENSATION

     We are incorporating by reference in this Annual Report the information
available under the caption "Executive Compensation" in our 2001 Proxy
Statement. We are not incorporating by reference, however, the information found
under caption "Board Compensation Committee Report on Executive Compensation"
and "Stock Price Performance Graph" in our 2001 Proxy Statement.


ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     We are incorporating by reference in this Annual Report the information
regarding security ownership of certain of our beneficial owners and management
furnished under the caption "Security Ownership of Certain Beneficial Owners and
Management" in our 2001 Proxy Statement.


ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Not applicable.



                                     PART IV

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

     (a) 1. FINANCIAL STATEMENTS - INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     The following Consolidated Financial Statements of Syntellect Inc. and
subsidiaries, related notes, and independent auditors report are filed as part
of this Annual Report:


                                       41
<PAGE>   44
<TABLE>
<CAPTION>
                                                                                                          PAGE
                                                                                                         NUMBERS
                                                                                                         IN OUR
                                                                                                          2000
                                                                                                         ANNUAL
                                                                                                         REPORT
<S>                                                                                                     <C>
Independent Auditors' Report -- KPMG LLP                                                                   23
Consolidated Balance Sheets -- December 31, 2000 and 1999                                                  24
Consolidated Statements of Operations and Comprehensive Income -- Years ended December 31, 2000,
    1999 and 1998                                                                                          25
Consolidated Statements of Shareholders' Equity -- Years ended December 31, 2000, 1999 and 1998            26
Consolidated Statements of Cash Flows -- Years ended December 31, 2000, 1999 and 1998                      27
Notes to Consolidated Financial Statements                                                                 28
</TABLE>

     (a) 2. FINANCIAL STATEMENT 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.

     (a) 3. EXHIBITS


<TABLE>
<CAPTION>
  EXHIBIT                                                            PAGE NUMBERS IN OUR 2000 ANNUAL REPORT OR
    NO.                 DESCRIPTION                                              METHOD OF FILING
  -------               -----------                                  ------------------------------------------
<S>         <C>                                                   <C>
(2)(i)      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
            Syntellect Acquisition Co., and Pinnacle              Form S-4 dated February 9, 1996 (the "S-4")
            Investment Associates Inc.

(2)(ii)     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.

(3)(i)(a)   Restated Certificate of Incorporation of              Incorporated by reference to Exhibit No. 3-A
            Registrant, filed with the Delaware Secretary of      to Syntellect's Registration Statement on
            State on April 2, 1990                                Form S-1 dated February 23, 1995
                                                                  (the "S-1")

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

(3)(i)(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 1995 Form 10-K
            Delaware Secretary of State on March 14, 1996

(3)(ii)     Amended and Restated Bylaws of Registrant as of       Filed Herewith
            February 13, 2001

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

(10)(i)     Syntellect Inc. Restated Stock Option Plan (as        Filed Herewith
            amended through February 17, 1998)

(10)(ii)    Syntellect Inc. 1990 Employee Stock Purchase Plan     Filed Herewith
            (as amended through May 21, 1998)

(10)(iii)   Syntellect Inc. Long-term Incentive Plan (as          Filed Herewith
            amended through June 1, 2000)

(10)(iv)    Syntellect Inc. Executive 401(K) Plan                 Filed Herewith
</TABLE>


                                       42
<PAGE>   45
<TABLE>
<S>         <C>                                                   <C>
(10)(v)     Syntellect Inc. Nonemployee Director Stock Plan (as   Filed Herewith
            amended through June 1, 2000)

(10)(vi)   Lease Agreement dated March 6, 2000 between Denali     Filed Herewith
           National Trust, Inc. and Syntellect Inc. for an
           office facility in Phoenix, Arizona

(10)(vii)  Form of Indemnification Agreement between              Incorporated by reference to Exhibit No. 10-L
           Syntellect and its directors and officers              to Syntellect's S-1

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

(11)       Statement Regarding Computation of Net Income (Loss)   Filed Herewith
           Per Share

(21)       Subsidiaries of Registrant                             Filed Herewith

(23)       Consents of Experts                                    Filed Herewith
</TABLE>


     (b) REPORTS ON FORM 8-K.

     No Report on Form 8-K was filed during 2000.


                                       43
<PAGE>   46
     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.

                                  SYNTELLECT INC.

                                  By:  /S/   TIMOTHY P. VATUONE
                                       ------------------------------------
                                       Timothy P. Vatuone
                                       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
dates indicated.



<TABLE>
<CAPTION>
      NAME AND SIGNATURE                             TITLE                          DATE:
      ------------------                             -----                          -----
<S>                                      <C>                                    <C>
/S/  Anthony V. Carollo                  Chairman of the Board, Chief           March 29, 2001
-----------------------------            Executive Officer, President, and
ANTHONY V. CAROLLO                       Director
                                         (Principal Executive Officer)


/S/  Timothy P. Vatuone                  Vice President, Chief Financial        March 29, 2001
-----------------------------            Officer, Secretary and Treasurer
TIMOTHY P. VATUONE                       (Principal Financial Officer)


/S/  Charles F. Sonneborn III            Vice President and Controller          March 29, 2001
-----------------------------            (Principal Accounting Officer)
CHARLES F. SONNEBORN III


/S/  William P. Conlin                   Director                               March 29, 2001
-----------------------------
WILLIAM P. CONLIN


/S/  Michael R. Bruce                    Director                               March 29, 2001
-----------------------------
MICHAEL R. BRUCE


/S/  Michael D. Kaufman                  Director                               March 29, 2001
-----------------------------
MICHAEL D. KAUFMAN
</TABLE>


                                       44
<PAGE>   47
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
  EXHIBIT                                                            PAGE NUMBERS IN OUR 2000 ANNUAL REPORT OR
    NO.                 DESCRIPTION                                              METHOD OF FILING
  -------               -----------                                  ------------------------------------------
<S>         <C>                                                   <C>
(2)(i)      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
            Syntellect Acquisition Co., and Pinnacle              Form S-4 dated February 9, 1996 (the "S-4")
            Investment Associates Inc.

(2)(ii)     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.

(3)(i)(a)   Restated Certificate of Incorporation of              Incorporated by reference to Exhibit No. 3-A
            Registrant, filed with the Delaware Secretary of      to Syntellect's Registration Statement on
            State on April 2, 1990                                Form S-1 dated February 23, 1995
                                                                  (the "S-1")

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

(3)(i)(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 1995 Form 10-K
            Delaware Secretary of State on March 14, 1996

(3)(ii)     Amended and Restated Bylaws of Registrant as of       Filed Herewith
            February 13, 2001

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

(10)(i)     Syntellect Inc. Restated Stock Option Plan (as        Filed Herewith
            amended through February 17, 1998)

(10)(ii)    Syntellect Inc. 1990 Employee Stock Purchase Plan     Filed Herewith
            (as amended through May 21, 1998)

(10)(iii)   Syntellect Inc. Long-term Incentive Plan (as          Filed Herewith
            amended through June 1, 2000)

(10)(iv)    Syntellect Inc. Executive 401(K) Plan                 Filed Herewith

(10)(v)     Syntellect Inc. Nonemployee Director Stock Plan (as   Filed Herewith
            amended through June 1, 2000)

(10)(vi)   Lease Agreement dated March 6, 2000 between Denali     Filed Herewith
           National Trust, Inc. and Syntellect Inc. for an
           office facility in Phoenix, Arizona

(10)(vii)  Form of Indemnification Agreement between              Incorporated by reference to Exhibit No. 10-L
           Syntellect and its directors and officers              to Syntellect's S-1

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

(11)       Statement Regarding Computation of Net Income (Loss)   Filed Herewith
           Per Share

(21)       Subsidiaries of Registrant                             Filed Herewith

(23)       Consents of Experts                                    Filed Herewith
</TABLE>