FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the quarterly period ended September 30, 2001

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 INC.

(Exact name of registrant as specified in its charter)

Delaware	86-0486871
(State or other jurisdiction of incorporation	(I.R.S. Employer
or organization)	Identification No.)

16610 N. Black Canyon Highway, Phoenix, Arizona 85053

(Address of principal executive offices)
(Zip Code)

(602) 789-2800

(Registrant’s telephone number, including area code)

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES X NO

         Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

         11,292,070 shares of common stock, $.01 par value per share, were outstanding on October 31, 2001

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART II. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
EX-10
EX-11

SYNTELLECT INC. AND SUBSIDIARIES
INDEX

				Page
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
			Condensed Consolidated Balance Sheets –– September 30, 2001 (unaudited) and December 31, 2000		3
			Condensed Consolidated Statements of Operations –– Three Months and Nine Months Ended September 30, 2001 and September 30, 2000 (unaudited)		4
			Condensed Consolidated Statements of Cash Flows –– Nine Months Ended September 30, 2001 and September 30, 2000 (unaudited)		5
			Notes to Condensed Consolidated Financial Statements		6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations				9
	Item 3. Quantitative and Qualitative Disclosure about Market Risk				12
PART II. OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K				14
SIGNATURES					14
EXHIBITS
	Exhibit Index				14
		Exhibit (10) –– By-Laws of Syntellect Inc. as Amended and Restated Through August 9, 2001			15
		Exhibit (11) –– Syntellect Inc. Computation of Net Income (Loss) Per Share			24

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SYNTELLECT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

				September 30,			December 31,
				2001			2000
				(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	3,689		$	7,334
	Trade receivables, net of allowance for doubtful accounts of $234 and $225, respectively				7,547			12,423
	Other receivables				8			9
	Note receivable				67			57
	Inventories, net				709			1,415
	Prepaid expenses				1,197			711
		Total current assets			13,217			21,949
Property and equipment, net					4,270			3,814
Note receivable, non-current portion					219			270
Restricted cash					—			75
Other assets					1,002			993
		Total assets		$	18,708		$	27,101
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	2,905		$	2,934
	Accrued liabilities				1,998			3,186
	Customer deposits				917			2,916
	Deferred revenue				6,280			6,421
	Line of credit				1,422			—
	Capital lease obligations				247			151
			Total current liabilities		13,769			15,608
Capital lease obligations – less current portion					534			316
		Total liabilities			14,303			15,924
Shareholders’ equity:
	Preferred stock, $.01 par value per share. Authorized 2,500,000 shares; no shares issued or outstanding				—			—
	Common stock, $.01 par value per share. Authorized 25,000,000 shares; issued, 14,616,072 and 14,505,298, respectively				146			145
	Additional paid-in capital				62,556			62,311
	Accumulated deficit				(46,666	)		(39,696	)
	Accumulated other comprehensive loss				(217	)		(169	)
					15,819			22,591
	Treasury stock, at cost, 3,332,432 shares				(11,414	)		(11,414	)
		Total shareholders’ equity			4,405			11,177
		Total liabilities and shareholders’ equity		$	18,708		$	27,101

See accompanying notes to condensed consolidated financial statements.

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SYNTELLECT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

				Three Months Ended						Nine Months Ended
				September 30,						September 30,
				2001			2000			2001			2000
Net revenues:							(notes 3 and 5)						(notes 3 and 5)
		Licenses		$	2,316		$	5,396		$	8,202		$	16,727
		Services			5,020			4,945			15,603			15,502
		Hosted services			1,131			1,354			3,497			4,245
			Total net revenues		8,467			11,695			27,302			36,474
Cost of revenues:
		Licenses			748			1,269			2,265			4,271
		Services			2,578			2,373			8,634			7,745
		Hosted services			1,131			1,067			3,282			3,269
			Total cost of revenues		4,457			4,709			14,181			15,285
Gross margin					4,010			6,986			13,121			21,189
Operating expenses:
		Selling, general and administrative			5,285			5,854			16,815			16,420
		Research and development			952			738			3,251			2,332
			Total operating expenses		6,237			6,592			20,066			18,752
Operating income (loss)					(2,227	)		394			(6,945	)		2,437
Other income (expense), net:
		Interest income			7			70			63			245
		Interest expense and other			(75	)		12			(103	)		(8	)
			Total other income (expense), net		(68	)		82			(40	)		237
Income (loss) before income taxes					(2,295	)		476			(6,985	)		2,674
		Income tax benefit			(16	)		—			(16	)		—
		Net income (loss)		$	(2,279	)	$	476		$	(6,969	)	$	2,674
Net income (loss) per common share – basic				$	(0.20	)	$	0.04		$	(0.62	)	$	0.23
Net income (loss) per common share – diluted				$	(0.20	)	$	0.04		$	(0.62	)	$	0.21
Weighted average shares – basic					11,294			11,894			11,236			11,845
Weighted average shares – diluted					11,294			13,047			11,236			12,856
Other comprehensive loss:
	Foreign currency translation adjustment				(8	)		(141	)		(48	)		(251	)
Other comprehensive loss					(8	)		(141	)		(48	)		(251	)
Comprehensive income (loss)				$	(2,287	)	$	335		$	(7,017	)	$	2,423

See accompanying notes to condensed consolidated financial statements.

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SYNTELLECT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

				Nine Months Ended
				September 30,
				2001			2000
Cash flows from operating activities:
	Net income (loss)			$	(6,969	)	$	2,674
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
		Depreciation and amortization			1,302			1,352
		Provision for doubtful accounts			232			316
		(Increase) decrease in receivables			4,644			(1,304	)
		Decrease in inventories			706			782
		Increase (decrease) in accounts payable			(29	)		804
		Decrease in accrued liabilities			(1,188	)		(546	)
		Decrease in customer deposits			(1,999	)		(2,253	)
		Increase (decrease) in deferred revenues			(141	)		1,576
		Increase (decrease) in other assets and liabilities			(453	)		367
			Net cash provided by (used in) operating activities		(3,895	)		3,768
Cash flows from investing activities:
	Proceeds from short term investments				75			––
	Sale of property and equipment				26			534
	Purchase of property and equipment				(1,338	)		(839	)
			Net cash used in investing activities		(1,237	)		(305	)
Cash flows from financing activities:
	Borrowings on line of credit				1,422			––
	Proceeds from issuance of common stock				246			904
	Purchase of treasury stock				––			(2,761	)
	Principal payments on capital lease obligations				(133	)		(401	)
			Net cash provided by (used in) financing activities		1,535			(2,258	)
Effect of exchange rates on cash					(48	)		(251	)
Net increase (decrease) in cash and cash equivalents					(3,645	)		954
Cash and cash equivalents at beginning of period					7,334			6,185
Cash and cash equivalents at end of period				$	3,689		$	7,139
Supplemental disclosure of cash flow information:
	Cash paid for interest			$	86		$	26
Non-cash Investing and Financing Activities Property and equipment acquired under capital lease				$	446		$	362

See accompanying notes to condensed consolidated financial statements.

5

SYNTELLECT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except shares and per share amounts)
(unaudited)

(1) Basis of Presentation

         The accompanying unaudited, condensed, consolidated financial statements include the accounts of Syntellect Inc. (together with its subsidiaries, collectively, the “registrant,” “we,” “us,” or “our”) and its wholly-owned subsidiaries, Syntellect Canada Inc., Syntellect Europe Limited, Syntellect Deutschland GmbH and Syntellect Interactive Services, Inc. (“SIS”). All significant inter-company balances and transactions have been eliminated in consolidation.

         The financial statements have been prepared in accordance with generally accepted accounting principles, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In our opinion, the financial statements include all adjustments of a normal recurring nature which are necessary for a fair presentation of the results for the interim periods presented. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. Although we believe that the disclosures are adequate to make the information presented not misleading, we suggest that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our December 31, 2000 Annual Report on Form 10-K. The results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year.

         Revenue Recognition

         We recognize revenue from sales of Licenses and of Services, two of our three operating segments, 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 our third operating segment, Hosted Services, are recognized in accordance with SAB No. 101.

(2) Business Segments

         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 segments. An operating 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 segments, which are organized around differences in products and services: Licenses, Services, and Hosted Services:

							HOSTED
Three months ended September 30, 2001	LICENSES			SERVICES			SERVICES			TOTAL
Revenues from customers	$	2,316		$	5,020		$	1,131		$	8,467
Depreciation and amortization		182			89			165			436
Segment loss before income taxes		(1,890	)		(184	)		(221	)		(2,295	)
Expenditures for segment assets		39			––			367			406
Three months ended September 30, 2000
Revenues from customers	$	5,396		$	4,945		$	1,354		$	11,695
Depreciation and amortization		166			82			150			398
Segment income (loss) before income taxes		784			(272	)		(36	)		476
Expenditures for segment assets		233			115			––			348

6

							HOSTED
Nine months ended September 30, 2001	LICENSES			SERVICES			SERVICES			TOTAL
Revenues from customers	$	8,202		$	15,603		$	3,497		$	27,302
Depreciation and amortization		542			265			495			1,302
Segment loss before income taxes		(5,060	)		(1,354	)		(571	)		(6,985	)
Expenditures for segment assets		560			257			521			1,338
Nine months ended September 30, 2000
Revenues from customers	$	16,727		$	15,502		$	4,245		$	36,474
Depreciation and amortization		604			298			450			1,352
Segment income (loss) before income taxes		3,168			(131	)		(363	)		2,674
Expenditures for segment assets		444			219			176			839

(3) Depreciation and Amortization Expense

         Depreciation and amortization expense related to cost of revenues has been reclassified from selling, general and administrative expenses to cost of revenues for all periods presented. The impact of this reclassification on our Statement of Operations for the three-month and nine-month periods ended September 30, 2000 is an increase in our cost of revenues and a decrease in our selling, general and administrative expenses, as previously reported by $79 and $234, respectively. Depreciation and amortization included in cost of revenues for the three-month and nine-month periods ended September 30, 2001 was $92 and $258, respectively.

(4) Reorganization Costs

         As part of an overall strategic plan to reduce costs and increase operating efficiencies, we began the process of reorganization during the first quarter of 2001 and completed the process by the end of the second quarter of 2001. As a result of these plans, we recorded pre-tax charges of $600 during the quarter ended March 31, 2001 as follows:

		Total Expense
Separation costs		$	292
Retention bonuses			79
Recruitment costs			229
	Total Reorganization Costs	$	600

         In accordance with our reorganization plan, we terminated twelve employees from the five departments indicated and incurred $292 in separation costs: Administration (3), Sales (4), Research and Development (2), Application Development (2), and System Development (1). All of the reorganization costs expensed in the first quarter of 2001 were paid prior to June 30, 2001.

(5) Restatement of Earnings for the Third Quarter 2000

         Earnings for the third quarter of 2000 were restated. This restatement effected the correction of an error. In connection with our December 31, 2000 audit, we determined that approximately $729 of revenues previously recognized during the three-month and nine-month periods ended September 30, 2000 did not satisfy the existence of persuasive evidence of an arrangement in selected instances because we had not executed the relevant contracts prior to period-end, although the respective customers had done so. This correction was made in our December 31, 2000 Form 10-K where the impact of this restatement on previously reported net revenues was disclosed.

7

         The effect of this restatement on our previously issued unaudited consolidated financial statements is summarized as follows:

	September 30, 2000
	Three months ended				Nine months ended
	As				As
	previously		As		previously		As
	reported		restated		reported		restated
Net revenues	$	12,424	$	11,695	$	37,203	$	36,474
Gross profit		7,620		6,986		21,978		21,189
Operating income		949		394		2,992		2,437
Net income		1,031		476		3,229		2,674
Basic:
Net income per common share:	$	0.09	$	0.04	$	0.27	$	0.23
Diluted:
Net income per common share:		0.08	$	0.04	$	0.25	$	0.21

         Since the September 30, 2000 10-Q is a Securities Exchange Act filing which was updated by the subsequent December 31, 2000 10-K 1934 Act filing, we did not refile the September 30, 2000 10-Q to reflect these changes.

(6) Inventories

         Inventories consist of the following:

	September 30,		December 31,
	2001		2000
Finished goods	$	187	$	507
Purchased components		250		460
Repair, warranty and maintenance inventory		272		448
	$	709	$	1,415

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         We develop, market and implement 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, application development environment, software platform, we offer customizable software applications including Interactive Voice Response (“IVR”), Automatic Speech Recognition (“ASR”), Vocalpoint Interactive Web Response® (“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 speech recognition, for unassisted, self-service access to applications, information, and transactions between an enterprise and its customers, employees, suppliers, partners, investors and other constituents.

         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. These services can be deployed from the customer’s premises, our Hosted Services Center, or a combination of the two. Our Hosted Services include, for example, cable and satellite pay-per-view orders, employee benefits enrollment, and utility outage applications.

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, Services, and Hosted Services.

         Licenses is our operating business segment that includes our contact center software platform Vista. Vista is an all-in-one software platform for enterprise customer call centers, which includes Interactive Voice Response, Interactive Web Response, Computer Telephony Integration, 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 infringement 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, and a variety of out-sourced electronic capabilities such as benefits enrollment and broadcast faxing which we offer through our subsidiary, SIS.

NET REVENUES

         Net revenues for the quarter ended September 30, 2001 were $8.5 million, a decrease of 27% from the $11.7 million reported for the third quarter of 2000. For the nine-month period ended September 30, 2001, net revenues were $27.3 million, a decrease of 25% from $36.5 million in the corresponding period in 2000. Net revenues consist of Licenses, Services, and Hosted Services, which represented 28%, 59% and 13% of net revenues, respectively, for the quarter ended September 30, 2001, and 30%, 57%, and 13% of net revenues, respectively, for the nine-month period ended September 30, 2001.

         Revenues from Licenses for the three-month period ended September 30, 2001 were $2.3 million, a decrease of $3.1 million, or 57%, compared to $5.4 million for the same period last year. For the nine months ended September 30, 2001, revenues from Licenses were $8.2 million, a decrease of 51% from the $16.7 million reported for the corresponding period in 2000. The decrease for the quarter was the result of customer orders for the period being delayed into future quarters, primarily due to a continued weakening of the economy creating uncertainty and

9

elongated sales cycles. Other factors that contributed to the decrease for the nine-month period were a slow down in the software-based economic sector, a general down turn in the U.S. economy, and a decline of hardware revenues from $3.0 million to $1.1 million, or 63%, compared to the same nine-month period last year. Hardware revenues continue to decline due to our ongoing transition to a software-based business.

         Services revenues increased $0.1 million from $4.9 million to $5.0 million, or 2%, for the three-month period ended September 30, 2001. For the nine-month period ended September 30, 2001, Services revenues increased $0.1 million from $15.5 million to $15.6 million, or 1%. The consistency of our Services revenues in a down year was the direct result of our increased maintenance and consulting revenues generated by the “Other Services” component of Services, which are normally associated with a software-based business.

         For the quarter ended September 30, 2001, the “Application Services” component of Services revenues was $2.2 million: $1.6 million from Applications, $0.3 million from Installations, and $0.3 million from Project Management revenues. Application Services remained constant at $2.2 million for the comparable prior year period: $1.6 million from Applications, $0.3 million from Installations, and $0.3 million from Project Management. For, the nine-month period ended September 30, 2001, the Application Services component of Services revenues increased from $6.6 million to $6.7 million, or $0.1 million, as compared to the prior year period, due to applications.

         For the quarter ended September 30, 2001, the “Maintenance” component of Services revenues was $2.3 million, a decrease of $0.1 million, or 4%, under the comparable prior year quarter revenue of $2.4 million. For the nine-month period ending September 30, 2001, the Maintenance component of Services revenues was $7.1 million, an increase of $0.6 million, or 9%, over the comparable prior year nine-month revenue of $6.5 million. The decline in the quarter ended September 30, 2001 resulted from a reduced number of maintenance contracts renewed by our legacy customers. The increase in our revenue stream in the nine-month period resulted from a greater number of Vista software installations in 2000 and early 2001 which, in turn, caused an increase in first time maintenance contracts in 2001.

         For the quarter ended September 30, 2001, the “Other Services” component of Services revenues was $0.5 million, an increase of $0.1 million, or 25%, over the comparable prior year quarter. For the nine-month period ending September 30, 2001, the Other Services revenue component of Services was $1.7 million, a decrease of $0.7 million, or 29%, under the comparable prior year period revenue of $2.4 million. In the current nine-month period ended September 30, 2001, there were no revenues from patent infringement lawsuits recognized compared to $0.8 million in the corresponding period last year. We do not anticipate future revenues from patent lawsuits. The revenue generated in 2001 is from consulting, training, and change orders.

         Hosted Services revenues were $1.1 million, a decrease of $0.3 million, or 21%, for the quarter ended September 30, 2001, compared to the prior year period revenues of $1.4 million. For the nine months ended September 30, 2001, Hosted Services revenue was $3.5 million, a $0.7 million decrease, or 17%, from the nine-month comparable period for 2000. The reason for the decline rests with our Home Ticket, a pay-per-view service for cable television providers. The cable television industry has been deploying new order entry technologies for consumer purchases of pay-per-view events that do not utilize toll free 800 numbers. These new technologies have resulted in a downward trend in transaction processing fees for us, a trend that is expected to continue. To offset the decline in pay-per-view services, Hosted Services has offered other out-sourced electronic capabilities including DialExpress (message delivery), Lead Capture, Speech Enabled Directory, Site Locators, outage ticket, broadcast faxing, call center processing, and audiotext. However, there can be no assurances as to whether, or when, such efforts will completely supplant declining pay-per-view revenues.

         Domestic and international revenues for the three-month period ended September 30, 2001 were $6.4 million, or 75%, and $2.1 million, or 25%, of total revenues, respectively, as compared to $8.7 million, or 74%, and $3.0 million, or 26%, of total revenues, respectively, for the same period in 2000. For the nine-month period ended September 30, 2001, domestic and international revenues were $20.4 million, or 75%, and $6.9 million, or 25%, of total revenues, respectively, compared to $23.9 million, or 65%, and $12.6 million, or 35%, of total revenues, respectively, for the comparable prior year period. Domestically, the decrease in revenues from the comparable nine-month period of the prior year was due to lower than anticipated customer orders received and, internationally, to smaller than anticipated orders in the third quarter of 2001 compared to the same period in 2000. International revenues typically consist of a small number of large orders and are subject to quarter-to-quarter fluctuations.

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GROSS MARGIN

         The gross margin percentage for the quarter ended September 30, 2001 was 47% of net revenues compared to 60% in the comparable prior year quarter. The gross margin percentage for the nine months ended September 30, 2001 was 48% of net revenues compared to 58% in the comparable period in 2000.

         Licenses gross margins for the quarter ending September 30, 2001 decreased from 76% to 68% in the same quarter of 2000. For the nine-month period ending September 30, 2001, gross margins on Licenses decreased to 72% from 74% in the same period of the prior year. This decrease in the gross margin is primarily due to an increase in the volume of licenses sold which resulted in an associated third party licenses cost in the three-month period ended September 30, 2001. Also, increased reseller activity in the quarter and associated costs lowered the gross margin percentage in the nine-month period ended September 30, 2001.

         Gross margins on Services for the quarter ending September 30, 2001 decreased to 49% from 52% in the prior year comparable period, and for the nine-month period ending September 30, 2001, decreased to 45% from 50% in the prior year. The decrease in margins for the three-month and nine-month period was primarily due to an increase in outside contractor expense in 2001. Also, for the nine-month period, the decrease in margins was affected by relatively high margin revenues from the settlement of a patent lawsuit in the first quarter of 2000.

         Gross margins on Hosted Services for the quarter ending September 30, 2001 decreased to 0% from 21% in the comparable prior year quarter, and decreased to 6% from 23% in the comparable prior year nine-month period. Margins decreased primarily due to declining pay-per-view revenues and the relatively fixed cost structure of this business segment. We have commenced steps to offset this decline in margins by offering other outsourcing capabilities. We expect these other capabilities, however, to require initial application development outlays which may delay their offsetting effects in the short term. Depreciation expense of $0.3 million compared to $0.2 million was included in the calculation of gross margin for the nine-month period ending September 30, 2001 and September 30, 2000, respectively.

         We include those costs directly associated with the generation of revenue in the computation of gross margin including direct labor, depreciation and amortization, application development, travel, maintenance, customer support, supplies and hardware. Gross margins will fluctuate on a quarterly 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 the third quarter and the nine months ending September 30, 2001 are not necessarily indicative of the results to be expected for the full year.

OPERATING EXPENSES

         Operating expenses for the third quarter of 2001 were $6.2 million, a decrease of $0.4 million, or 6%, as compared to the same quarter of the prior year. Selling, general and administrative expenses including depreciation and amortization, decreased $0.6 million, or 10%, from the comparable prior year quarter and increased $0.4 million, or 2%, over the comparable prior year nine-month period. The primary reasons for the increase in expenses in the current nine-month period consist of the $0.6 million we expended in reorganization costs and the $0.5 million we expended to reposition our market presence during the first quarter of 2001. We repositioned our marked presence to increase demand for our voice processing products and to create market differentiation and awareness for our Interactive Media Response solution for Enterprise Voice Portals. As anticipated with our on-going transition to a software-based company, research and development expenses for the third quarter of 2001 increased $0.3 million, or 43%, over the comparable prior year quarter and increased by $1.0 million, or 43%, over the comparable nine-month period.

NET INCOME (LOSS)

         We reported net loss of $2.3 million, or $(0.20) per diluted share, for the third quarter of 2001, compared to net income of $0.5 million, or $0.04 per diluted share, for the prior year quarter. For the nine-month period ended September 30, 2001, we reported net loss of $7.0 million, or $(0.62) per diluted share, compared to net income of $2.7 million, or $0.21 per diluted share, for the comparable prior year period.

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LIQUIDITY AND CAPITAL RESOURCES

         We had a working capital deficit of $(0.6) million at September 30, 2001, as compared to working capital of $6.3 million at December 31, 2000. The current ratio was 0.96:1 and 1.4:1 on such dates, respectively. Cash and cash equivalents at the end of the third quarter 2001 totaled $3.7 million compared with $7.3 million at the previous year-end. A reduction of receivables and cash resulted in the change in working capital.

         For the nine months ending September 30, 2001, we had a net loss of $7.0 million. After adjustments for non-cash activities and changes in certain balance sheet items, our operations incurred a negative cash flow of $3.9 million compared to a positive cash flow of $3.8 million in the same period of 2000. The primary factors affecting the difference between net income and cash flow were a decrease in accruals and customer deposits coupled with a decrease in accounts receivable caused by the decline in customer orders.

         Cash flows from investing activities, primarily for the purchase of property and equipment, used $1.2 million during the nine months ended September 30, 2001, compared to $0.3 million, net of a sale of property and equipment of $0.5 million, for the same period last year.

         Cash flows from financing activities totaled $1.5 million for the period generated primarily from the proceeds of common stock issuances and borrowings on a line of credit. For the same period last year, cash flows used in financing activities were $2.3 million primarily due to the purchase of treasury stock totaling $2.8 million and proceeds of $0.9 million from the issuance of common stock.

         In order to support our operations as we restructure our organization, the $4.0 million line of credit that was executed on October 11, 2000 was terminated on June 26, 2001. In place of that line of credit, we executed a one-year, $3.0 million asset-based operating line of credit on June 14, 2001 with another financial institution. On October 1, 2001, we executed an amendment to this line of credit agreement, reducing the available limit from $3.0 million to $2.0 million, and increasing the interest rate from the prime rate plus 4.5% to the prime rate plus 8.5%, not to be less than 15% per annum. The minimum interest due each month is $7,500. We may borrow according to a formula based on 65% of eligible domestic accounts receivable less than 90 days old, excluding maintenance receivables and customer deposits. Domestic accounts receivable and inventory collateralize the line of credit. As of September 30, 2001, we had an outstanding balance of $1.4 million on the line of credit. Based on the formula, we had an additional $0.6 million in available funds under the line of credit at September 30, 2001. The line of credit requires compliance with certain debt covenants. Although we were in violation of certain debt covenants pertaining to the line of credit as of September 30, 2001, the financial institution waived these violations.

         We expect our current cash and cash equivalents combined with future cash flows from operating activities and the borrowings on our operating line of credit to be sufficient to support our operations for the next twelve months.

         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 in accordance with 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 November 1, 2001, we had repurchased a total of 3,135,000 shares under these plans since November 13, 1998. Although we continue to be authorized to repurchase 365,000 additional shares, we repurchased no additional shares during the first nine months of 2001.

ITEM 3. 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

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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 2.35%. 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 asset-based operating line of credit bears interest at the prime rate plus 8.5%. For the first nine months of 2001, the prime rate ranged between 9.5% at January 1, 2001 and 6.0% at September 30, 2001. At September 30, 2001, we had approximately $1.4 million outstanding under this line of credit, all of which is classified as current and is to be paid from receipts of customer receivables. Due to the current nature of this debt, the requirement to make payments on the outstanding balance as receivables are paid by customers, and the currently low prime rates, we do not believe that market risk related to this line of credit is significant. Our only long-term liabilities are capital lease obligations at a fixed rate. An increase in the interest rate on our line of credit of 10 basis points would result in an increase in interest expense of $10,352 on an annualized basis. 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 at this point in time.

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 Form 10-Q 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,” “expect,” “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, 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 Form 10-Q 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. We advise you, however, to review the Section entitled “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2000 for a discussion of important cautionary factors that may affect future results. We also advise you 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.

(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)

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PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

     Exhibit (10) –– By-Laws of Syntellect Inc. as Amended and Restated Through August 9, 2001

     Exhibit (11) –– Syntellect Inc. Computation of Net Income (Loss) Per Share

b) Reports on Form 8-K

     No current reports on Form 8-K were filed during the three months ended September 30, 2001.

SIGNATURES

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

	SYNTELLECT INC.
Date: November 1, 2001	By:	/s/ Timothy P. Vatuone
		Timothy P. Vatuone
		Vice President, Chief Financial Officer,
		Secretary and Treasurer
		(Principal financial officer and duly
		authorized officer of the registrant)

EXHIBIT INDEX

         Exhibit (10) –– By-Laws of Syntellect Inc. as Amended and Restated Through August 9, 2001, page 15

         Exhibit (11) –– Syntellect Inc. Computation of Net Income (Loss) Per Share, page 24

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