SYNTELLECT INC, 10-K, 1998-03-30

SYNTELLECT INC
10-K, 1998-03-30
TELEPHONE & TELEGRAPH APPARATUS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File No. 0-18323

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

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

1000 Holcomb Woods Parkway, Suite 410A, Roswell, Georgia 30076
(Address of principal executive office) (Zip Code)

(770) 587-0700
(Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:

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NAME OF EXCHANGE ON WHICH
TITLE OR CLASS REGISTERED
---------------------------- -----------------------------
<S> <C>
Common Stock, $.01 par value NASDAQ National Market System
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

At March 19, 1998, the aggregate market value of common stock held by non-
affiliates of the Registrant was $24,780,000.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ] Not applicable

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
13,581,073 shares of Common Stock outstanding on March 19, 1998.

DOCUMENTS INCORPORATED BY REFERENCE

Materials from the Registrant's Proxy Statement relating to its 1998 Annual
Meeting of Shareholders (the "Proxy Statement") have been incorporated by
reference into Part III, Items 10, 11, 12 and 13.
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TABLE OF CONTENTS

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PAGE
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PART I
ITEM 1. BUSINESS...................................................... 1
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........................................... 12
ITEM 6. SELECTED FINANCIAL DATA....................................... 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................... 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 38
ITEM 11. EXECUTIVE COMPENSATION........................................ 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K...................................................... 38
SIGNATURES............................................................... 42
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PART I

ITEM 1--BUSINESS

GENERAL

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

This report on Form 10-K may contain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These statements
include without limitation, certain statements contained in Part I, Item 1--
"Business" under the captions "Historical Development of the Company",
"Industry and Market Background", "Products and Services", "Sales, Marketing,
Service & Support", "Product Development", "Manufacturing and Suppliers",
"Backlog", "Proprietary Rights and Intellectual Property" and "Employees";
Part I, Item 3--"Legal Proceedings"; Part II, Item 5, "Market for the
Company's Common Equity Securities and Related Shareholder Matters"; and Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations". Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Also see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of important factors that could affect the
validity of any such forward-looking statements.

HISTORICAL DEVELOPMENT OF THE COMPANY

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

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

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The merger between Syntellect Inc. and Pinnacle provided the combined
company with several distinct marketing advantages including: (i) a more
diversified product line which includes both inbound voice processing
technology and outbound predictive dialer products; (ii) a larger sales force
and distribution network together with improved access and cross-selling
opportunities in new vertical markets; and (iii) the combination of recurring
revenue from Syntellect's transaction-based service bureau and Telecorp's Home
Ticket pay-per-view service, with the automated processing capacity of what
the Company believes is one of the world's largest outsourced transaction
centers. In addition, the merger provided the combined company with greater
financial resources and access to a new management team with substantial
expertise in the voice processing industry.

INDUSTRY AND MARKET BACKGROUND

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

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

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

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Market Potential and Industry Rank. The Gartner Group, an industry analyst
firm, reports that the $3 billion call center market in North America is
growing at a rate of 20% per year. The group estimates that there are
approximately 55,000 call centers worldwide, with 30,000 of those call centers
operated in the United States. Frost & Sullivan, a market research firm,
forecasts that the compound annual growth rate in the U.S. call center
services market from 1996-2003 will be 15.8%.

By the year 2000, it is predicted that 75% of all call centers will conduct
up to 33% of their transactions electronically. Out of the 55,000 call centers
in operation today, In-Stat estimates that only 2,500, or 4.6%, are web-
enabled. That number is expected to grow to 8% in 1998, 15% in 1999 and over
35% in the year 2000. The speech recognition market, as a significant
component of the call center market, is projected to surpass $1 billion by the
end of the decade.

Ovum, a market research firm, forecasts the North American CTI market will
experience a compound annual growth rate of 25% from 1996 to the year 2000 and
approach $6.1 billion by the year 2000. The CTI market is divided into three
distinct segments: formal call centers, typically large workgroups using an
automatic call distributor ("ACD"); informal call centers, smaller workgroups
not using an ACD; and small office/home office products targeted at small
businesses and individual workers from the office. The Company competes
primarily in the formal call center market with its IVR, IWR and predictive
dialer products.

Ovum reports that the European call center market is currently growing at
40% per year. DataQuest, a global market research and consulting firm serving
the high-technology and financial communities, ranks Syntellect as the number
one supplier of IVR in the United Kingdom with a total market share of 25%.
Syntellect also ranks third in Western Europe with a market share of 8.9%.

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

Syntellect's principal domestic competitors for IVR products include Lucent
Technologies, InterVoice Inc., Periphonics Corporation, Edify, Brite Voice
Systems Inc., and IBM Corporation. The Company's principal domestic
competitors for predictive dialer products are Davox Corporation, EIS
International, Inc., Melita International Corporation and Mosaix, Inc.
Internationally, Syntellect's primary competitors include InterVoice Inc.,
Telsis, Periphonics and IBM Corporation. Many of the Company's competitors
have more extensive engineering, manufacturing, and marketing capabilities, in
addition to their substantially greater financial, technological and personnel
resources. The Company also expects new competitors to enter its markets.

PRODUCTS AND SERVICES

Product Focus. Syntellect has undergone a significant transition in its
product focus over the past several years in order to meet the changing
requirements of its markets. Historically, the Company was a technology-driven
organization focused on developing proprietary IVR systems. These products
were designed primarily for the formal call system market and required
customers to develop their own application software. With the introduction of
the VocalPoint IVR in 1993, the Company moved to an open architecture platform
that allowed for improved functionality and which integrated industry-standard
hardware with software developed by the

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Company. Syntellect expanded its product focus with the March 1996 acquisition
of Pinnacle. With this acquisition, the Company added an outbound call
transaction system (VocalPoint Predictive Dialer) and the automated processing
capacity of one of the world's largest transaction service bureaus. Syntellect
is currently the only company in its industry to offer both inbound and
outbound voice processing systems, and a transaction-based service bureau for
those customers who prefer to outsource their voice processing applications.

Syntellect has focused on providing an all-in-one solution for interactive
voice response, interactive web response, predictive dialing, computer
telephony integration, fax-on-demand, speech recognition and more. With this
offering, companies can process transactions from customers using almost any
communication devices including phones, Web browsers, fax machines and pagers.

Syntellect's VocalPoint IVR, VocalPoint Interactive Web Response ("IWR") and
other servers providing fax-on-demand, bank card processing, and other
services, operate on the company's VocalPoint platform. These VocalPoint
products are based on an OS/2 operating system and communicate with each other
via VistaLink, an application programming interface ("API"). Upon the 1996
merger, Syntellect added Telecorp Systems' Predictive Dialer to the VocalPoint
platform.

In 1996, Syntellect also began the migration of its product line to a new
software platform, called Vista. This new platform is Windows NT-based with
distributed client-server architecture for flexibility and scaleability. All
the software needed to automate a small call center can reside on one computer
while companies with larger call centers, or multiple call center sites, can
configure the software to reside on multiple servers or networked computers.

In November 1996, Syntellect introduced the Interaction Server, the first
system based on the Vista (VocalPoint Interactive Services Transaction
Architecture) platform. The Interaction Server provides computer telephony
integration capabilities. In July 1997, the Company added the SpeechReco
Server to the Vista platform. This system provides large vocabulary, natural-
language speech recognition. While both servers are based on the new Vista
platform and run under Microsoft's Windows NT operating system, they can also
be integrated with earlier VocalPoint products. Syntellect's Vista
architecture allows products on the VocalPoint and Vista platforms to
interact. The Vista architecture also provides an easy migration to the
company's new NT-based products. VocalPoint applications will run in
compatibility mode on the Vista platform.

Syntellect's vision for Vista is to provide an integrated scaleable software
platform that integrates multiple call center technologies. In 1998, the
company will add full IVR and IWR capabilities to the Vista platform. One
application generator will be used to develop the applications utilizing all
features of the Vista platform and one web-based monitoring tool will be used
to manage an entire network of computers running Vista software.

Interactive Communications Management: Syntellect specializes in providing
Interactive Communications Management ("ICM") solutions, or comprehensive call
center applications that automate complex customer transactions using multiple
call center technologies such as interactive voice and web response,
predictive dialing and computer telephony integration. These ICM solutions
automate the callflow process in customer service departments by eliminating
the need for agents to ask customers redundant questions, by reducing call
duration and by increasing the ability of agents to solve customer problems.

Virtual Access: The Company's Virtual Access technology allows callers to
access an automated self-service application using their choice of
communication devices. With this technology, customers can write a single
application for multiple call center technologies.

New Product Introductions. The Company introduced several new products in
1997. The new products are designed to add functionality to existing products
and expand the scope of the Company's product offerings. The new product
introductions include the following:

Mondex Smart Card Interface is a VocalPoint IVR hardware and software
feature which allows you to conduct Mondex deposit, withdrawal or balance
transfer transactions through Mondex telephones. VocalPoint IVR, utilizing
the Mondex Smart Card Interface, provides the link between retail point-of-
sale devices and the financial institution that has issued the card.
Syntellect has deployed this technology with one of Asia's leading
financial services providers and aims to expand its activity in the
electronic smart card market through direct sales as well as partnership
agreements with other smart card vendors.

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SpeechReco Server provides large-vocabulary speech recognition
capabilities with natural language understanding. This product allows
callers using VocalPoint IVR systems to speak their request for
transactions over the phone instead of using the touchtone keypad of the
telephone. For example, in the banking industry, callers speaking naturally
and fluently can request to pay bills, transfer funds or check on loans and
credit card balances. The SpeechReco Server is highly scaleable and can be
shared by multiple IVR systems and applications, eliminating the
requirement for dedicated speech recognition hardware per IVR platform.
While the SpeechReco Server is based on the Vista platform, it is
accessible to VocalPoint products through VistaLink API.

SYNthesizer 3.0 is a new version of Syntellect's graphical application
development tool. This 3.0 release provides enhanced editing capabilities.
These enhancements enable Syntellect customers as well as Syntellect
application developers to rapidly design and create applications for
VocalPoint products.

VocalPoint Predictive Dialer 3.0 is a high-performance outbound dialing
system. Release 3.0 improves system performance through latest-generation
technology incorporating Pentium processors, a Unixware operating system
and an Informix relational database. Product enhancements include:
supervisor/agent messaging which allows supervisors and agents to send and
receive text messages; call transfer which allows agents and supervisors to
transfer calls to others in the calling group; and agent-specific scheduled
callback which can direct a callback to the agent who originally scheduled
it.

Call Center Systems

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

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

VocalPoint IWR allows companies to take advantage of the Internet with self-
service solutions designed exclusively for the World Wide Web. The VocalPoint
IWR can be voice-enabled for Virtual Access applications accessible by both
Web browsers and phones.

VocalPoint Predictive Dialer is an open architecture system designed for
targeted telemarketing, collections and customer service applications. The
system incorporates the latest in predictive dialer technology, including call
pacing, call screening, call blending, and CTI links between telecommunication
equipment and mainframe databases. The VocalPoint Predictive Dialer maximizes
the number of live contacts reached, supports on-screen interactive scripts,
instantaneously displays contact data when the call goes through, and provides
detailed management statistics and reports on agent productivity and calling
campaign results.

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VocalPoint Fax Server receives fax requests from inbound or outbound agents
and IVR and Interactive Web Response ("IWR") applications.

Interaction Server. This Windows NT-based server provides CTI capabilities.
The server tracks, routes and manages customer calls and Web transactions
using rules-based software.

VocalPoint Desktop Software uses CTI to link the agent's terminal with the
Interaction Server to provide customer data with each phone call transferred
to the agent's desk. This functionality is commonly referred to as a
"ScreenPop."

SYNthesizer Graphical Application Generator is an easy-to-use application
development tool designed for non-programmers. SYNthesizer allows users to
develop applications by creating visual diagrams with "drag-and-drop' icons.
This powerful tool provides users with a simple approach to creating and
modifying call center applications.

VocalPoint BankCard Server allows callers to make account payments and
purchase goods or services with their credit cards automatically over the
phone. This processing capability is available as a feature of the VocalPoint
IVR system or as a separate server.

VocalPoint 6000 ARU is an audio response unit specifically designed for the
cable television industry. In 1997, the company made a decision to no longer
devote development resources to this product line; rather, it is actively
marketing a migration path from the VocalPoint ARU to the VocalPoint IVR
product while continuing to provide customer support services. As a result,
the company experienced a decline in sales of this product to new customers
during 1997 as most sales were add-ons to existing systems.

Premier 030 is a proprietary IVR system designed to work in conjunction with
sophisticated ACD or PBX telephone systems, as well as a variety of host
computers. The Premier 030 addresses the need for a powerful IVR system and is
sold as a complete voice processing platform or as an upgrade to certain of
the Company's earlier generations of IVR systems. Demand for new Premier 030
products declined significantly in 1997 as most companies were reluctant to
add proprietary systems to their call center. The Company continues to market
a migration path for its Premier customers to the VocalPoint product line as
well as provide customer support services and enhancements to its install
base.

Service Bureau. The Company operates an outsourced transaction center
through its Syntellect Interactive Services, Inc. ("SIS") subsidiary.
Telemarketing(R) and Call Center Solutions(TM) magazine ranked SIS third among
interactive service bureaus in the United States for 1997. The ranking was
based on the cumulative number of minutes of services provided over a 12-month
period. The SIS Transaction Center ("Transaction Center") as it is known, is a
service bureau with nearly 5,000 ports, which offers complete automated
transaction outsourcing, system redundancy, fault-tolerant power protection
and disaster recovery services, 24 hours a day, 7 days a week. The Transaction
Center is a call center that unlike most, which are labor intensive, features
an automated "lights out" facility. The Transaction Center handles more than
four million telephone calls and Internet-based inquiries each month for its
customers. The Transaction Center is used for the Company's Home Ticket(TM)
pay-per-view service. Home Ticket combines the speed and convenience of 800
numbers, the user-friendly nature of IVR technology and real-time connectivity
with cable billing host systems to process orders for over 700 cable and
satellite television operators in North America including TCI, Time Warner,
Cox Cable and Comcast. Home Ticket(TM) is the pay-per-view service utilized by
approximately 10 million households in the United States alone. The Company
has added additional features to the Home Ticket(TM) service, including Hot
Spots advertising and promotion messaging, commercial ordering for hotels and
motels, and Call Redirect which transfers an incoming call to a second
destination for enhanced customer service and retailing options. In 1997, SIS
introduced CyberStats(TM), an online reporting tool for Home Ticket customers.
CyberStats provides real-time reports on pay-per-view order calls. Users can
access CyberStats on the Internet and select the report delivery method of
choice: to their desktop screen, by e-mail, or to a fax machine.

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The Service Bureau is also designed to handle employee benefits enrollments
and automated dealer inquiries relating to large, one-time events such as
special promotions or customer surveys for companies wishing to automate and
outsource these services. These services which generally became available in
1995, are typically billed on a transaction-by-transaction basis.

SALES, MARKETING, SERVICE & SUPPORT

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

Domestic Sales. Domestic sales including maintenance fees represented 76%,
73% and 79% of the Company's total revenues for 1997, 1996 and 1995,
respectively. During these years no single distributor or customer accounted
for more than 10% of total revenues. More than 93% of the Company's 1997 sales
were made by its direct sales force. A substantial portion of these direct
sales are made by a limited number of sales representatives, the loss of whom
could adversely affect future operating results.

International Sales. International sales including maintenance fees
represented 24%, 27% and 21% of the Company's total revenues for 1997, 1996
and 1995, respectively. For additional information regarding international
operations, see Note 13 of Notes to Consolidated Financial Statements. All of
the Company's product lines and services are sold world-wide with the
exception of the Service Bureau which is currently limited to Canada. The
products have been modified to meet specific power, safety and
telecommunication requirements of the country of destination. The Company
currently offers its products in 30 different languages. Syntellect maintains
a direct sales force in London and uses 5 distributors to market its systems
in various countries around the world. The Company supports its European
distributors through the London office. Sales in Canada and the United Kingdom
are denominated in Canadian dollars and pounds sterling, respectively, and are
subject to foreign currency adjustments. Sales in all other foreign countries
are denominated in United States dollars. Syntellect conducts business in
international markets in compliance with each country's applicable laws and
regulations, including safety and telecommunication laws, import duties and
quotas. Syntellect has not experienced any difficulty in obtaining export
licenses for foreign sales from the United States Department of Commerce.

Marketing Organization and Vertical Market Focus. Syntellect's marketing
organization is charged with (i) enhancing the Company's corporate image; (ii)
increasing demand for the Company's voice processing products; (iii) creating
market differentiation; and (iv) identifying future development opportunities
for market-driven features. The marketing organization conducts market and
competitive research, participates in industry trade shows and conferences,
creates sales literature and presentations, and maintains relationships with
key industry analysts and media contacts. Syntellect's strategic marketing
plan is focused on four vertical markets--financial services, media
(cable/satellite television and newspaper), utilities and healthcare
industries. Sales to these markets represented approximately 81% of the
Company's total revenues for 1997; 84% for 1996; and 83% for 1995. Syntellect
markets its products to industry leaders within these vertical markets as
management believes the industry leaders have the greatest need for voice
processing products, are most likely to require system expansion and
additional services, and serve as an important source of customer referrals.

7
<PAGE>

Customer Support. Syntellect provides customer support in the areas of
consulting services, project management, systems planning, application
development, installation, scripting and voice file production, database
maintenance services for cable television IVR customers, maintenance and
software support services, a 24 hour-a-day, 7 day-a-week Help Desk, on-site
technical support, remote diagnostics, classroom training and on-site
educational services. These services are generally provided as part of the
initial sale of a system. Syntellect provides warranties on its various
product lines for periods generally ranging from three months to one year
after shipment. After the initial warranty period, hardware and software
maintenance services are available on both a contractual and on-demand time
and material basis. Substantially all of the hardware maintenance and support
provided to domestic customers is performed on-site under contractual
arrangements with independent third party service providers. Internationally,
the Company provides training, service and support services through a
combination of its direct customer support function, third party service
providers and distributors.

PRODUCT DEVELOPMENT

Syntellect believes that its success is dependent upon its ability to expand
the market for its existing products, provide new options and features on a
timely basis, and develop new applications that can be incorporated into
commercially viable voice processing products. While the Company introduced
several new products in 1997, it believes there can be no assurance that these
new product lines or features will receive market acceptance. Further, there
can be no assurance that future announcements of new products will not cause
customers to defer purchases of existing products, which could adversely
affect the Company's results of operations.

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

Syntellect's product development organization consisted of 61, 73, and 78
individuals at December 31, 1997, 1996 and 1995, respectively. The Company
spent $5.9 million, $5.9 million, and $ 4.9 million for research and
development during 1997, 1996 and 1995, respectively.

MANUFACTURING AND SUPPLIERS

Syntellect's manufacturing operation consists of in-house configuration,
product assembly, product testing and quality control. The Company obtains
hardware components from third parties for its products, including telephony
interface and voice recognition boards. The Company does not believe it is
dependent on single source suppliers for components used in any of its product
lines. Syntellect is currently able to obtain key components in a timely
manner from a variety of sources; however, any inability to secure alternate
suppliers of key components or alternate assembly sources in a timely manner
could adversely affect the Company's results of operations.

BACKLOG

The Company's backlog at December 31, 1997 and 1996 was approximately $10.2
million and $8.3 million, respectively. The Company believes that all orders
in backlog at December 31, 1997 are firm and will be delivered within the
fiscal year. Because the possibility exists for customers to make changes to
their original order, to alter or significantly delay delivery schedules or to
cancel their order, the backlog total as of any particular date may not be
indicative of actual revenues for any future period.

8
<PAGE>

PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY

Syntellect is also licensed to use certain patents, technology and other
intellectual property rights owned by others, and, similarly, other companies
are licensed to use certain patents, technology and intellectual rights
formerly owned by Syntellect. In July 1992, Syntellect acquired an extensive
patent portfolio in connection with its acquisition of Dytel Inc., a
manufacturer of equipment for the voice messaging and call processing
industry. Syntellect sold the Dytel product line in February 1995 to a third
party but retained the rights to their patent portfolio. On October 25, 1997,
Syntellect signed a Patent Assignment Agreement with Aspect Telecommunications
Corporation ("ATC") assigning their patent portfolios and related applications
worldwide to ATC (see Note 3 of Notes to Consolidated Financial Statements).

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

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

Syntellect's strategic move from proprietary hardware platforms to
integration of its application software with industry-standard hardware, has
resulted in an increased reliance on licensed technology obtained from third
parties for use in the Company's products. The Company contracted with IBM in
1993 to obtain IBM's personal computer-based voice processing software
technology, including the key components of the CallPath architecture.
Pursuant to the terms of the licensing agreement, Syntellect obtained a
worldwide nonexclusive license to develop and sell a version, under the
Company's name, of IBM's voice processing software that runs on personal
computers using IBM's OS/2 operating system. The agreement also provides the
company with the rights to all future IBM basic and major enhancements to the
software, including IBM's language packages for foreign markets. IBM is
obligated to provide backup maintenance support for the software it provides
under the agreement. The agreement expires in June 2002, subject to certain
early termination provisions. In accordance with its obligations under the
agreement, Syntellect prepaid royalties of $1 million in June 1994 and $3
million in December 1994. As of December 31, 1996, the Company had utilized
all of the prepaid royalties and had accrued $791,000 in additional royalty
payments due IBM. As of December 31, 1997, the Company had accrued royalty
payments of $436,000. The technology licensed under the IBM agreement is the
foundation of the VocalPoint family of products and related ApplicationWorks
packages. The termination or loss of this agreement or IBM's failure to
perform its obligations thereunder would adversely affect the Company's
results of operations. Upon certain events of default by IBM, Syntellect has
the right to purchase the source code currently licensed under the agreement
for $4 million.

EMPLOYEES

At December 31, 1997, Syntellect employed a total of 339 employees, 334 on a
full-time basis and 5 on a part-time basis: 51 in sales, 18 in marketing, 101
in customer support, 24 in manufacturing, 61 in product development, 41 in the
service bureau operation, and 43 in administration. The Company's success
depends on a number of technical employees. Competition for highly skilled
people with extensive experience in systems and applications software and
advanced electronics is intense. Syntellect's inability to retain these
employees could severely impact the Company's ability to conduct its business.
The Company has never had a work stoppage and none of its employees are
represented by a labor organization.

9
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is information with respect to the names, ages, positions
and offices held with Syntellect by the Executive Officers as of March 27,
1998.

J. Lawrence Bradner, 46, became Syntellect's Chairman and Chief Executive
Officer upon completion of the merger with Pinnacle on March 14, 1996. He had
served as Chairman and Chief Executive Officer of Pinnacle and its wholly
owned subsidiary, Telecorp, since their formation in 1991. From 1977 to 1990,
Mr. Bradner was employed by Scientific-Atlanta, Inc. ("Scientific-Atlanta"), a
leading provider of satellite and other telecommunications products based in
Atlanta, Georgia. Mr. Bradner served as President of the Broadband
Communications Business Division of Scientific-Atlanta and as Corporate Vice
President from 1987 to 1990. Mr. Bradner holds a Bachelors Degree, with
honors, in Industrial and Systems Engineering from the Georgia Institute of
Technology and a Master of Business Administration Degree from Harvard
Business School. Mr. Bradner will assume the positions of President and Chief
Operating Officer of Syntellect with the resignation of Mr. Steve Nussrallah.

Steve G. Nussrallah, 47, became Syntellect's President and Chief Operating
Officer upon completion of the merger with Pinnacle on March 14, 1996. He had
served as President of Pinnacle and Telecorp since their formation in 1991.
From 1984 to 1990, Mr. Nussrallah was employed by Scientific-Atlanta. From
1988 to 1990, Mr. Nussrallah served as Vice President and General Manager of
the Subscriber Business Unit, Scientific-Atlanta's largest single business.
Mr. Nussrallah holds a Bachelors Degree, with honors, in Electrical
Engineering from the University of Cincinnati and a Masters Degree in
Electrical Engineering from the University of Michigan. Mr. Nussrallah
resigned his position with Syntellect effective March 31, 1998.

Neal L. Miller, 38, has served as Syntellect's Corporate Vice President,
Chief Financial Officer, Secretary and Treasurer since December 1995. In
February 1998, Mr. Miller was appointed Division President of SIS, the
Company's Service Bureau business. Mr. Miller served as Division Finance
Director/Controller for the Communications Division of Tandem Computers, Inc.
from 1993 to 1995. Prior to that, Mr. Miller served as Vice President and
Chief Financial Officer of American Software, Inc. from 1990 to 1993, and in
various finance and sales positions with American Software from 1984 to 1990.
Mr. Miller is a Certified Public Accountant and holds a Bachelors Degree in
Business Administration, with honors, in Accounting from Georgia State
University.

W. Scott Coleman, 42, has served as Syntellect's President--Call Center
Systems since May 5, 1997. Mr. Coleman, together with former director Daniel
D. Ross, served in Syntellect's Office of the Chief Executive Officer from
November 10, 1995 to March 14, 1996. On February 1, 1996, Mr. Coleman was
promoted to the position of Syntellect's Senior Vice President and General
Manager--Call Center Systems. Prior to that time, Mr. Coleman served as
Syntellect's Vice President of Product Development from 1993 to 1995. Mr.
Coleman has been involved in the voice processing industry since 1982, serving
as Vice President of American Telesystems Corporation, where he was
responsible for product strategy, business development and product development
activities. Mr. Coleman holds a Master of Science Degree in Electrical
Engineering from the Georgia Institute of Technology.

David C. Phillips, 44, became Syntellect's Corporate Vice President--
Operations upon completion of the merger with Pinnacle on March 14, 1996. He
had served as Executive Vice President--Finance and Operations of Telecorp
since 1991. From January 1990 to August 1990, Mr. Phillips was employed by
CableGraphix, Inc., a producer and distributor of cable-specific marketing and
promotional literature for cable subscribers, based in Phoenix, Arizona. From
1979 to 1989, Mr. Phillips was employed in various positions by Scientific-
Atlanta. Mr. Phillips, a Certified Public Accountant, received a Bachelors
Degree in Business Administration from the University of Georgia and a Masters
Degree in Professional Accountancy from Georgia State University.

Peter W. Pamplin, 43, has served as Syntellect's Vice President and
Controller since June 2, 1997. Prior to joining the Company, Mr. Pamplin was
employed by American Software, Inc. beginning in February 1985 and served as
its Corporate Controller from August 1987 until May 1997. Mr. Pamplin holds a
Bachelors Degree in Biochemistry and a Master of Business Administration
Degree from Virginia Polytechnic Institute and State University.

10
<PAGE>

ITEM 2--PROPERTIES

Syntellect's principal corporate offices are located in 38,904 square feet
of leased space in Roswell, Georgia. This facility is also used for certain of
the Company's sales, customer support, research and development, and service
bureau functions. The lease extends through 2001. In June 1996, the Company
entered into a ten year lease for a new 70,564 square foot office facility in
Phoenix, Arizona. This lease commenced in April 1997. The new facility has
provided for expansion and consolidation of the Company's systems business,
and includes space for customer support, research and development, sales,
marketing, production, training and administrative functions.

Syntellect leases a 1,600 square foot facility in Atlanta, Georgia for its
National Transaction Center. This facility is used for the Home Ticket pay-
per-view service and other service bureau applications offered through the
Company's Syntellect Interactive Services subsidiary. The Company also leases
three sales and support offices in the United States, including a 9,600 square
foot facility in Wood Dale, Illinois, and one in London. Aggregate monthly
rental payments for Syntellect's office facilities are approximately $112,000.

ITEM 3--LEGAL PROCEEDINGS

Syntellect is from time to time involved in legal proceedings of a character
normally incident to its business. Syntellect is 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 Syntellect's shareholders during the
fourth quarter of 1997.

11
<PAGE>

PART II

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

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

<TABLE>
<CAPTION>
YEAR ENDED 1997 HIGH LOW
--------------- ---- ---
<S> <C> <C>
1st Quarter.............................................. $4 3/4 $3 1/4
2nd Quarter.............................................. 3 7/8 2 11/32
3rd Quarter.............................................. 3 5/16 1 7/8
4th Quarter.............................................. 3 1/4 1 21/32
<CAPTION>
YEAR ENDED 1996 HIGH LOW
--------------- ---- ---
<S> <C> <C>
1st Quarter.............................................. $4 7/8 $2 7/8
2nd Quarter.............................................. 7 7/8 4
3rd Quarter.............................................. 6 3/8 4 3/8
4th Quarter.............................................. 5 7/8 3 3/4
</TABLE>

On March 19, 1998, the closing sale price for Syntellect's common stock was
$2 3/18 per share. On such date, there were 242 holders of record of
Syntellect's common stock. This figure does not reflect beneficial ownership
of shares held in nominee names. Syntellect has never declared or paid a cash
dividend on its common stock. Syntellect presently intends to retain earnings
for use in its business and does not anticipate paying cash dividends on its
outstanding shares in the foreseeable future.

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

ITEM 6--SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with Syntellect's consolidated financial statements and related
notes and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein. The selected
consolidated financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of, each of
the years in the five-year period ended December 31, 1997, are derived from
the consolidated financial statements of Syntellect Inc. The consolidated
financial statements as of December 31, 1997 and 1996, and for each of the
years in the three-year period ended December 31, 1997, and the report
thereon, are included elsewhere herein.

12
<PAGE>

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net revenues..................... $48,182 $55,305 $ 49,510 $57,396 $ 51,759
Cost of revenues................. 25,678 27,783 26,147 28,065 24,142
------- ------- -------- ------- --------
Gross margin................. 22,504 27,522 23,363 29,331 27,617
Operating expenses:
Selling, marketing and adminis-
trative........................ 19,463 21,383 23,026 19,263 21,506
Product development............. 5,874 5,943 4,884 4,893 7,132
Depreciation and amortization... 3,908 3,229 3,079 3,401 3,560
Fixed asset write-down.......... 1,303 -- -- -- --
Special charge.................. -- -- 8,800 879 8,801
------- ------- -------- ------- --------
Total operating expenses..... 30,548 30,555 39,789 28,436 40,999
------- ------- -------- ------- --------
Operating income (loss).......... (8,044) (3,033) (16,426) 895 (13,382)
Gain on sale of patent portfolio. 7,860 -- -- -- --
Other income, net................ 304 253 302 297 179
------- ------- -------- ------- --------
Income (loss) before income tax-
es.............................. 120 (2,780) (16,124) 1,192 (13,203)
Income tax expense (benefit)..... (21) -- 134 75 80
------- ------- -------- ------- --------
Net income (loss)................ $ 141 $(2,780) $(16,258) $ 1,117 $(13,283)
======= ======= ======== ======= ========
Earnings (loss) per share - di-
luted........................... $ .01 $ (.21) $ (1.24) $ .08 $ (1.02)
------- ------- -------- ------- --------
Shares used in per share calcula-
tion............................ 13,964 13,256 13,159 13,468 13,026
======= ======= ======== ======= ========

BALANCE SHEET DATA (in thousands)

<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Working capital.................. $13,488 $13,677 $ 17,443 $31,989 $ 30,304
Total assets..................... 34,808 34,808 39,719 51,395 49,443
Long-term debt, less current por-
tion............................ 530 229 175 875 665
Shareholders' equity............. 22,186 22,021 24,176 39,538 38,344
</TABLE>

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

ACQUISITION OF PINNACLE INVESTMENT ASSOCIATES INC.

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

13
<PAGE>

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

NET REVENUES

Net revenues for 1997 were $48.2 million, a decrease of 13% over the $55.3
million reported for 1996. Net revenues consist of SYSTEM SALES, SERVICE
BUREAU REVENUES and MAINTENANCE AND OTHER SERVICE REVENUES, which represented
51%, 20% and 29% of net revenues, respectively, for 1997, and 57%, 17% and 26%
of net revenues, respectively, for 1996.

SYSTEM SALES for 1997 were $24.3 million, a decrease of $7.5 million, or
23%, over the $31.8 million reported for 1996. System sales include sales of
core and non-core products. Core product sales include the Company's primary
inbound product line, VocalPoint, an open architecture Interactive Voice
Response ("IVR") platform; Computer Telephone Integration ("CTI"); and
Interactive Web Response ("IWR"). Non-core products, Premier and Premier 030
IVR systems and the VocalPoint Audio Response Unit ("ARU"), declined $6.5
million, or 53%, between comparable periods and the Company expects these
revenues to continue to decline over time as the Company migrates its customer
base to the core product offerings.

The decrease in SYSTEM SALES was related to two major factors. First, in
late 1996, the Company introduced its new product and marketing strategy
around the Interactive Communications Management ("ICM") solution set. This
strategy is designed to sell a more complex, fully-integrated and higher value
solution. As the Company began introducing this strategy, the average selling
price of new customer orders began to increase. This resulted in an elongation
of the selling cycle as the Company experienced more involvement from
executive management and third party consultants in the prospective customer
base. Second, the change in management of the Company associated with the
merger with Pinnacle, combined with the change in the sales and marketing
strategy, resulted in a significant turnover in the Company's sales force
beginning in early 1997. The Company believes that there is a direct
relationship between system sales volume and the number of sales
representatives employed. The Company has made significant progress in
increasing the size of the direct sales force from its lowest levels in 1997
as it enters into 1998.

SERVICE BUREAU REVENUES increased $465,000, or 5.0% between the comparable
years primarily from the Company's Home Ticket, a pay-per-view service for
cable television providers which is offered through the Company's SIS
subsidiary. The cable TV industry experienced a significant decline in the
consumer purchases of pay-per-view events during 1997 which resulted in lower
than expected transaction processing fees by the Company. MAINTENANCE AND
OTHER SERVICE REVENUES decreased $126,000, or .9%, between the comparable
years. This decrease results from a $1.2 million decrease in patent revenue
(see Note 3 of the Notes to Consolidated Financial Statements) and a $1.1
million increase in maintenance and other services between periods.

DOMESTIC AND INTERNATIONAL SALES for 1997 were $36.8 million, or 76%, and
$11.4 million, or 24%, of total revenues, respectively, compared to $40.3
million, or 73%, and $15.0 million, or 27% of total revenues, respectively,
for 1996.

14
<PAGE>

GROSS MARGIN

The gross margin percentage for the year ended December 31, 1997 was 47% of
net revenues, as compared with 50% for the year ended December 31, 1996
primarily due to the proportion of fixed costs in overhead relative to the
decline in revenues. Gross margins on SYSTEM SALES declined from 41% to 34%
between years. Gross margins for the SERVICE BUREAU decreased from 40% to 39%
between years with the Company's decision to increase spending on
infrastructure that will facilitate continued growth of the Home Ticket(TM)
pay-per-view service and other service bureau applications. Gross margins for
MAINTENANCE AND OTHER SERVICE REVENUES decreased from 75% to 74% between
years. The Company includes those costs directly associated with the
generation of revenue in its computation of gross margin, including direct
labor, application development, travel, maintenance, customer support,
supplies and hardware. Gross margins will fluctuate on a year-to-year basis
due to changes in competitive pressures, sales volume, product mix, variations
in the ratio of domestic versus international sales, or changes in the mix of
direct and indirect sales activity. Accordingly, the gross margins reported
for 1997 are not necessarily indicative of the results to be expected for
future periods.

OPERATING EXPENSES

During 1997, the Company initiated and completed a consolidation of the
assembly, customer support and product development operations of the Systems
business into the Company's Phoenix location. This consolidation is expected
to result in cost savings in future periods.

Operating expenses for 1997 were $30.5 million, a decrease of $7,000, or
.02%, from the $30.6 million reported for 1996, which includes a fixed asset
write-down of $1.3 million discussed below. Excluding this write-down,
operating expenses would have been $29.2 million, a decrease of $1.3 million,
or 4.3%, as compared to 1996. Selling, marketing and administrative expenses
decreased $1.9 million, or 9%, between years. This decrease resulted primarily
from the lowering of expenses which vary with revenues and profits and lower
expenses associated with the reductions in personnel that were completed in
1997 as part of overall consolidation plans. Research and development expenses
remained flat between years. The Company reallocated its development resources
to the development of market-driven features and upgrades for the Company's
core product lines and away from on its non-core products. Depreciation and
amortization expense increased $679,000, or 21%, between years as a result of
capital expenditures in 1996 and 1997, primarily additional equipment required
for the expansion of the Company's Service Bureau operation and the Company's
move to a new Phoenix, Arizona facility in April 1997.

FIXED ASSET WRITE-DOWN

The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" (SFAS No. 121) effective January 1, 1996. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by a company be reviewed for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In 1997, the Company recorded a $1.3 million write-down to
fixed assets. The change is expected to result in a significant reduction in
depreciation and amortization expense in future periods.

GAIN ON SALE ON PATENT PORTFOLIO

The Company recognized a gain on sale of $7.9 million due to the terms of a
Patent Assignment Agreement by and among the Company, Syntellect Technology
Corporation, a wholly owned subsidiary of the Company ("STC"), and Aspect
Telecommunications Corporation ("ATC"). The Company and STC assigned to ATC
their respective patent portfolios and related applications worldwide. The
Company received consideration of $10 million, $5 million of which was paid at
closing and $5 million of which is payable in 20 equal quarterly installments
of $250,000 on the last day of each calendar quarter, under a promissory note
maturing December 31, 2002. This note bears no interest and consequently has a
present value of $4 million. As an additional consideration under the
agreement, the Company has retained certain economic rights, including the
right to pursue certain litigation against third parties.

15
<PAGE>

NET INCOME (LOSS)

Syntellect reported a net income of $141,000, or $.01 per share, for 1997,
compared to a net loss of $2.8 million, or $(.21) per share, for 1996.
Excluding the effects of the fixed asset write-down and the gain on sale of
the patent portfolio, the Company incurred a net loss for 1997 of $6.4
million, or $(.46) per share.

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

NET REVENUES

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

SYSTEM SALES for 1996 were $31.8 million, an increase of $1.7 million, or
6%, over the $30.1 million reported for 1995. System sales include sales of
core and non-core products. Core product sales include the Company's primary
inbound product line, VocalPoint, an open architecture Interactive Voice
Response ("IVR") platform; Computer Telephone Integration ("CTI"); and
Interactive Web Response ("IWR"). Non-core product sales primarily include
Premier and Premier 030 IVR systems and the VocalPoint Audio Response Unit
("ARU").

The increase in SYSTEM SALES was due to the significant shift in the product
mix during 1996. More than 60% of all system sales orders received were for
VocalPoint IVR units. International VocalPoint sales increased due to sales to
large telecommunications and cable television customers in the United Kingdom.
Also, during 1996, the Company delivered its first ICM solution which uses
advanced CTI technology.

Non-core product sales declined in 1996. Premier and Premier 030 IVR system
sales decreased as these product lines continue their final phase-out stages.
VocalPoint Audio Response Unit ("ARU") sales increased in 1996 due to the
installation of a large call center for a cable television customer in the
United Kingdom. The Company expects non-core product sales to continue to
decline over time as the Company migrates its customer base to the core
product offerings.

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

SERVICE BUREAU REVENUES increased $2.8 million, or 43%, between the
comparable years. This increase reflected the continued growth of the
Company's Home Ticket pay-per-view service. Revenues from other service bureau
applications were flat between the comparable periods as a result of
infrastructure changes and relocation of the Company's Chicago facility to
Atlanta. MAINTENANCE AND OTHER SERVICE REVENUES increased $1.3 million, or
10%, between the comparable years. This increase results from a $1.2 million
increase in patent revenue and a $100,000 increase in maintenance and other
services between periods.

DOMESTIC AND INTERNATIONAL SALES for 1996 were $40.3 million, or 73%, and
$15.0 million, or 27%, of total revenues, respectively, compared to $39.0
million, or 79%, and $10.5 million, or 21% of total revenues, respectively,
for 1995. The international sales figures for 1996 include a $3.0 million
VocalPoint System 6000 call center installation and a $800,000 VocalPoint
Predictive Dialer installation for a cable television customer in the United
Kingdom.

16
<PAGE>

GROSS MARGIN

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

OPERATING EXPENSES

Operating expenses for 1996 were $30.6 million, a decrease of $400,000, or
1%, from the $31 million reported for 1995, exclusive of an $8.8 million
special charge discussed below. Selling, marketing and administrative expenses
decreased $1.6 million, or 7%, between years. This decrease resulted primarily
from economies of scale related to the integration of the Company's sales
functions, and a reduction in administrative salaries and benefit costs. The
1995 totals also include $700,000 in direct transaction costs incurred in
connection with the acquisition of Pinnacle. Research and development expenses
increased $1.1 million, or 22%, between years. The Company allocated
additional resources during 1996 for the development of market-driven features
such as CTI, an Interactive Web Response platform, and upgrades for the
Company's existing product lines, including Version 3.0 of the VocalPoint
Predictive Dialer. Depreciation and amortization expense increased $150,000,
or 5%, between years primarily due to the Company's purchase of $2.5 million
in computer and voice processing equipment and $2.3 million in other equipment
that will be used to expand the capacity of the Service Bureau.

SPECIAL CHARGE

Syntellect incurred an $8.8 million special charge to operations during
1995. The special charge includes an allowance for inventory obsolescence
($5.0 million), a write-down of software and equipment to be relocated or
disposed of ($1.7 million), employee severance for a reduction in force ($1.2
million), an accounts receivable allowance ($700,000), and other charges
($200,000).

The allowances for accounts receivable and inventory obsolescence were
utilized during 1996 to write off specifically identified receivable balances
and inventory disposed of during the year. The software and equipment charge
was utilized during 1996 to write down the value of specific assets that were
relocated, lost or disposed of. The Company made $741,000 in severance
payments to terminated employees during 1996 in connection with its reduction
in force. As of December 31, 1996, there remained outstanding payments due on
severance transactions relating to 1995 and 1996.

NET INCOME (LOSS)

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

17
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Syntellect had working capital of $13.5 million at December 31, 1997,
compared with $13.7 million at December 31, 1996. The current ratio at both
these dates was 2.1:1. Cash, cash equivalents and marketable securities at the
end of 1997 totaled $10.5 million compared with the $6.2 million reported at
the end of 1996. The Company generated a $2.1 million positive cash flow from
operating activities during 1997, increased its investment in marketable
securities by $7.0 million, received $183,000 in proceeds from the issuance of
common stock, and added $559,000 in long-term debt related to a capital lease.
Cash was used during 1997 to make $2.6 million in capital expenditures and
$363,000 in principal payments on long-term debt. Receivables, net of reserves
were $10.9 million at December 31, 1997, a decrease of $2.4 million from the
$13.3 million reported at December 31, 1996. The average collection period for
trade receivables increased from 69 days at December 31, 1996 to 89 days at
December 31, 1997. The allowance for doubtful accounts remained flat between
years at $1.2 million. Inventory balances decreased $1.5 million during 1997
as a result of the Company's continuing effort to improve processing controls.
Notes receivable-current portion increased $407,000 between years due to the
sale of the patent portfolio.

Syntellect expects that its current cash, cash equivalents and marketable
securities, combined with future cash flows from operating activities will be
sufficient to support the Company's operations during 1998. In 1996, the
Company entered into a ten year lease for a new office facility in Phoenix.
The lease commenced in April 1997 at an initial monthly rate of $61,000. The
Company negotiated a $2.0 million revolving credit agreement with a commercial
bank during 1996 to replace an existing $500,000 credit line. In 1996, the
Company used $1.1 million of the available credit line to secure a letter of
credit as a security deposit on the Company's new facility in Phoenix,
Arizona. On November 7, 1997, the Board of Directors approved the termination
of this line of credit. The $1.1 million letter of credit is now secured by a
U.S. Treasury security held in the Company's available-for-sale portfolio and
accordingly, this marketable security is restricted as to the disposal by such
letter of credit agreement.

YEAR 2000 COMPLIANCE

The Company has addressed the Year 2000 Compliance issues, both the software
that it licenses and its internal use of software, and believes there will be
no material effect on the Company's operations or financial condition since
the cost of remediation has been incurred or those costs to be incurred are
not expected to be material. However, because costs related to this project
are based on estimates of the Company, there is no assurance that actual costs
will not differ materially from the current expectations which could cause an
adverse effect on the Company's results of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" which requires companies to display, with the same
prominence as other financial statements, the components of comprehensive
income. SFAS No. 130 requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement
of financial position. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company's financial
statements will include the disclosure of comprehensive income in accordance
with the provision of SFAS No. 130 beginning the first quarter of 1998.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires that an
enterprise disclose certain information about operating segments. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. The Company will evaluate the need for such disclosures at that time.

In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2). SOP 97-
2 is effective for financial statements for fiscal years beginning after
December 15, 1997. The Company does not expect the adoption of SOP 97-2 to
significantly affect its results of operations.

18
<PAGE>

ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Independent Auditors' Report of KPMG Peat Marwick LLP and the
Consolidated Financial Statements of Syntellect as of December 31, 1997 and
1996, and for each of the years in the three-year period ended December 31,
1997, follows:

19
<PAGE>

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, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the 1995
consolidated financial statements of Pinnacle Investments Associates Inc. and
subsidiary, a wholly owned subsidiary, which statements reflect total assets
constituting 25 percent and total revenues constituting 32 percent of the
Syntellect Inc. and subsidiaries consolidated totals as of and for the year
ended December 31, 1995, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Pinnacle Investment Associates Inc. and
subsidiary, is based solely on the report of the other auditors.

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

In our opinion, based on our audits and the report of the other auditors as
it relates to 1995, 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Atlanta, Georgia
February 6, 1998

20
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Pinnacle Investment Associates Inc.:

We have audited the consolidated statements of income, stockholders' equity,
and cash flows of Pinnacle Investment Associates Inc. and subsidiary (the
"Company") for the year ended December 31, 1995 (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

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

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

DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 9, 1996, except as to Note 20
which is dated as of March 14, 1996

21
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,290 $ 4,928
Marketable securities ($1.1 million restricted at December
31, 1997)................................................ 8,233 1,275
Trade receivables, net allowance for doubtful accounts of
$1,199 and $1,233 at December 31, 1997 and 1996,
respectively............................................. 10,894 13,295
Notes receivables-current portion......................... 856 449
Inventories............................................... 2,593 4,085
Prepaid expenses.......................................... 714 1,197
Other current assets...................................... -- 1,006
-------- --------
Total current assets................................... 25,580 26,235
-------- --------
Property and equipment, net................................ 5,813 7,676
Notes receivable--noncurrent portion....................... 3,361 --
Other assets............................................... 54 897
-------- --------
$ 34,808 $ 34,808
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,160 $ 1,302
Accrued liabilities....................................... 5,471 6,329
Customer deposits......................................... 1,081 699
Deferred revenue.......................................... 3,197 3,940
Capital lease obligations--current portion................ 183 288
-------- --------
Total current liabilities.............................. 12,092 12,558
-------- --------
Capital lease obligations, less current portion............ 530 229
-------- --------
Total liabilities...................................... 12,622 12,787
-------- --------
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 2,500,000
shares; no shares issued or outstanding.................. -- --
Common stock, $.01 par value. Authorized 25,000,000
shares; issued 13,576,761 and 13,478,127, respectively... 136 135
Additional paid-in capital................................ 60,727 60,545
Deferred compensation..................................... (33) (52)
Accumulated deficit....................................... (37,454) (37,595)
Foreign currency translation adjustment................... (43) 136
Net unrealized holding loss on marketable securities...... (6) (7)
-------- --------
23,327 23,162
Treasury stock, at cost, 175,732 shares.................... (1,141) (1,141)
-------- --------
Total shareholders' equity............................. 22,186 22,021
-------- --------
$ 34,808 $ 34,808
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

22
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Net revenues:
System sales...................................... $24,349 $31,811 $ 30,110
Service bureau.................................... 9,749 9,284 6,491
Maintenance and other services.................... 14,084 14,210 12,909
------- ------- --------
Total net revenues............................. 48,182 55,305 49,510
------- ------- --------
Cost of revenues:
System sales...................................... 16,093 18,645 19,211
Service bureau.................................... 5,967 5,560 3,560
Maintenance and other services.................... 3,618 3,578 3,376
------- ------- --------
Total cost of revenues......................... 25,678 27,783 26,147
------- ------- --------
Gross margin....................................... 22,504 27,522 23,363
------- ------- --------
Operating expenses:
Selling, marketing and administrative............. 19,463 21,383 23,026
Research and development.......................... 5,874 5,943 4,884
Depreciation and amortization..................... 3,908 3,229 3,079
Fixed asset write-down............................ 1,303 -- --
Special charge.................................... -- -- 8,800
------- ------- --------
Total operating expenses....................... 30,548 30,555 39,789
------- ------- --------
Operating loss................................. (8,044) (3,033) (16,426)
------- ------- --------
Other income (expense), net:
Interest income, net.............................. 355 341 530
Gain on sale of patent portfolio.................. 7,860 -- --
Gain on sale of SNS............................... 47 -- --
Other expense, net................................ (98) (88) (228)
------- ------- --------
Total other income (expense), net.............. 8,164 253 302
------- ------- --------
Income (loss) before income taxes.............. 120 (2,780) (16,124)
Income tax (benefit) expense....................... (21) -- 134
------- ------- --------
Net income (loss).............................. $ 141 $(2,780) $(16,258)
======= ======= ========
Earnings (loss) per common share--basic............ $ .01 $ (.21) $ (1.24)
======= ======= ========
Earnings (loss) per common share--diluted.......... $ .01 $ (.21) $ (1.24)
======= ======= ========
Weighted average shares--basic..................... 13,504 13,256 13,159
======= ======= ========
Weighted average shares--diluted................... 13,964 13,256 13,159
======= ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

23
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
NET
UNREALIZED
HOLDING
COMMON STOCK FOREIGN GAIN
------------------- ADDITIONAL CURRENCY (LOSS) ON TOTAL
$.01 PAR PAID-IN DEFERRED ACCUMULATED TRANSLATION MARKETABLE TREASURY SHAREHOLDERS'
SHARES VALUE CAPITAL COMPENSATION DEFICIT ADJUSTMENT SECURITIES STOCK EQUITY
---------- -------- ---------- ------------ ----------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1995........... 13,289,811 $133 $59,450 $(55) $(18,557) $(128) $(164) $(1,141) $39,538
Issuance of common
stock upon
exercise of stock
options........... 66,719 1 247 -- -- -- -- -- 248
Issuance of common
stock under
employee stock
purchase plan..... 25,223 -- 94 -- -- -- -- -- 94
Issuance of stock
options below fair
value............. -- -- 61 (61) -- -- -- -- --
Amortization of
deferred
compensation
related to stock
options........... -- -- -- 25 -- -- -- -- 25
Compensation
expense related to
stock options
issued to
officers.......... -- -- 394 -- -- -- -- -- 394
Net loss.......... -- -- -- -- (16,258) -- -- -- (16,258)
Foreign currency
translation
adjustment........ -- -- -- -- -- (12) -- -- (12)
Net unrealized
holding gain on
marketable
securities........ -- -- -- -- -- -- 147 -- 147
---------- ---- ------- ---- -------- ----- ----- ------- -------
Balance at
December 31,
1995............ 13,381,753 134 60,246 (91) (34,815) (140) (17) (1,141) 24,176
Issuance of common
stock upon
exercise of stock
options........... 49,533 1 143 -- -- -- -- -- 144
Issuance of common
stock under
employee stock
purchase plan..... 46,841 -- 156 -- -- -- -- -- 156
Amortization of
deferred
compensation
related to stock
options........... -- -- -- 39 -- -- -- -- 39
Net loss.......... -- -- -- -- (2,780) -- -- -- (2,780)
Foreign currency
translation
adjustment........ -- -- -- -- -- 276 -- -- 276
Net unrealized
holding gain on
marketable
securities........ -- -- -- -- -- -- 10 -- 10
---------- ---- ------- ---- -------- ----- ----- ------- -------
Balance at
December 31,
1996............ 13,478,127 135 60,545 (52) (37,595) 136 (7) (1,141) 22,021
Issuance of common
stock upon
exercise of stock
options........... 13,338 -- 34 -- -- -- -- -- 34
Issuance of common
stock under
employee stock
purchase plan..... 85,296 1 148 -- -- -- -- -- 149
Amortization of
deferred
compensation
related to stock
options........... -- -- -- 19 -- -- -- -- 19
Net income........ -- -- -- -- 141 -- -- -- 141
Foreign currency
translation
adjustment........ -- -- -- -- -- (179) -- -- (179)
Net unrealized
holding gain on
marketable
securities........ -- -- -- -- -- -- 1 -- 1
---------- ---- ------- ---- -------- ----- ----- ------- -------
Balance at
December 31,
1997............ 13,576,761 $136 $60,727 $(33) $(37,454) $ (43) $ (6) $(1,141) $22,186
========== ==== ======= ==== ======== ===== ===== ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

24
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 141 $ (2,780) $(16,258)
-------- -------- --------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Gain on sale of patent portfolio.............. (7,860)
Depreciation and amortization................. 3,908 3,229 3,079
Fixed asset write-down........................ 1,303 -- 1,700
Provision for doubtful accounts............... 493 480 1,113
Provision for inventory obsolescence.......... 30 36 5,213
Stock option compensation expense............. 19 39 419
Decrease in receivables....................... 1,908 1,235 4,427
(Increase) decrease in inventories............ 1,462 799 (1,578)
Increase (decrease) in accounts payable....... 858 (2,355) 1,237
Increase (decrease) in accrued liabilities.... (858) (1,065) 2,078
Change in other assets and liabilities........ 691 1,997 1,578
-------- -------- --------
Total adjustments............................ 1,954 4,395 19,266
-------- -------- --------
Net cash provided by operating activities..... 2,095 1,615 3,008
-------- -------- --------
Cash flows from investing activities:
Purchase of marketable securities............... (23,851) (11,825) (1,939)
Sales of marketable securities.................. -- 851 190
Maturities of marketable securities............. 16,894 13,934 1,776
Purchase of property and equipment.............. (2,717) (4,741) (3,479)
Proceeds from sale of patent portfolio.......... 5,000 -- --
Proceeds from disposition of SNS subsidiary..... 300 30 --
Proceeds from other sales....................... -- 110 20
-------- -------- --------
Net cash used in investing activities......... (4,374) (1,641) (3,432)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of common stock.............. 183 300 342
Payments on note payable to bank................ -- -- (200)
Principal payments on long-term debt............ (363) (747) (502)
-------- -------- --------
Net cash used in financing activities......... (180) (447) (360)
Effect of exchange rates on cash................. (179) 276 (12)
-------- -------- --------
Net decrease in cash and cash equivalents........ (2,638) (197) (796)
Cash and cash equivalents at beginning of year... 4,928 5,125 5,921
-------- -------- --------
Cash and cash equivalents at end of year......... $ 2,290 $ 4,928 $ 5,125
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest........................ $ 97 $ 33 $ 166
======== ======== ========
Cash paid for income taxes.................... $ 5 $ 276 $ 152
======== ======== ========
</TABLE>

NONCASH INVESTING AND FINANCING ACTIVITIES:

The Company received a $5 million promissory note for the sale of the patent
portfolio which is payable in 20 equal quarterly installments of $250,000 on
the last day of each quarter beginning March 31, 1998 and matures on December
31, 2002. This note bears no interest and consequently was discounted upon
receipt at a present value of $4 million.

The Company entered into capital lease obligations of $559,000 during 1997
for furniture for the new Phoenix, Arizona facility and $342,000 during 1996
for a telephone system.

25
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997, 1996 AND 1995

(1) Summary of Significant Accounting Policies

Nature of Business and Principles of Consolidation

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

The consolidated financial statements include the accounts of Syntellect
Inc. and its wholly-owned subsidiaries ("Syntellect" or the "Company"). The
consolidated financial statements also include the accounts of Syntellect
Network Systems, Inc. through March 31, 1996 (See Note 3). All significant
intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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

Cash Equivalents

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

Marketable Securities

Marketable securities (see Note 4) are classified as available-for-sale and
are available to support current operations. These securities are stated at
estimated fair value based on market quotes with any net unrealized holding
gain or loss included in the consolidated financial statements as a component
of shareholders' equity until realized.

Inventories

Inventories are stated 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 five 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.

26
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

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 three months to one year after shipment. The Company has provided
a reserve for estimated warranty expense.

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. 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 carryforwards. 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.

Foreign Currency Translation

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

Earnings Per Share

In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
presents standards for computing earnings per share (EPS) and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS and fully diluted with diluted
and requires restatement of previously disclosed EPS for all periods. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures.

Stock-Based Compensation

Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and

27
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

related interpretations ("APB No. 25"). As such, compensation expense would be
recorded on the date of grant if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996 the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation" which encourages entities
to recognize as expense, over the vesting period, the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS. No. 123 also allows
entities to continue to apply the provisions of APB No. 25 and provide pro
forma disclosure of net income (loss) and net income (loss) per common share
for employee stock option grants made in 1995 and future years as if the fair-
value-based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB No. 25 and provide the pro
forma disclosures under the provisions of SFAS No. 123 (see Note 10).

Reclassifications

Certain 1996 and 1995 consolidated financial statement balances have been
reclassified to conform to the 1997 presentation.

(2) Acquisition Of Pinnacle Investment Associates, Inc.

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

The consolidated financial statements herein have been restated to include
the accounts of Pinnacle for 1996 and 1995.

(3) Disposition of Syntellect Network Systems Inc. Subsidiary and Patent
Portfolio

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 is recognizing the gain on this transaction on a cash collected basis.

In October 1997, the Company sold its patent portfolio to a third party for
$10 million. The Company received cash of $5 million paid at closing and a $5
million promissory note payable in 20 equal quarterly installments of
$250,000, maturing on December 31, 2002. This note bears no interest and
consequently has a present value of approximately $4 million based on the
Company's incremental borrowing rate of 8.5%. As additional consideration
under the agreement, the Company has retained certain economic rights,
including the right to pursue certain litigation against third parties. As a
result of this transaction, the Company reported a gain on the patent
portfolio sale of $7.9 million.

28
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(4) Marketable Securities

The Company has classified all marketable securities as available-for-sale
at December 31, 1997 and 1996. The amortized cost, gross unrealized holding
gains and losses and fair value of the available-for-sale securities by major
security type are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
As of December 31, 1997
-----------------------
Mortgage-backed securities.............. $7,188 -- $(4) $7,184
U.S. Treasury securities: restricted.... 1,051 -- (2) 1,049
------ ---- --- ------
$8,239 $-- $(6) $8,233
====== ==== === ======
As of December 31, 1996
-----------------------
Mortgage-backed securities.............. $1,282 $-- $(7) $1,275
====== ==== === ======
</TABLE>

All marketable securities held at December 31, 1997 have contractual
maturities of one year or less. Gross realized gains from sales of securities
classified as available-for-sale for the year ended December 31, 1996 was
$851,000, and no gains were realized in 1997. For purposes of determining
gross realized gains and losses, the cost of securities sold is based on
specific identification.

(5) Inventories

Inventories consist of the following:

<TABLE>
<CAPTION>
(IN
THOUSANDS)
1997 1996
------ ------
<S> <C> <C>
Finished goods........................................... $ 913 $3,085
Purchased components..................................... 2,742 2,797
Repair, warranty and maintenance inventories............. 2,346 2,348
------ ------
6,001 8,230
Less allowance for obsolescence.......................... (3,408) (4,145)
------ ------
$2,593 $4,085
====== ======
</TABLE>

(6) Property and Equipment

Property and equipment consist of the following:

<TABLE>
<CAPTION>
(IN THOUSANDS)
1997 1996
------ -------
<S> <C> <C>
Furniture, fixtures and computer equipment.............. $7,074 $19,256
Service bureau equipment................................ 4,671 4,242
Leasehold improvements.................................. 394 994
------ -------
12,139 24,492
Less accumulated depreciation and amortization.......... (6,326) (16,816)
------ -------
$5,813 $ 7,676
====== =======
</TABLE>

During 1997, the Company wrote off all fully depreciated property and
equipment.

In 1997, the Company assessed its long-lived assets in accordance with SFAS
No. 121 and recorded a write-down of $1.3 million. This charge represents the
amount by which the carrying amount of the assets exceeded

29
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

the fair value of the assets. Fair value was determined based on the future
net cash flows expected to be generated by the assets.

(7) Credit Facilities and Lease Commitments

Credit facilities:

In July 1996, the Company negotiated a new $2.0 million revolving credit
agreement with a commercial bank to replace its prior credit facilities. The
new line of credit was collateralized by accounts receivable and accrued
interest at the prime rate. There were no amounts outstanding on this line of
credit at December 31, 1997 or 1996, however, the Company used $1.1 million of
the available credit line at December 31, 1996 to secure a letter of credit to
be used as a security deposit on the Company's new facility in Phoenix,
Arizona. On November 7, 1997, the Board of Directors approved the termination
of this line of credit. The $1.1 million letter of credit is now secured by a
U.S. Treasury security held in the Company's available-for-sale portfolio and
accordingly this marketable security is restricted as to the disposal by such
letter of credit agreement.

Capital leases consist of the following:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
1997 1996
----- -----
<S> <C> <C>
Capital lease obligations with interest ranging from
9.43% to 10%, collateralized by equipment............... $ 713 $ 517
Less current portion..................................... (183) (288)
----- -----
$ 530 $ 229
===== =====
</TABLE>

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

<TABLE>
<CAPTION>
1997 1996
---- ------
<S> <C> <C>
Furniture, fixtures and computer equipment................. $900 $1,285
Less accumulated amortization.............................. (214) ( 828)
---- ------
$686 $ 457
==== ======
</TABLE>

The Company leases office facilities and various equipment under
noncancellable operating leases that expire at various dates through 2007. In
June 1996, the Company entered into a ten year lease for a new 70,564 square
foot office facility in Phoenix. The lease commenced in April 1997 at an
initial monthly rate of $61,000. Rental expense under operating leases was
$1.6 million in 1997, $1.4 million in 1996 and $961,000 in 1995. Future
minimum lease payments under noncancellable 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, 1997 are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR CAPITAL LEASES OPERATING LEASES
- ---- -------------- ----------------
<S> <C> <C>
1998 $246 $1,446
1999 246 1,376
2000 195 1,334
2001 142 1,079
2002 24 733
Thereafter...................................... -- 3,418
---- ------
Total minimum lease payments.................... 853 $9,386
==== ======
Less amounts representing interest.............. (140)
----
Net minimum lease payments...................... $713
====
</TABLE>

30
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(8) Litigation

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

In January 1991, Pinnacle acquired substantially all the assets of Telecorp
in a business combination accounted for using the purchase method of
accounting. As part of the acquisition, Pinnacle issued two subordinated
promissory notes aggregating $1.4 million to the former owners in exchange for
consulting and noncompetition agreements that extended through December 31,
1995. These agreements required Pinnacle to pay annual performance payments
during the noncompete period based on a percentage of its revenues (as defined
in the agreements). The former owners filed a claim against Pinnacle in
November 1995 regarding the calculation of the performance payments and
seeking in excess of $800,000 in additional payments. Pinnacle recorded a
charge to operations during 1995 in the amount of $600,000 as an estimate of
the potential liability that could be incurred in connection with this matter.
Syntellect settled the litigation in November 1996 for an amount within the
accrual that has been established.

(9) Accrued Liabilities

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C> <C>
1997 1996
------ ------
Accrued compensation and benefits........................ $2,427 $2,982
Accrued legal and accounting............................. 425 381
Accrued royalties........................................ 494 791
Other accrued liabilities................................ 2,125 2,175
------ ------
$5,471 $6,329
====== ======
</TABLE>

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

Syntellect adopted a long-term incentive plan effective February 1, 1995, as
amended, that provides for the issuance of up to 750,000 shares of common
stock to employees, consultants and advisors under incentive stock options,
non-qualified stock options, stock appreciation rights, performance shares,
restricted stock, dividend equivalents and other stock-based awards. Incentive
and non-qualified stock options may be granted at a price not less than the
fair market value of the common stock at the date of grant, generally become
exercisable over a 50 month period commencing at the date of grant, and expire
in six years. In no case shall the term of any option issued under this plan
exceed ten years from the date of grant. The plan terminates in February 2005.
On May 20, 1997, the number of shares authorized for issuance under the plan
increased from 750,000 to 1,500,000.

31
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

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

Syntellect adopted a non-employee director stock plan in 1995 that provides
for the issuance of up to 50,000 shares of common stock to eligible
participants under non-qualified stock option grants. Under the plan, non-
employee directors receive a one time grant to purchase 10,000 shares upon
appointment to the Board of Directors and an annual grant to purchase 2,000
shares from June 1995 through June 1998. Options may be granted at a price not
less than the fair market value at the date of grant, become exercisable over
a 50 month period commencing at the date of grant, and expire in six years.
The plan has no scheduled termination date. During 1997, the Company
authorized an increase of 750,000 shares.

In connection with the acquisition of Pinnacle, Syntellect assumed
outstanding options for the purchase of 740,848 shares of common stock (see
Note 2). A portion of these options were granted to certain executive officers
in connection with the negotiation of their employment agreements. These
options, covering 565,702 shares, were granted fully vested and immediately
exercisable. The Company recognized compensation expense of $394,000 in 1995
related to these options and credited the same to paid-in capital. The
remaining options are accounted for as non-compensatory stock options, and
generally become exercisable over a 48 month period commencing at the date of
grant, and expire in 10 years. Unexercised options will be terminated and not
available for future grants in the event an employee holding such options
terminates his employment.

At December 31, 1997, 830,665 options were exercisable under the above plans
at prices ranging from $0.87 to $8.00. A summary of the combined stock option
activity for all plans during the three-year period ended December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------
WEIGHTED AVERAGE
OPTIONS AVAILABLE EXERCISE PRICE
FOR GRANT SHARES PER SHARE
----------------- --------- ----------------
<S> <C> <C> <C>
Balance, January 1, 1995......... 15,889 791,511 $4.72
Increase in reserved shares.... 300,000 -- --
Expiration of reserved shares.. (286,590) -- --
Granted........................ (402,000) 402,000 5.14
Canceled....................... 381,301 (381,301) 4.32
Exercised...................... -- (66,719) 4.82
-------- --------- -----
Balance, December 31, 1995....... 108,600 745,491 $5.24
Assumption of Pinnacle options. -- 740,848 1.02
Termination of Pinnacle op-
tions......................... -- (14,551) 1.48
Increase in reserved shares.... 500,000 -- --
Expiration of reserved shares . (277,551) -- --
Granted........................ (613,750) 613,750 4.69
Canceled....................... 345,241 (345,241) 6.24
Exercised...................... -- (49,533) 5.07
-------- --------- -----
Balance, December 31, 1996....... 62,540 1,690,764 $3.10
Increase in reserved shares.... 750,000
Granted........................ (315,500) 315,500 3.04
Canceled....................... 197,668 (197,668) 4.49
Exercised...................... -- (13,338) 3.18
-------- --------- -----
Balance, December 31, 1997....... 694,708 1,795,258 $2.94
======== ========= =====
</TABLE>

<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ----- ---
<S> <C> <C> <C> <C>
Options exercisable at year-end (in thousands)........... 831 439 314
Weighted average fair value of options granted during the
year.................................................... $3.04 $4.69 $5.14
</TABLE>

32
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

Syntellect has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation cost for Syntellect's 1997 and 1996 stock option grants been
determined based on the fair value at the grant date, as prescribed by the
provisions of SFAS No. 123, the Company's net income (loss) and net income
(loss) per common share would have been:

<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Net income (loss)--as reported.............. $ 141 $(2,780) $(16,258)
Net loss--pro forma......................... $ (762) $(3,723) $(16,690)
Net income (loss) per common share--as re-
ported..................................... $ 0.01 $ (0.21) $ (1.24)
Net loss per common share--pro forma........ $ (0.06) $ (0.28) $ (1.27)

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

Expected dividend yield..................... 0%
Expected stock price volatility............. 50%
Risk-free interest rate..................... 5.63%
Expected life of options.................... 3 years
</TABLE>

On February 5, 1998, the Board of Directors amended all option plans to
extend the expiration date for all unexpired options from six years to ten
years from the original grant date.

Employee Stock Purchase Plan

Syntellect has an employee stock purchase plan that provides for the
purchase of up to 400,000 shares of common stock. Under the plan, eligible
participants may purchase common stock semi-annually at the lower of 85% of
the fair market value on either the first day or last day of the offering
period, whichever is lower. During 1997, 31,627 and 53,268 shares were
purchased at $2.13 and $1.54 per share, respectively. During 1996, 11,674 and
35,167 shares were purchased at $2.87 and $3.51 per share, respectively. At
December 31, 1997, 23,494 shares of common stock were available for issuance
under the plan. The number of shares will be increased by 400,000 pending
approval by the shareholders on May 21, 1998.

(11) Employee Benefit Plans

Syntellect maintained two 401(k) plans during 1996; one covering eligible
employees of Syntellect (the "Syntellect 401(k) Plan") and one covering
eligible employees of Pinnacle (the "Pinnacle 401(k) Plan"). Participants
could contribute up to 15% and 6%, respectively of their total compensation
under these plans. The Company provided matching contributions under the
Pinnacle 401(k) Plan equal to 50% of employee contributions, up to a maximum
of 2% of the employee's total compensation. The Company could also make
discretionary contributions to either plan in amounts determined by the Board
of Directors. Amounts contributed by the Company vest over a six year period.
The Company made matching contributions to the Pinnacle 401(k) Plan of $91,000
in 1996 and $49,000 in 1995. There were no matching contributions to the
Syntellect 401(k) Plan in 1996 or 1995.

Effective January 1, 1997, Syntellect adopted a single 401(k) plan covering
all eligible employees of the Company. Under the new plan, participants can
contribute up to 15% of their total compensation. The Company will provide
matching contributions equal to one third of employee contributions up to a
maximum of 7% of the employee's total compensation. Syntellect made matching
contributions to the 401(k) plan of $244,000 in 1997. 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. Amounts contributed by the
Company vest over a four year period.

33
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(12) 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 (benefit) for the years ended
December 31, 1997, 1996 and 1995 consists of the following:

<TABLE>
<CAPTION>
(IN THOUSANDS)
1997 1996 1995
---- ------- --------
<S> <C> <C> <C>
U.S. operations....................................... $216 $(2,275) $(13,159)
International operations.............................. (96) (505) (2,965)
---- ------- --------
$120 $(2,780) $(16,124)
==== ======= ========
</TABLE>

The components of income tax expense (benefit) included in the Consolidated
Statement of Operations are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
1997 1996 1995
---- ----- ----
<S> <C> <C> <C>
Current income tax expense (benefit):
Federal.................................................... $-- $(399) $544
Foreign.................................................... (21) -- --
State...................................................... -- (69) 58
---- ----- ----
(21) (468) 602
---- ----- ----
Deferred income tax expense (benefit):
Federal.................................................... -- 399 (430)
Foreign.................................................... -- -- --
State...................................................... -- 69 (38)
---- ----- ----
-- 468 (468)
---- ----- ----
Total income tax expense (benefit)....................... $(21) $ -- $134
==== ===== ====
</TABLE>

Income tax expense (benefit) 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)
1997 1996 1995
----- ------ -------
<S> <C> <C> <C>
Computed "expected" income tax expense (benefit)....... $ 41 $ (945) $(5,482)
Increase (decrease) in income tax expense resulting
from:
State income tax expense (benefit) net of federal in-
come tax benefit.................................... 18 (74) (155)
Increase in valuation allowance...................... (252) 1,028 4,892
Other, net........................................... 172 (9) 879
----- ------ -------
Total income tax expense (benefit)................. $ (21) $ -- $ 134
===== ====== =======
</TABLE>

34
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

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

<TABLE>
<CAPTION>
(IN THOUSANDS)
1997 1996
------- -------
<S> <C> <C>
Deferred income tax assets:
Net operating loss and tax credit carryforwards............... $11,886 $11,097
Warranty and inventory allowances............................. 1,518 1,537
Amortization.................................................. -- 462
Accrued expenses.............................................. 673 1,121
Allowance for doubtful accounts............................... 395 276
Property and equipment due to differences in depreciation..... 352 --
------- -------
Gross deferred income tax assets.............................. 14,824 14,493
------- -------
Deferred income tax liabilities:
Property and equipment due to differences in depreciation..... -- (782)
Deferred gain on installment sale of patent portfolio......... (1,533) --
Other......................................................... -- (168)
------- -------
Gross deferred income tax liabilities......................... (1,533) (950)
------- -------
Less valuation allowance...................................... (13,291) (13,543)
------- -------
Net deferred income tax asset................................. $ -- $ --
======= =======
</TABLE>

The increase (decrease) in the net deferred income tax assets for the years
ended December 31, 1997 and 1996 was $0 and $(468,000), respectively. The
increase in the valuation allowance for the net deferred income tax asset for
these years was $(252,000) and $1,028,000, 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 carryforwards. 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 carryforwards depends on having
sufficient taxable income within the carryback and carryforward 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 carryback, (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, 1997 the Company had a net operating loss, investment tax
credit, alternative minimum tax credit, and research and development tax
credit carryforwards of approximately $26.3 million, $15,000, $77,000, and
$1.2 million, respectively, which expire at various dates through the year
2012.

(13) Business Segments, Geographic Data and Major Customers

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

35
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

Net revenues, by geographic area, for the three-year period ended December 31,
1997 are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
Geographic Area 1997 1996 1995
--------------- ------- ------- -------
<S> <C> <C> <C>
United States........................................... $36,836 $40,296 $39,047
International markets................................... 11,346 15,009 10,463
------- ------- -------
$48,182 $55,305 $49,510
======= ======= =======
</TABLE>

No single customer accounted for more than 10% of the Company's revenues in
1997, 1996 or 1995.

The Company conducts business with a major media company who is also a
significant shareholder of the Company. Revenues from this customer were $1
million, $1.3 million and $1.3 million for the years ended December 31, 1997,
1996 and 1995, respectively. The Company was due $247,000 and $163,000 in
outstanding accounts receivable from the customer at December 31, 1997 and
1996, respectively.

(14) 1995 Special Charge

Syntellect initiated a plan in December 1995 designed to improve its
presence in the Interactive Voice Response ("IVR") market, regain market
share, reduce expenses, focus management and the sales force on the VocalPoint
IVR product line and return Syntellect to profitability. Syntellect incurred a
special charge of $8.8 million during the quarter ended December 31, 1995
related to the implementation of this plan.

The special charge included a $5 million increase in allowances for
inventory obsolescence related to (i) proprietary product lines that are being
discontinued ($2.4 million); (ii) an adjustment of the net realizable value of
overstocked components for the Premier 030 and System 2000 product lines ($2.4
million); and (iii) a write-down of obsolete components from early versions of
the VocalPoint IVR product line ($200,000).

During the second half of 1994, Syntellect began building an infrastructure
to further support the delivery of its whole product solutions and facilitate
future growth opportunities. This anticipated growth did not materialize
during 1995 and, accordingly, Syntellect began reducing its infrastructure
expenses to a level which was more in line with projected revenue streams. As
part of this plan, Syntellect initiated a reduction in force in late 1995 that
affected all areas of the organization. Syntellect provided a special charge
of $1.2 million during the quarter ended December 31, 1995 related to this
reduction in force and in accordance with Syntellect's established severance
benefit plan. Concurrent with the reduction in force, Syntellect began to
consolidate most of its administrative, manufacturing and customer support
functions, which currently reside in multiple locations. As a result,
Syntellect incurred a special charge of $1.7 million during the quarter ended
December 31, 1995 to write-down the value of software and equipment that was
relocated or disposed of.

Syntellect also incurred a special charge of $700,000 during the quarter
ended December 31, 1995, to increase the allowance for doubtful accounts for
specific receivables identified in connection with the Company's review of its
maintenance revenue database and to provide specific reserves for potential
contractual penalties relating to European customers.

A summary of the major elements of the 1995 special charge of $8.8 million,
or $(0.67) per share, is as follows:

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

36
<PAGE>

SYNTELLECT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

The allowances for accounts receivable and inventory obsolescence were
utilized during 1996 to write-off specifically identified receivable balances
and inventory disposed of during the year. The software and equipment charge
was utilized during 1996 to write-down the value of specified assets that were
relocated, lost or disposed of. The Company made $309,000 and $741,000 in
severance payments to terminated employees during 1997 and 1996, respectively,
in connection with its reduction in force.

(15) Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires that Syntellect disclose estimated
fair values for its financial instruments. The carrying amount of cash and
cash equivalents approximates fair value because their maturity is generally
less than three months. The fair value of marketable securities classified as
available-for-sale is based on quoted market prices at the reporting date for
those or similar investments. The fair value of notes receivables is based on
the present value of the note, discounted at 8.5% which can be currently
earned on similar instruments. The carrying amount of receivables, accounts
payable and accrued liabilities approximates fair value as they are expected
to be collected or paid within 90 days of year-end. The fair value of long-
term debt, which is comprised of capital lease obligations, is estimated by
discounting the future cash flows at rates currently offered to the Company
for similar debt instruments.

(16) Supplemental Financial Information

A summary of additions and deductions related to the allowances for accounts
receivable and inventories for the years ended December 31, 1997, 1996 and
1995 follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
CHARGED
BALANCE AT TO BALANCE
BEGINNING COSTS AT END
OF YEAR AND DEDUCTIONS OF YEAR
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1997 $1,233 $ 493 $ (527) $1,199
1996 1,528 480 (775) 1,233
1995 668 1,113 (253) 1,528
Allowance for inventory obsolescence:
1997 $4,145 $ 30 $ (767) $3,408
1996 9.025 36 (4,916) 4,145
1995 4,616 5,213 (804) 9,025
</TABLE>

37
<PAGE>

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

None.

PART III

ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding continuing directors and nominees of Syntellect is set
forth under the caption "Information Concerning Directors and Nominees" in the
Registrant's Proxy Statement relating to its 1998 Annual Meeting of
Shareholders (the "1998 Proxy Statement") incorporated by reference into this
Form 10-K, which will be filed with the Securities and Exchange Commission.
With the exception of the foregoing information and other information
specifically incorporated by reference into this Form 10-K, the 1998 Proxy
Statement is not being filed as a part hereof. Information concerning
executive officers of the Registrant is set forth in Part I of this Form 10-K.

ITEM 11--EXECUTIVE COMPENSATION

Information regarding executive compensation is incorporated herein by
reference to the information furnished under the caption "Executive
Compensation" in the 1998 Proxy Statement, provided, however, that the "Board
Compensation Committee Report on Executive Compensation" and the "Stock Price
Performance Graph" contained in the 1998 Proxy Statement are not incorporated
by reference herein.

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

Information regarding security ownership of certain beneficial owners and
management of Syntellect is incorporated herein by reference to the
information furnished under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 1998 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. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.

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

<TABLE>
<CAPTION>
PAGE OR
METHOD
OF
FILING
-------
<S> <C>
Independent Auditors' Report--KPMG Peat Marwick LLP Page 20
Independent Auditors' Report--Deloitte & Touche LLP Page 21
Consolidated Balance Sheets--December 31, 1997 and 1996 Page 22
Consolidated Statements of Operations--Years ended December 31, 1997,
1996 and 1995 Page 23
Consolidated Statements of Shareholders' Equity--Years ended December
31, 1997, 1996 and 1995 Page 24
Consolidated Statements of Cash Flows--Years ended December 31, 1997,
1996 and 1995 Page 25
Notes to Consolidated Financial Statements Page 26
</TABLE>

38
<PAGE>

2. CONSOLIDATED SUPPLEMENTAL SCHEDULES

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

(B) EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE OR METHOD OF FILING
- ------- ---------------------------------------- --------------------------------------
<S> <C> <C>
2 Agreement and Plan of Reorganization as Incorporated by reference to Exhibit
of December 6, 1995, between Syntellect No. 2 to Syntellect's Registration
Inc., Syntellect Acquisition Co., and Statement on Form S-4 dated February
Pinnacle Investment Associates Inc. 9, 1996 (the "S-4")
3.1(a) Restated Certificate of Incorporation of Incorporated by reference to Exhibit
Registrant No. 3-A to Syntellect's Registration
Statement on Form S-1 dated February
23, 1995 (the "S-1")
3.1(b) Certificate of Amendment to Restated Incorporated by reference to Exhibit
Certificate of Incorporation of No. 3.1(b) to Syntellect's S-4
Registrant, filed with the Delaware
Secretary of State on May 18, 1993
3.1(c) Certificate of Amendment to Restated Incorporated by reference to Exhibit
Certificate of Incorporation of 3.1(c) to Syntellect's 1995 Form 10-K
Registrant filed with the Delaware
Secretary of State on March 14, 1996
3.2 Amended and Restated Bylaws of Incorporated by reference to Exhibit
Registrant No. 3-B to Syntellect's S-1
4 Specimen Certificate representing Common Incorporated by reference to Exhibit
Stock No. 4 to Amendment No. 1 of
Syntellect's S-1
10.1 Restated Stock Option Plan, as amended Incorporated by reference to Exhibit
through May 23, 1995 10.1 to Syntellect's 1995 Form 10-K
10.2 Employee Stock Purchase Plan Incorporated by reference to Exhibit
No. 10-B to Amendment No. 1 of
Syntellect's S-1
10.3 Long-Term Incentive Plan, as amended Incorporated by reference to Exhibit
August 8, 1996 10.4 to Syntellect's 1996 Form 10-K
10.4 1997 Management Incentive Plan Page
10.5 Nonemployee Director Stock Plan Incorporated by reference to Exhibit B
to Syntellect's Proxy Statement for
the 1995 Annual Meeting of
Stockholders
10.6(c) Lease Agreement dated June 28, 1996, Incorporated by reference to Exhibit
together with first amendment to lease 10.6(c) to Syntellect's 1996 on Form
dated October 6, 1996, between Opus 10-K
Southwest Corporation and Syntellect for
an office facility in Phoenix, Arizona
</TABLE>

39
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE OR METHOD OF FILING
- ------- ---------------------------------------- --------------------------------------
<S> <C> <C>
10.7 Form of Indemnification Agreement Incorporated by reference to Exhibit
between Syntellect and its directors and No. 10-L to Syntellect's S-1
officers
10.8(a) Agreement for Licensing of IBM Software Incorporated reference to Exhibit 10-I
Technology dated February 3, 1993 of Syntellect's 1992 Form 10-K
between Syntellect and IBM
10.8(b) Amendment Number One (1) to Agreement Incorporated by reference to Exhibit
for the Licensing of IBM Technology, No. 10.8(b) to Syntellect's S-4
Agreement Number JWQ9308, dated March
25, 1993
10.8(c) Amendment Number Two (2) to Agreement Incorporated by reference to Exhibit
for the Licensing of IBM Technology, No. 10.8(c) to Syntellect's S-4
Agreement Number JWQ9308, dated June 8,
1993
10.8(d) Amendment Number Three (3) to Agreement Incorporated by reference to Exhibit
for the Licensing of IBM Technology, No. 10.8(d) to Syntellect's S-4
Agreement Number JWQ9308, dated December
16, 1993
10.8(e) Amendment Number Four (4) to Agreement Incorporated by reference to Exhibit
for the Licensing of IBM Technology, No. 10.8(e) to Syntellect's S-4
Agreement Number JWQ9308, dated October
4, 1994
10.8(f) Amendment Number Five (5) to Agreement Incorporated by reference to Exhibit
for the licensing of IBM Technology, 10.8(f) to Syntellect's 1996 on Form
Agreement Number JWQ9308, dated February 10-K
13, 1995
10.8(g) Amendment Number Six (6) to Agreement Incorporated by reference to Exhibit
for the Licensing of IBM Technology, 10.8(g) to Syntellect's 1996 Form 10-K
Agreement number JWQ9308, dated June 6,
1995
10.8(h) Amendment Number Seven (7) to Agreement Incorporated by reference to Exhibit
for the Licensing of IBM Technology, 10.8(h) to Syntellect's 1996 Form 10-K
Agreement Number JWQ9308, dated
September 9, 1996
10.8(i) Amendment Number Eight (8) to Agreement Incorporated by reference to Exhibit
for Licensing of IBM Technology, 10.8(i) to Syntellect's 1996 Form 10-K
Agreement Number JWQ9308, dated March
11, 1997
10.9 Asset Purchase Agreement dated February Incorporated by reference to Exhibit
21, 1995 between Syntellect Technology 10-K of Syntellect's 1994 Form 10-K
Corp. (formerly known as Dytel Inc.) and
Dytel Incorporated
10.10 Form of Affiliate Agreement between Incorporated by reference to Exhibit
Syntellect Inc. and affiliates of No.10.10 to Syntellect's S-4
Pinnacle Investment Associates Inc.
10.11 Employment Agreement between J. Lawrence Incorporated by reference to Exhibit
Bradner and Syntellect Inc. dated March No. 10.11 to Syntellect's S-4
14, 1996
10.12 Separation Agreement between Steve Page
Nussrallah and Syntellect Inc. dated
February 20, 1998
10.13 Form of Registration Rights Agreement Incorporated by reference to Exhibit
10.13 to Syntellect's S-4
</TABLE>

40
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE OR METHOD OF FILING
- ------- ---------------------------------------- --------------------------------------
<S> <C> <C>
10.14 Stock Purchase Agreement, dated April 1, Incorporated by reference to Exhibit
1996, between Syntellect Inc. and Atlas 10.14 to Syntellect's quarterly report
Telecom, Inc. on Form 10-Q, dated May 13, 1996.
21 Subsidiaries of Registrant Page
23 Independent Auditors' Consents Page
27.1 Financial Data Schedule--1997 Page
27.2 Financial Data Schedule--1996 Page
27.3 Financial Data Schedule--1995 Page
</TABLE>

A Current Report on Form 8-K/A was filed on November 12, 1997.

41
<PAGE>

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

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

NAME AND SIGNATURE TITLE DATE:

/s/ J. Lawrence Bradner Chairman of the Board, March 20,
- ------------------------------------- Chief Executive Officer 1998
J. LAWRENCE BRADNER (Principal Executive
Officer)

/s/ Neal L. Miller Vice President, Chief March 20,
- ------------------------------------- Financial Officer, 1998
NEAL L. MILLER Secretary & Treasurer
(Principal Financial
Officer)

/s/ Peter W. Pamplin Vice President, March 20,
- ------------------------------------- Controller (Principal 1998
PETER W. PAMPLIN Accounting Officer)

/s/ Jack R. Kelly, Jr. Director March 20,
- ------------------------------------- 1998
JACK R. KELLY, JR.

/s/ William P. Conlin Director March 20,
- ------------------------------------- 1998
WILLIAM P. CONLIN

/s/ Michael R. Bruce Director March 20,
- ------------------------------------- 1998
MICHAEL R. BRUCE

<PAGE>

EXHIBIT 10.4

MINUTES OF COMPENSATION COMMITTEE MEETING
FOR
SYNTELLECT INC.

Meetings of the Syntellect Inc. (the "Company") Compensation Committee
(the "Committee") of the Board of Directors of Syntellect Inc. were held on
Thursday, January 9, 1997 from 3:00 p.m. to 4:00 p.m. and Thursday, January 30,
1997 from 4:00 p.m. to 5:00 p.m. via telephone. Attending the meetings were:
Daniel D. Ross, Jack Kelly and LeRoy Ellison.

At the meetings, the Committee discussed a variety of matters, including
the following:

1. Management Incentive Program for key employees.
2. Stock Option Grants for certain employees.
3. Special Bonuses for certain employees.

In connection with these matters, upon motion duly made, seconded and
approved, the Committee adopted the following resolutions:

1. APPROVAL OF THE 1997 MANAGEMENT INCENTIVE PLAN.
WHEREAS, the Committee has determined that it would be in
the best interest of the Company to implement a Management
Incentive Program for certain of the Company's key employees for
the fiscal year ending 1997,
NOW, THEREFORE, BE IT RESOLVED that the form, terms and
provisions of the 1997 Management Incentive Program for J.
Lawrence Bradner, Steve Nussrallah, Scott Coleman, Neal Miller,
David C. Phillips, Roger Reece, David Morales, Tricia Lester,
Dean Giancola, Lindsay Hoopes, and Jim Geer, copies of which are
Exhibits A-1 through A-11 inclusive of the attached 1997
Management Incentive Program, be and the same hereby are,
approved in all respects.

2. APPROVAL OF STOCK OPTION GRANTS.
WHEREAS, it is in the best interest of the Company to
attract and retain the highest qualified employees available,
NOW, THEREFORE, BE IT RESOLVED that Stock Option Grants be
made in accordance with the list as provided in the attached
1997 Management Incentive Program and subject to final
Shareholder approval of the 750,000 share increase at the May
20, 1997 Annual Meeting.

3. APPROVAL OF SPECIAL BONUSES FOR 1996.
WHEREAS, it is in the best interest of the Company to award
Special Bonuses to certain employees of the Company as provided
in the attached 1997 Management Incentive Program.
NOW, THEREFORE, BE IT RESOLVED that Special Bonus Awards be
awarded in accordance with the list provided in Attachment B-1
herein.

There being no further business, the meetings adjourned at the times
shown above.

Respectfully submitted,

/s/ DANIEL D. ROSS
--------------------------------
Daniel D. Ross, Chairman

<PAGE>

EXHIBIT 10.12

SEPARATION AGREEMENT
--------------------

This Separation Agreement ("Agreement") is dated, entered into, and
delivered by SYNTELLECT INC., a corporation organized and existing under the
laws of the state of Delaware ("Employer"), on the one hand, and STEVE
NUSSRALLAH ("Employee"), on the other hand, on this 20th day of February, 1998.

W I T N E S S E T H:

WHEREAS, Employee has been and will be employed by Employer from March 14,
1996 to March 31, 1998 pursuant to an Employment Agreement between Employer and
Employee, dated March 14, 1996 ("Employment Agreement");

WHEREAS, Employee has most recently been employed by Employer as President
and Chief Operating Officer and also serves as a Director of Employer;

WHEREAS, Employee and Employer mutually desire to terminate the Employment
Agreement effective March 31, 1998 (the "Separation Date") and in a single
document, including attachments, which supersedes the Employment Agreement,
settle all claims that Employer or Employee may have under the Employment
Agreement;

WHEREAS, Employee tenders and Employer accepts Employee's resignation,
effect on the Separation Date, from all positions Employee currently holds as an
employee or officer of or with Employer or any of its parents, subsidiaries, or
affiliates;

WHEREAS, Employer will pay to Employee his salary under the Employment
Agreement through the Separation Date, plus any accrued but unused vacation;

WHEREAS, Employer and Employee desire to settle fully and finally all
claims they may have against each other as a result of Employee's employment by
Employer or its termination; and

WHEREAS, Employer and Employee desire to state in a single document,
including attachments, their understandings and agreements;

NOW, THEREFORE, in consideration of the covenants and agreements set forth
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties to this Agreement, and each of
them, agree as follows:
<PAGE>

1. Promises and Agreements of Employer.
-----------------------------------

Employer agrees to treat Employee's resignation as a "No Cause Termination"
under Sections 3(c) and 4.3 of the Employment Agreement. As a result, Employer
shall:

1. Pay to Employee his salary under the Employment Agreement through the
Separation Date on the same schedule that Employee has been paid prior
to the date of this Agreement;

2. Pay to Employee as severance pay, and in lieu of any other payments
except as expressly provided in this Agreement, in twelve (12) equal
monthly installments, commencing ten (10) days after the Separation
Date, a gross amount, less applicable withholdings, equal to
$210,000.00;

3. Provide to Employee medical insurance substantially similar to the
medical insurance provided to Employee prior to the Separation Date
for the twelve (12) consecutive months immediately following the
Separation Date; and

4. Pay to Employee any bonus payments due to him pursuant to Section 2.2
of the Employment Agreement for the years 1997 and 1998.

In addition, Employer agrees that the stock options granted to Employee in
Section 2.3 of the Employment Agreement will survive, and are in no way modified
or affected by, the termination of the Employment Agreement pursuant to
Paragraph 4 of this Agreement.

2. Consulting Services.
-------------------

Employee agrees to provide consulting services to Employer up to twenty
(20) hours a month for the first three (3) consecutive months after the
Separation Date. These consulting services will be provided by Employee to
Employer as an independent contractor and not as an employee of Employer and at
no additional compensation or charge whatsoever to Employer, but Employer will
reimburse Employee for his reasonable out-of-pocket expenses in providing these
consulting services.

3. Employee's Resignation.
----------------------

On the Separation Date, Employee will be deemed to have resigned as
President and Chief Operating Officer of Employer and from all other employment
positions which he holds with Employer or any of its parents, subsidiaries, or
affiliates. As of the Separation Date, Employee's employment with Employer, and
his authority to act on behalf of Employer, will be terminated.

-2-
<PAGE>

4. Termination of Employment Agreement.
-----------------------------------

On the Separation Date, the Employment Agreement will be terminated.
Neither Employer nor Employee will thereafter have any further duties or
obligations under the Employment Agreement except as expressly provided in this
Agreement.

5. No Re-Election as Director.
--------------------------

Employee agrees that he will not seek, stand for, or accept re-election as
a Director of Employer when Employee's current term as a Director ends on May
21, 1998.

6. General Release and Covenant Not to Sue.
---------------------------------------

a. Employee hereby releases, discharges, and covenants not to sue
Employer and its predecessors, successors, parents, subsidiaries,
affiliates, and divisions, and their respective current and former
employees, officers, directors, shareholders, partners, trustees,
representatives, attorneys, and agents (collectively referred to
herein as "Releasees") from and for all claims, liabilities, demands,
and causes of action, KNOWN OR UNKNOWN, fixed or contingent, of any
nature whatsoever, which he, his heirs, administrators, executors,
personal representatives, beneficiaries, and assigns may have or claim
to have against the Releasees or any of them as a result of his
employment with Employer or the termination of said employment. This
includes but is not limited to claims arising under federal, state, or
local laws prohibiting discrimination on any basis, including but not
limited to the Civil Rights Act of 1964, as amended, the
Rehabilitation Act of 1973, as amended, the Employee Retirement Income
Security Act of 1974 , as amended, the Americans With Disabilities Act
of 1990, as amended, claims under or related to the Employment
Agreement, and other federal, state or local laws including claims for
breach of contract or wrongful discharge under state laws. By
referencing the laws above, Employer does not admit coverage under any
of these laws.

b. Employer hereby releases, discharges, and covenants not to sue
Employee from and for all claims, liabilities, demands, and causes of
action, KNOWN OR UNKNOWN, fixed or contingent, of any nature
whatsoever, which it may have or claim to have against Employee as a
result of his employment with Employer or the termination of said
employment. This includes but is not limited to claims arising under
federal, state, or local laws prohibiting discrimination on any basis,
including but not limited to the Civil Rights Act of 1964, as amended,
the Rehabilitation Act of 1973, as amended, the Employee Retirement
Income Security Act of 1974 , as amended, the Americans With
Disabilities Act of 1990, as amended, claims under or related to the

-3-
<PAGE>

Employment Agreement, and other federal, state or local laws including
claims for breach of contract or wrongful discharge under state laws.
By referencing the laws above, Employee does not admit coverage under
any of these laws.

7. Release of Claims under the Age Discrimination in Employment Act of
-------------------------------------------------------------------
1967, as Amended.
----------------

Employee hereby knowingly and voluntarily releases, discharges and
covenants not to sue each and all of the Releasees, jointly and severally, from
any and all liability, claims, allegations, and causes of action arising under
the Age Discrimination in Employment Act of 1967, as amended ("ADEA"), which he,
his heirs, administrators, executors, personal representatives, beneficiaries,
and assigns may have or claim to have against the Releasees or any of them.
Notwithstanding any other provision or paragraph of this Agreement, Employee
does not hereby waive any rights or claims under the ADEA that may arise after
the day on which the Agreement is signed by Employee or by Employer, whichever
is later.

Employee hereby acknowledges and represents that he has been given a
period of at least twenty-one (21) days to consider the terms of this Agreement;
that Employer has advised Employee in writing to consult with an attorney prior
to executing this Agreement; and that he has received valuable and good
consideration to which Employee is otherwise not entitled in exchange for his
execution of this Agreement.

Employee and Employer hereby acknowledge that Employee may revoke this
Agreement within seven (7) days from his signing of this Agreement, and that
this Agreement shall not become effective or enforceable until after the seven
(7) day revocation period has expired. In the event Employee chooses to
exercise his option to revoke this Agreement, Employee shall notify Employer in
writing to Employer's designated agent for this purpose, Larry Bradner at
Syntellect Inc., 1000 Holcomb Woods Parkway, Bldg. 410A, Roswell, Georgia 30076-
2585, and return to Employer all monies paid pursuant to this Agreement, no
later than 5:00 p.m. E.S.T. of the last day of the revocation period.

8. Attorneys' Fees, Costs and Expenses.
-----------------------------------

Employee understands and agrees that the aforesaid payments to him
include and encompass therein any and all claims with respect to attorneys'
fees, costs, and expenses for or by any and all attorneys who have represented
him or with whom he has consulted or who have done anything in connection with
the subject matter of this Agreement or any and all claims released herein.

9. Future Claims.
-------------

-4-
<PAGE>

Employee agrees that, except as to any rights or claims under the ADEA
that may arise after the date this Agreement is executed, this Agreement
releases and resolves any and all future charges or claims which might be filed
by him or on his behalf against any of the Releasees with the Equal Employment
Opportunity Commission or any other federal, state, or local agency or
commission. Employee agrees that this Agreement constitutes a full resolution
of any and all such charges, and that if any action should be taken to pursue
any such charge, any or all of the Releasees shall be entitled to a protective
order against or summary judgment dismissing any such action, and that neither
he nor anyone on his behalf will file or cause to be filed any charge, claim, or
complaint in any forum against any of the Releasees.

10. Trade Secrets and Confidential Information.
------------------------------------------

This Agreement hereby incorporates and adopts by reference the terms
and restrictions contained in Section 6.1 of the Employment Agreement. A copy
of the Employment Agreement is attached as Exhibit 1.
---------

11. Non-Competition.
---------------

This Agreement hereby incorporates and adopts by reference the terms
and restrictions contained in Section 6.3 of the Employment Agreement, except to
the extent such provision is expressly amended below.

With regard to the Noncompete Period of the covenants contained in
Section 6.3(b) of the Employment Agreement, Employer agrees to treat Employee's
resignation as a "No Cause Termination Event." Furthermore, the term
"Territory" as used in Section 6.3(b) of the Employment Agreement is hereby
amended to mean only the United States and the following other countries or
jurisdictions in which Employer has actively engaged in or solicited business
during Employee's employment as its President and Chief Operating Officer:
Australia, Canada, Germany, Hong Kong, Israel, Malaysia, Puerto Rico, and the
United Kingdom.

12. Non-Disparagement.
-----------------

Employee and Employer hereby agree and covenant that they shall not
make any statement, written or verbal, in any forum or media, or take any
action, in disparagement of each other, including, but not limited to, in the
case of Employee, negative references to Employer's products, services,
corporate policy, officers and/or employees and any other action which may
disparage Employer to the general public and/or to Employer's employees,
customers, suppliers, and/or business partners.

13. Reasonable Restrictions.
-----------------------

-5-
<PAGE>

Employee agrees and acknowledges that the covenants specified in
Paragraphs 10 through 12 are reasonable, fair and equitable and contain
reasonable limitations as to time, geographical area and scope of activities to
be restricted and that such covenants do not impose a greater restraint on
Employee than is necessary to protect the goodwill, confidential information and
other legitimate business interests of Employer.

14. Future Cooperation.
------------------

Employee agrees and covenants that he shall, to the extent reasonably
requested in writing, cooperate with and assist Employer in any pending or
future litigation in which Employer is a party, and regarding which Employee, by
virtue of his employment with Employer, has factual knowledge or information
relevant to said litigation, including, but not limited to, acting as Employer's
representative, on behalf of Employer, in any said litigation. Employee further
agrees and covenants that, in any such litigation, he shall, without the
necessity for subpoena, provide, in any jurisdiction in which Employer requests,
truthful testimony relevant to said litigation. Employer will reimburse
Employee for his reasonable out-of-pocket expenses in complying with this
Paragraph 14.

15. Modification.
------------

No provision of this Agreement may be changed, altered, modified or
waived except in writing signed by Employee and an officer of Employer, which
writing shall specifically reference this Agreement and the provision which the
parties intend to waive or modify.

16. Severability.
------------

Except as noted below, should any provision of this Agreement be
declared or determined by any court of competent jurisdiction to be
unenforceable or invalid for any reason, the validity of the remaining parts,
terms or provisions of this Agreement shall not be affected thereby and the
invalid or unenforceable part, term or provision shall be deemed not to be a
part of this Agreement. The covenants set forth in this Agreement are to be
reformed pursuant to Paragraph 18 if held to be unreasonable or unenforceable,
in whole or in part, and, as written and as reformed, shall be deemed to be part
of this Agreement.

17. Reformation.
-----------

If any of the covenants or promises of this Agreement, including but
not limited to Paragraphs 10 through 12 are determined by any court of law or
equity, with jurisdiction over this matter, to be unreasonable or unenforceable,
in whole or in part, as written, Employee hereby consents to and affirmatively
requests that said court reform the covenant or promise so as to be reasonable
and enforceable and that said court enforce the covenant or promise as reformed.

-6-
<PAGE>

18. Assignment of Claims.
--------------------

Employee hereby represents and warrants that he has not heretofore
assigned, transferred, or hypothecated or purported to assign, transfer, or
hypothecate to any person or entity not a signatory to this Agreement any claim
or matter herein released, disclaimed, discharged, or terminated. In the event
of such assignment, transfer, or hypothecation of any claims or other matter
herein released, discharged, terminated, or disclaimed, Employee agrees to
indemnify and hold harmless Employer or any other adversely affected Releasee
from and against any liability or loss, and for any cost, expense or judgment or
settlement arising out of or occasioned by, or arising in connection with any
such assignment, transfer or hypothecation.

19. Applicable Law and Mutual Submission.
------------------------------------

This Agreement has been entered into in and shall be governed by and
construed under the laws of the State of Georgia (except as to choice of laws).

20. Headings and Captions.
---------------------

The headings and captions used in this Agreement are for convenience
of reference only, and shall in no way define, limit, expand or otherwise affect
the meaning or construction of any provision of this Agreement.

21. Waiver.
------

The waiver by any party to this Agreement of a breach of any of the
provisions of this Agreement shall not operate or be construed as a waiver of
any subsequent or simultaneous breach.

22. Communications.
--------------

No notice, request, consent, approval, waiver or other communication
required or permitted to be given or received under this Agreement shall be
effective unless it is in writing and is mailed by registered or certified mail,
return receipt requested, postage prepaid, or sent by a recognized overnight
courier, signature required, addressed:

a. if to Employer, to the address designated as Employer's Notice
Address, or such other address as Employer designates by giving notice
to Employee, with a copy to the address designated as Employer's
Notice Copy Address or to such other person or party as Employer shall
designate by giving notice to Employer; and

b. if to Employee, to the address designated as Employee Notice
Address, or such other address as Employee designates by giving notice
to Employer.

-7-
<PAGE>

23. Notice Addresses.
----------------

a. Employer Notice Address:
-----------------------

Syntellect Inc.
1000 Holcomb Woods Parkway
Suite 410A
Roswell, Georgia 30076

Attention: Chief Executive Officer

b. Employer Notice Copy Address:
----------------------------

Mr. Alan J. Prince
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303-1763

c. Employee Notice Address:
-----------------------

Mr. Steve Nussrallah
605 Buttercup Trace
Alpharetta, Georgia 30222

24. Entire Agreement.
----------------

This Agreement constitutes a single integrated contract expressing the
entire agreement of the parties hereto. There are no other agreements, written
or oral, express or implied, between the parties hereto, concerning the subject
matter hereof.

25. Understanding.
-------------

Employee herewith covenants and agrees that he has read and fully
understands the contents and the effect of this Agreement. Employee warrants
and agrees that he has had a reasonable opportunity and been advised in writing
to seek the advice of an attorney as to such content and effect. Employee
accepts each and all of the terms, provisions, and conditions of this Agreement,
and does so voluntarily and with full knowledge and understanding of the
contents, nature, and effect of this Agreement.

-8-
<PAGE>

STEVE NUSSRALLAH

/s/ Steve Nussrallah Date: February 20, 1997
- ------------------------------- ----------------------

SYNTELLECT INC.

By: /s/ J. Lawrence Bradner Date: February 20, 1997
---------------------------- ----------------------
J. Lawrence Bradner

Title: Chief Executive Officer
-------------------------

-9-

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF REGISTRANT

Telecorp Systems, Inc., a Georgia Corporation

Syntellect Canada Inc., an Ontario Corporation

Syntellect Europe Limited,
a Corporation formed under the laws of the United Kingdom

Syntellect Deutschland GmbH

Syntellect Technology Corp.

Syntellect Interactive Services, Inc.

<PAGE>

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in the Registration Statements
(Nos. 33-35974, 33-48637, 333-02362, 333-02368, and 333-44587) of Syntellect,
Inc. on Form S-8 of our report dated February 9, 1996, except as to Note 20
which is dated March 14, 1996, relating to the consolidated statements of
income, stockholders' equity, and cash flows of Pinnacle Investment Associates
Inc. and subsidiary for the year ended December 31, 1995 (which are not
presented separately therein) appearing in the Annual Report on Form 10-K of
Syntellect, Inc. for the year ended December 31, 1997.

DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 27, 1998

<PAGE>

The Board of Directors
Syntellect Inc.:

We consent to incorporation by reference in the registration statements (No.
33-35974, 33-48637, 33-63642, 333-02362, 333-02368, 333-44587) on Form 10-K of
our report dated February 6, 1998, relating to the consolidated balance sheets
of Syntellect Inc. and subsidiaries as of December 31, 1997, and 1996, and the
related consolidated statements of earnings, retained earnings, and cash flows
for each of the years in the three-year period ended December 31, 1997, and
all related schedules, which report appears in the December 31, 1997, annual
report on Form 10-K of Syntellect Inc.

KPMG Peat Marwick LLP

Atlanta, Georgia
March 24, 1998

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF SYNTELLECT, INC. AND SUBSIDIARIES AS OF
DECEMBER 31, 1997, AND THE CONSOLIDATED STATEMENT OF OPERATIONS OF SYNTELLECT,
INC. AND SUBSIDIARIES FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,290
<SECURITIES> 8,233
<RECEIVABLES> 12,949
<ALLOWANCES> 1,199
<INVENTORY> 2,593
<CURRENT-ASSETS> 25,580
<PP&E> 12,139
<DEPRECIATION> 6,326
<TOTAL-ASSETS> 34,808
<CURRENT-LIABILITIES> 12,092
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 22,050
<TOTAL-LIABILITY-AND-EQUITY> 34,808
<SALES> 24,349
<TOTAL-REVENUES> 48,182
<CGS> 16,093
<TOTAL-COSTS> 25,678
<OTHER-EXPENSES> 30,548
<LOSS-PROVISION> 493
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 120
<INCOME-TAX> (21)
<INCOME-CONTINUING> 141
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141
<EPS-PRIMARY> .01
<EPS-DILUTED> .01

</TABLE>

<PAGE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Syntellect, Inc. and subsidiaries as of December
31, 1996, and the consolidated statement of operations of Syntellect, Inc. and
subsidiaries for the twelve months ended December 31, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 4,928
<SECURITIES> 1,275
<RECEIVABLES> 14,977
<ALLOWANCES> 1,233
<INVENTORY> 4,085
<CURRENT-ASSETS> 26,235
<PP&E> 24,492
<DEPRECIATION> 16,816
<TOTAL-ASSETS> 34,808
<CURRENT-LIABILITIES> 12,558
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 21,886
<TOTAL-LIABILITY-AND-EQUITY> 34,808
<SALES> 31,811
<TOTAL-REVENUES> 55,305
<CGS> 18,645
<TOTAL-COSTS> 27,783
<OTHER-EXPENSES> 30,555
<LOSS-PROVISION> 480
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> (2,780)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,780)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,780)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)

</TABLE>

<PAGE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Syntellect, Inc. and subsidiaries as of December
31, 1995, and the consolidated statement of operations of Syntellect, Inc. and
subsidiaries for the twelve months ended December 31, 1995 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 5,125
<SECURITIES> 4,225
<RECEIVABLES> 16,409
<ALLOWANCES> 1,528
<INVENTORY> 5,293
<CURRENT-ASSETS> 32,811
<PP&E> 20,521
<DEPRECIATION> 14,700
<TOTAL-ASSETS> 39,719
<CURRENT-LIABILITIES> 15,368
<BONDS> 0
0
0
<COMMON> 134
<OTHER-SE> 24,042
<TOTAL-LIABILITY-AND-EQUITY> 39,719
<SALES> 30,110
<TOTAL-REVENUES> 49,510
<CGS> 19,211
<TOTAL-COSTS> 26,147
<OTHER-EXPENSES> 39,789
<LOSS-PROVISION> 1,113
<INTEREST-EXPENSE> 166
<INCOME-PRETAX> (16,258)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,258)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> (1.24)

</TABLE>