10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2000

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

For the transition period from                to                

Commission File Number 000-27385

INTERACTIVE INTELLIGENCE, INC.

(Exact name of registrant as specified in its charter)

Indiana (State or other jurisdiction of incorporation or organization)	35-1933097 (I.R.S. Employer Identification No.)
8909 Purdue Road Suite 300 Indianapolis, Indiana 46268 (Address of principal executive offices)
(317) 872-3000 (Registrant's telephone number)

Indicate by checkmark 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 / /

The number of shares of common stock outstanding on April 28, 2000 was 14,134,709.

TABLE OF CONTENTS

		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999	4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 2.	Changes in Securities and Use of Proceeds	21
Item 6.	Exhibits and Reports on Form 8-K	21
	Signature	22

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements and Footnotes.

Interactive Intelligence, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)

	March 31, 2000			December 31, 1999
	(Unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	1,340		$	2,235
Short-term investments		13,050			12,141
Accounts receivable, net of allowance for doubtful accounts of $385 in 2000 and $437 in 1999		4,899			3,578
Prepaid expenses		477			513
Other current assets		79			80
Total current assets		19,845			18,547
Property and equipment, net		5,492			4,472
Long-term investments		6,031			8,989
Other assets, net		445			362
Total assets	$	31,813		$	32,370
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities	$	2,263		$	1,806
Accrued compensation and related expenses		303			484
Deferred revenue		5,733			4,988
Current portion of capital lease obligations		582			560
Total current liabilities		8,881			7,838
Capital lease obligations, net of current portion		212			377
Shareholders' equity:
Preferred stock, no par value; 10,000,000 authorized; no shares issued and outstanding		—			—
Common stock, $0.01 par value; 100,000,000 authorized; 14,040,555 issued and outstanding at March 31, 2000, 13,831,486 issued and outstanding at December 31, 1999		140			138
Additional paid-in capital		45,979			45,775
Accumulated deficit		(23,399	)		(21,758	)
Total shareholders' equity		22,720			24,155
Total liabilities and shareholders' equity	$	31,813		$	32,370

See accompanying notes.

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Interactive Intelligence, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts)

	Three Months Ended March 31,
	2000			1999
Revenues:
Software	$	4,946		$	2,372
Services		2,094			647
Total revenues		7,040			3,019
Costs and expenses:
Costs of software		63			24
Costs of services		1,926			1,068
Sales and marketing		3,522			2,091
Research and development		2,270			1,363
General and administrative		1,144			507
Total costs and expenses		8,925			5,053
Operating loss		(1,885	)		(2,034	)
Interest income (expense), net		281			(189	)
Loss before income taxes		(1,604	)		(2,223	)
Income taxes		37			—
Net loss	$	(1,641	)	$	(2,223	)
Net loss per share:
Basic and diluted	$	(0.12	)	$	(0.21	)
Shares used to compute net loss per share:
Basic and diluted		13,932			10,417

See accompanying notes.

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Interactive Intelligence, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)

	Three Months Ended March 31,
	2000			1999
Operating activities
Net loss	$	(1,641	)	$	(2,223	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation		367			197
Amortization of deferred stock-based compensation		21			—
Changes in operating assets and liabilities:
Accounts receivable		(1,321	)		478
Prepaid expenses		36			39
Other current assets		1			(38	)
Accounts payable and accrued liabilities		457			136
Accrued compensation and related expenses		(181	)		140
Deferred revenue		745			696
Accounts payable and deferred compensation—shareholder		—			111
Net cash used by operating activities		(1,516	)		(464	)
Investing activities
Purchases of property and equipment, net		(1,387	)		(296	)
Purchases of available-for-sale investments		(262	)		—
Sales of available-for-sale investments		2,311			—
Change in other assets		(83	)		(39	)
Net cash provided (used) by investing activities		579			(335	)
Financing activities
Principal payments on capital lease obligations		(143	)		(131	)
Repayments under notes payable and accrued interest—shareholder		—			(982	)
Proceeds from issuances of common stock		—			1,204
Repurchases of common stock		—			(6	)
Proceeds from stock options exercised		185			94
Net cash provided by financing activities		42			179
Net (decrease) in cash and cash equivalents		(895	)		(620	)
Cash and cash equivalents, beginning of period		2,235			2,021
Cash and cash equivalents, end of period	$	1,340		$	1,401

See accompanying notes.

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Interactive Intelligence, Inc

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.  Description of Business and Basis of Presentation

    Interactive Intelligence, Inc. ("13" or "the Company") develops, markets, and supports interaction management software that manages a broad range of customer interactions including not only traditional telephone calls and faxes but also Internet-based interactions such as e-mail, text chat, Web callback requests, and voice over Net calls. The Company's flagship product, Enterprise Interaction Center® (EIC), is a complete communications solution providing PBX (private branch exchange), ACD (automated call distributor), IVR (interactive voice response), unified messaging, and Internet functionality on a single Windows NT® Server. The Company currently derives substantially all of its revenues from licenses of the Enterprise Interaction Center product and related services.

    Principal operations of the Company commenced during 1997. In 1998, the Company established a wholly-owned subsidiary in France and a branch office in Japan. In 1999, the Company established branch offices in Korea, the United Kingdom, and the Netherlands. The Company's products are marketed in North America, Central and South America, Europe, Asia, Australia, and South Africa.

    The accompanying unaudited financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, the statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented.

    The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

    These financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 1999, included in Form 10-K for the year ended December 31, 1999, filed with the Securities and Exchange Commission on March 30, 2000. Our results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

2.  Net Loss Per Common Share

    Basic loss per share is calculated based on the weighted-average number of outstanding common shares. Diluted loss per share is calculated based on the weighted-average number of outstanding common shares plus the effect of dilutive potential common shares.

    The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):

	Three Months Ended March 31,
	2000			1999
Net Loss:	$	(1,641	)	$	(2,223	)
Basic and diluted:
Weighted-average shares used to compute net loss per share:		13,932			10,417
Basic and diluted net loss per share:	$	(.012	)	$	(0.21	)

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    The Company's calculation of diluted net loss per share excludes potential common shares as the effect would be antidilutive. Potential common shares are composed of shares of common stock of the Company issuable upon the exercise of stock options. Options to purchase 2,202,935 shares of common stock with exercise prices of $0.13 to $50.50 per share were outstanding as of March 31, 2000 and options to purchase 2,080,935 shares of common stock with exercise prices of $0.13 to $9.33 per share were outstanding as of March 31, 1999.

3.  Contingencies

    In June 1999 and September 1999, the Company received letters from a competitor in the call center market claiming that the Company's products utilize technologies pioneered and patented by that competitor. The Company's patent counsel has reviewed all of the patents listed in the letter dated June 1999 from the competitor and is in the process of reviewing the additional patents noted in the letter dated September 1999. Based on the advice of the Company's patent counsel, the Company believes that its products do not infringe any of the patents listed in either letter. The Company intends to continue to discuss its conclusion with the competitor, but cannot assure you that the competitor will concur with the Company's conclusion or that this matter can be resolved amicably, without infringement claims being made by the competitor or without a material adverse effect on the Company's business, financial condition or results of operations.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Information

    Certain statements in this Form 10-Q contain "forward-looking" information (as defined in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties which may cause actual results to differ materially from those predicted in the forward-looking statements. Forward-looking statements include, without limitation, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, and statements regarding reliance on third parties, and can be identified by their use of such verbs as "expects," "anticipates," and "believes" or similar verbs or conjugations of such verbs. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statement. If any of our assumptions on which the statements are based prove incorrect or should unanticipated circumstances arise, our actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors, including, but not limited to, the "Factors Affecting Operating Results" described herein and the Risk Factors described in our Securities and Exchange Commission filings, including the Form 10-K filing for the year ended December 31, 1999.

Overview

    We commenced operations in October 1994. Through the end of 1996, we focused primarily on research and development activities. EIC was released in March 1997. In 1997 and 1998, we expanded our operations to capitalize on the increased market demand for communications and interaction management software. We decided, at the expense of profitability, to continue investing significantly in research and development, and to accelerate our investments in marketing, services and sales operations. We had no revenue in 1996, and our total revenues were $1.6 million in 1997, $9.0 million in 1998, and $19.1 million in 1999.

    We believe our investments in research and development and in marketing, services and sales operations will continue to be critical to our revenue growth. However, these investments have also significantly increased our operating costs and expenses, contributing to the operating and net losses that we have incurred in each fiscal quarter since our formation. We anticipate that our operating costs and expenses will increase substantially for the foreseeable future as we continue to expand our research and development, marketing, services and sales operations. Accordingly, we are likely to continue to experience losses and negative cash flows from operations in future quarters. We cannot assure you when or if we will achieve profitability or, if achieved, that we will be able to sustain profitability. Our operating results have varied significantly from quarter to quarter and may continue to do so in the future. As a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, and you should not rely on them as an indication of our future performance.

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Historical Results of Operations

    The following table presents certain financial data, derived from our unaudited statements of operations, as a percentage of total revenues for the periods indicated. The operating results for the three months ended March 31, 2000 and 1999 are not necessarily indicative of the results that may be expected for the full year or for any future period.

	Three Months Ended March 31,
	2000		1999
Revenues:
Software	70	%	79	%
Services	30		21
Total Revenues	100		100
Costs and expenses:
Cost of software	1		1
Cost of services	27		36
Sales and marketing	50		69
Research and development	32		45
General and administrative	16		17
Total costs and expenses	126		168
Operating loss	(26	)	(68	)
Interest income (expense), net	4		(6	)
Loss before income taxes	(22	)	(74	)
Income Taxes	1		0
Net Loss	(23	)%	(74	)%

Revenues

    Our total revenues increased 133% to $7.0 million for the three months ended March 31, 2000, from $3.0 million for the three months ended March 31, 1999. Non-North American revenues grew to $2.0 million for the three months ended March 31, 2000 from $693,000 for the three months ended March 31, 1999. Our revenues are derived primarily from license fees and charges for services, including product maintenance, education services, and professional services. The increase in total revenues resulted primarily from increases in the number of both new and existing software licenses and, to a lesser extent, product maintenance revenues. We do not believe that the percentage increases in revenues achieved in prior periods should be anticipated in future periods. We anticipate that software revenues will continue to represent the majority of our revenues for the foreseeable future.

    Software.  Our software revenues increased 109% to $4.9 million for the three months ended March 31, 2000, from $2.4 million for the three months ended March 31, 1999. The increase in software revenues can be attributed to an increase in EIC licenses as a result of the July 1999 release of EIC Version 1.3, continued market acceptance for our products, and a growing geographic presence in North America, Europe, and the Asia/Pacific region.

    Services.  Services revenues increased 224% to $2.1 million for the three months ended March 31, 2000, from $647,000 for the three months ended March 31, 1999. The increase in services revenue was primarily due to an increase in product maintenance revenues, which is related to our growing installed base of end-user customers. We also realized additional education revenues and additional implementation and customization revenues from our recently established professional services organization.

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Costs and Expenses

    Our total costs and expenses increased 77% to $8.9 million for the three months ended March 31, 2000, from $5.1 million for the three months ended March 31, 1999. The increase in amount was primarily due to increases in investments in our research and development, marketing, and sales and services efforts.

    Costs of Software.  Costs of software consist primarily of product royalties paid to third-parties for the use of their technologies in our products and, to a lesser extent, software packaging costs, which includes product media, duplication and documentation. Costs of software increased to $63,000 for the three months ended March 31, 2000, from $24,000 for the three months ended March 31, 1999. This represents 1% of software revenues for both the three months ended March 31, 2000 and the three months ended March 31, 1999. The increase in amount was due to royalties owed as a result of higher software revenues and software packaging costs associated with the releases of EIC Version 1.3 and Interaction Dialer. We expect product royalties to continue to increase as we release additional products and integrate additional third-party functions and features into our product offerings.

    Costs of Services.  Costs of services consist primarily of compensation expenses for technical support, education, and professional services personnel and other costs associated with supporting our resellers and end-user customers. Costs of services increased to $1.9 million for the three months ended March 31, 2000, from $1.1 million for the three months ended March 31, 1999. As a percentage of total services revenues, cost of services represented 92% and 165% for the three months ended March 31, 2000 and 1999, respectively. The increase in amount was due to an ongoing effort to maximize our reseller effectiveness and end-user customer satisfaction through the development and expansion of our technical support, education and professional services organizations. We expect that costs of services will increase as we make continued investments to support our end-user customer base and resellers.

    Sales and Marketing.  Sales and marketing expenses consist of trade shows, telemarketing campaigns, public relations and other promotional expenses, compensation expenses, including sales commissions, and travel expenses. Sales and marketing expenses increased to $3.5 million for the three months ended March 31, 2000, from $2.1 million for the three months ended March 31, 1999. The increase reflects the expansion of our worldwide sales and marketing organizations, higher sales compensation expenses associated with higher software revenues, and marketing activities such as trade shows and advertising. We currently plan to continue investing significantly in sales and marketing efforts.

    Research and Development.  Research and development expenses consist primarily of compensation expenses for our developers and third party efforts to develop and enhance our products, including adapting our products for specific non-English languages. Research and development expenses increased to $2.3 million for the three months ended March 31, 2000, from $1.4 million for the three months ended March 31, 1999. Currently, all costs related to research and development of our products are charged to research and development expense as incurred. The dollar increases in research and development expenses were due to the hiring of software developers and third party efforts required to enhance our existing product suite, develop new products, and localize our products for the Japanese, Korean, and Spanish markets. We believe that a significant investment in research and development has been, and will continue to be, critical to market acceptance of our products.

    General and Administrative.  General and administrative expenses consist primarily of compensation for our administrative, financial, and information technology personnel, and a number of non-allocable costs, including legal and other professional service fees. General and administrative expenses increased to $1.1 million for the three months ended March 31, 2000, from $507,000 for the three months ended March 31, 1999. The increase resulted primarily from the addition of personnel to support the growth of our business and a significant increase in legal and other professional service fees. We believe our general and administrative expenses will continue to increase as we expand our administrative infrastructure and incur legal and other professional service fees.

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Interest income (expense), net

    Interest income is generated primarily from invested cash from our initial public offering completed in September 1999. Interest expense is currently generated only by our capital lease lines of credit and previously, during the three months ended March 31, 1999, was also generated by debt owed to our principal stockholder and various commercial lines of credit. Net interest income was $281,000 for the three months ended March 31, 2000, while interest expense was $189,000 for the three months ended March 31, 1999. The change to net interest income from net interest expense was due to proceeds from our initial public offering, which we used to repay all outstanding debt except for our capital lease lines, and invested remaining funds.

Income taxes

    For U.S. corporate income tax purposes, we did not recognize a tax benefit related to U.S. federal or state income taxes during the three months ended March 31, 2000 or March 31, 1999 because of the uncertainty of eventually realizing these benefits. However, we did recognize a tax expense related to our international legal entities for the three months ended March 31, 2000.

Liquidity and Capital Resources

    In September 1999, we sold 3.0 million shares of common stock in our initial public offering, generating $39.0 million in cash, before offering expenses. As of March 31, 2000, we had cash and cash equivalents of $1.3 million, short-term investments of $13.1 million, a working capital balance of $11.0 million, and long-term investments of $6.0 million. Prior to our initial public offering, we funded our operations primarily through equity and debt infusions from our principal stockholder, Dr. Brown, a $5.0 million equity investment by Dialogic Investment Corporation (now owned by Intel Corporation), and borrowings under commercial lines of credit.

    Our operating activities resulted in a net cash outflow of $464,000 for the three months ended March 31, 1999, compared to a net cash outflow of $1.5 million for the three months ended March 31, 2000. The operating cash outflows for the first three months of 1999 were primarily the result of our operating loss, partially offset by a decrease in accounts receivable and an increase in deferred revenue. The operating cash outflows for the first three months of 2000 were primarily the result of our operating loss and an increase in accounts receivable, partially offset by an increase in deferred revenue and the non-cash depreciation amount.

    Our investing activities have consisted primarily of capital expenditures for property and equipment, including $296,000 and $1.4 million of capital expenditures for the three months ended March 31, 1999 and 2000, respectively. These capital expenditures were primarily related to purchases of computer hardware and software for our growing employee headcount, our research and development needs and equipment and furniture related to recent moves and expansions of our foreign operations. In addition, we generated, net of purchases, $2.0 million from our available-for-sale investments for the three months ended March 31, 2000. At March 31, 2000, we did not have any material commitments for future capital expenditures.

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    Prior to the initial public offering, financing activities consisted primarily of the issuance of debt and equity to Dr. Brown, borrowings under commercial lines of credit, and the equity investment by Dialogic Investment Corporation (now owned by Intel Corporation). For the three months ended March 31, 1999 we generated $1.2 million in proceeds from issuances of common stock, which was partially offset by repayments of debt and accrued interest to Dr. Brown. For the three months ended March 31, 2000 we generated $185,000 from stock option exercises, which was partially offset by scheduled repayments of our capital lease lines. At March 31, 2000, we had no amounts outstanding on our commercial lines of credit totaling $5.0 million and were in compliance with all related financial covenants and restrictions. These lines of credit are currently scheduled to expire on June 30, 2000.

    We believe that the net proceeds from our initial public offering, together with existing cash and cash equivalents, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. After that time, we may require additional funds to support our working capital requirements or for other corporate purposes and may seek to raise additional funds through public or private equity or debt financings or from other sources. We cannot assure you that additional financing will be available at all or that, if available, it will be on terms favorable to us or that any additional financing will not dilute your ownership interest in Interactive Intelligence.

Factors Affecting Operating Results

OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT AND, IN ASSESSING OUR PROSPECTS, YOU SHOULD CONSIDER OUR EARLY STAGE OF DEVELOPMENT AND PRESENCE IN A NEW AND RAPIDLY EVOLVING INDUSTRY

    Our limited operating history makes it difficult to forecast our future operating results. We commenced operations in October 1994, but did not begin shipping our flagship product, Enterprise Interaction Center® or EIC, until 1997. In 1999, we began shipping Interaction Recorder™, Interaction Dialer™, and e-FAQ™. Accordingly, you should assess our prospects in light of the risks and difficulties frequently encountered by companies in the early stage of development, particularly companies in new and rapidly evolving industries.

WE HAVE HISTORICALLY INCURRED LOSSES AND WE MAY NOT ACHIEVE PROFITABILITY

    We have not operated profitably to date. We incurred net losses of $7.1 million, $7.4 million, and $5.4 million in 1999, 1998, and 1997, respectively. At March 31, 2000, we had accumulated losses since inception of $23.4 million. We intend to continue to make significant investments in our research and development, marketing, services and sales operations. We anticipate that these expenses could significantly precede any revenues generated by the increased spending. As a result, we are likely to continue to experience losses and negative cash flow from operations in future calendar quarters. If we do become profitable, we may not sustain or increase our profitability.

OUR QUARTERLY OPERATING RESULTS HAVE VARIED SIGNIFICANTLY AND, IF SEVERAL FACTORS AFFECTING OUR BUSINESS CAUSE THEM TO CONTINUE TO DO SO, THE MARKET PRICE OF OUR COMMON STOCK COULD BE AFFECTED

    Our operating results have varied significantly from quarter to quarter and may continue to do so in the future depending on a number of factors affecting us or our industry, including many that are beyond our control. As a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, and you should not rely on them as an indication of our future performance. In addition, our operating results in a future quarter or quarters may fall below expectations of securities analysts or investors and, as a result, the price of our common stock may fluctuate.

    Because we do not know when our potential end-user customers will place orders and finalize contracts, we cannot accurately forecast our revenues and operating results for future quarters. We

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recognize revenues on satisfaction of the requirements of AICPA Statement of Position 97-2, which generally occurs in the same quarter that the order is received. As a result, our quarterly revenues and operating results depend primarily on the size, quantity and timing of orders received for our products during each quarter. If a large number of orders or several large orders do not occur or are deferred or delayed, our revenues in a quarter could be substantially reduced. This risk is heightened by the significant investment and executive level decision making typically involved in our end-user customers' decisions to license our products. Since a large portion of our operating expenses, including rent and salaries, is fixed and difficult to reduce or modify, our business, financial condition or results of operations could be materially adversely affected if revenues do not meet our expectations.

    Because of our early stage of development and limited number of products, changes in pricing policies and the timing of the development, announcement and sale of new or upgraded versions of our products are some of the additional factors that could cause our revenues and operating results to vary significantly from quarter to quarter.

WE HAVE A LENGTHY PRODUCT SALES CYCLE, WHICH HAS CONTRIBUTED, AND MAY CONTINUE TO CONTRIBUTE, TO THE QUARTER-TO-QUARTER VARIABILITY OF OUR REVENUES AND OPERATING RESULTS, WHICH COULD AFFECT THE MARKET PRICE OF OUR COMMON STOCK

    We have generally experienced a lengthy product sales cycle, averaging approximately six to nine months. The lengthy sales cycle is one of the factors that has caused, and may in the future continue to cause, our software revenues and operating results to vary significantly from quarter to quarter, which could affect the market price of our common stock. It also makes it difficult for us to forecast product license revenues. Because of the unique characteristics of our products, our prospective end-user customers' decisions to license our products often require significant investment and executive level decision making. We believe that many companies currently are not aware of the benefits of interaction management software of the type we license or of our products and capabilities. For this reason, we must provide a significant level of education to prospective end-user customers about the use and benefits of our products, which can cause potential end-user customers to take many months to make these decisions. As a result, sales cycles for end-user customer orders vary substantially from customer to customer. Excessive delay in product sales could materially adversely affect our business, financial condition or results of operations.

    The length of the sales cycle for end-user customer orders depends on a number of other factors over which we have little or no control, including:

— an end-user customer's budgetary constraints;

— the timing of an end-user customer's budget cycles;

— concerns by end-user customers about the introduction of new products by us or our competitors; and

— potential downturns in general economic conditions, including reductions in demand for call center services.

In addition, the sales cycle for our products in international markets has been, and is expected to continue to be, longer than the sales cycle in the United States. The average sales cycle for our products may lengthen as we expand internationally.

OUR INABILITY TO MANAGE SUCCESSFULLY OUR GROWTH OR OUR INCREASINGLY COMPLEX THIRD PARTY RELATIONSHIPS COULD ADVERSELY AFFECT US

    If we are not able to manage our growth successfully, we will not grow as planned and our business could be adversely affected. We have grown total revenues to $19.1 million in 1999 from $9.0 million in

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1998 and $1.6 million in 1997, and we intend to continue to grow our business operations significantly in the future. Our existing management, operational, financial and human resources and management information systems and controls may be inadequate to support our future operations. In addition, as the complexity of our product technology and our reseller and other third-party relationships have increased, the management of those relationships and the negotiation of contractual terms sufficient to protect our rights and limit our potential liabilities has become more complicated, and we expect this trend to continue in the future. As a result, our inability to successfully manage these relationships or negotiate sufficient contractual terms could have a material adverse effect on us.

WE FACE COMPETITIVE PRESSURES, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON US

    The market for our software products is highly competitive and, because there are relatively low barriers to entry in the software market, we expect competition to increase significantly in the future. In addition, because our industry is new and evolving and characterized by rapid technological change, it is difficult for us to predict whether, when and by whom new competing technologies or new competitors may be introduced into our markets. Currently, our competition comes from several different market segments, including computer telephony platform developers, computer telephony applications software developers and telecommunications equipment vendors. We cannot assure you that we will be able to compete effectively against current and future competitors. In addition, increased competition or other competitive pressures may result in price reductions, reduced margins or loss of market share, any of which could have a material adverse effect on our business, financial condition or results of operations.

    Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing, customer service and other resources, greater name recognition and a larger installed base of customers than we do. As a result, these competitors may be able to respond to new or emerging technologies and changes in customer requirements faster and more effectively than we can, or to devote greater resources to the development, promotion and sale of products than we can. Current and potential competitors have established, and may in the future establish, cooperative relationships among themselves or with third parties, including mergers or acquisitions, to increase the ability of their products to address the needs of our current or prospective end-user customers. If these competitors were to acquire significant market share, it could have a material adverse effect on our business, financial condition or results of operations.

WE MAY NOT BE ABLE TO GROW OUR BUSINESS AS PLANNED IF WE DO NOT MAINTAIN SUCCESSFUL RELATIONSHIPS WITH OUR RESELLERS OR OEM PARTNERS AND CONTINUE TO RECRUIT AND DEVELOP ADDITIONAL SUCCESSFUL RESELLERS AND OEM PARTNERS

    Our ability to achieve revenue growth in the future will depend in part on our success in maintaining successful relationships with our existing and future resellers and OEM partners and in recruiting and training additional resellers and OEM partners. We rely primarily on resellers to market and support our products, and plan on relying more on our OEM partners in the future. We are still developing and refining our reseller and OEM distribution networks and may be unable to attract additional resellers with both voice and data expertise or appropriate OEM partners that will be able to market our products effectively and that will be qualified to provide timely and cost-effective customer support and service. We generally do not have long-term or exclusive agreements with our resellers or OEM partners, and the loss of specific larger resellers or OEM partners or a significant number of resellers or OEM partners could materially adversely affect our business, financial condition or results of operations.

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OUR MARKETS ARE CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE WHICH MAY CAUSE US TO INCUR SIGNIFICANT DEVELOPMENT COSTS AND PREVENT US FROM ATTRACTING NEW CUSTOMERS

    The market for our products is characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles and changing end-user customer demands. The introduction of products embodying new technologies and the emergence of new industry standards could render existing products obsolete or unmarketable and cause us to incur significant development costs.

A DECLINE IN MARKET ACCEPTANCE FOR MICROSOFT CORPORATION TECHNOLOGIES ON WHICH OUR PRODUCTS RELY COULD HAVE A MATERIAL ADVERSE EFFECT ON US

    EIC and our other products currently run only on Microsoft Windows NT® servers. In addition, our products use other Microsoft Corporation technologies, including Microsoft Exchange Server® and Microsoft SQL Server®. A decline in market acceptance for Microsoft technologies or the increased acceptance of other server technologies could cause us to incur significant development costs and could have a material adverse effect on our ability to market our current products. Although we believe that Microsoft technologies will continue to be widely used by businesses, we cannot assure you that businesses will adopt these technologies as anticipated or will not in the future migrate to other computing technologies that we do not currently support. In addition, our products and technologies must continue to be compatible with new developments in Microsoft technologies.

OUR FUTURE BUSINESS PROSPECTS DEPEND IN PART ON OUR ABILITY TO MAINTAIN AND IMPROVE OUR CURRENT PRODUCTS AND DEVELOP NEW PRODUCTS

    We believe that our future business prospects depend in large part on our ability to maintain and improve our current products and to develop new products on a timely basis. Our products will have to achieve market acceptance, maintain technological competitiveness and meet an expanding range of end-user customer requirements. As a result of the complexities inherent in our products, major new products and product enhancements require long development and testing periods. We may not be successful in developing and marketing, on a timely and cost effective basis, product enhancements or new products that respond to technological change, evolving industry standards or end-user customer requirements. We may also experience difficulties that could delay or prevent the successful development, introduction or marketing of product enhancements, and our new products and product enhancements may not achieve market acceptance. Significant delays in the general availability of new releases of our products or significant problems in the installation or implementation of new releases of our products could have a material adverse effect on our business, financial condition or results of operations.

SLOWER THAN ANTICIPATED GROWTH IN DEMAND FOR INTERACTION MANAGEMENT SOFTWARE OF THE TYPE WE LICENSE COULD MATERIALLY ADVERSELY AFFECT OUR GROWTH PROSPECTS

    If the demand for interaction management software of the type we license does not continue to grow as anticipated within each of our four targeted markets, our ability to grow our business as planned could be materially adversely affected. All of our revenues have been generated from licenses of our EIC software or complementary products, and related support, educational and professional services. We expect these products and services to account for the majority of our revenues for the foreseeable future. Although we believe demand for the functions performed by EIC is high, and growth in demand has accelerated in recent years, particularly among call centers and e-businesses, the market for our products and services is still emerging. Further, our growth plans require us to successfully attract end-user customers in our two other target markets, enterprises and service providers, which have been much slower to adopt software technologies such as our EIC product.

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IF WE ARE UNABLE TO ADAPT OUR SOFTWARE IN A WAY THAT WILL PERMIT US TO SERVE LARGE, SINGLE-SITE END-USER CUSTOMERS, THE MARKETABILITY OF EIC COULD BE ADVERSELY AFFECTED

    EIC currently serves small to medium sized call centers and enterprises with approximately 25 to 300 users at a single location. As these organizations expand to include multiple locations, EIC can be customized to increase the number of telephone lines, extensions and users. However, EIC cannot currently meet the communications needs of organizations with more than 200 users at a single call center location or 300 users at a single enterprise location. We will need to adapt our software to serve larger single-site organizations. Although we are currently developing and testing a solution that would enable our software to double the number of users that EIC can serve at a single location, we cannot assure you that we will be able to successfully introduce this technology into a currently available version of EIC. Further, we may not be able to adapt our software in a timely or cost effective manner in a way that will permit us to serve these customers. This inability could have a material adverse effect on our business, financial condition or results of operations.

DIALOGIC CORPORATION MAY BECOME UNWILLING OR UNABLE TO CONTINUE TO MANUFACTURE AND SUPPLY US WITH VOICE PROCESSING BOARDS, REQUIRING US TO INTRODUCE A SUBSTITUTE SUPPLIER WHICH COULD PROVE DIFFICULT OR COSTLY

    Dialogic Corporation is our only supplier of the voice processing boards that are necessary for the operation of the currently available versions of our products. If Dialogic Corporation becomes unable or unwilling to continue to manufacture and supply these voice processing boards in the volume, price and technical specifications we require, then we would have to adapt our products to a substitute supplier. Although we are currently testing voice processing boards from an alternative supplier, we cannot assure you that we will be able to successfully introduce voice processing boards made by this alternative supplier into the available versions of our products. In addition, introducing a new primary or only supplier of voice processing boards could result in unforeseen additional product development or customization costs and could also introduce hardware and software operating or compatibility problems. These problems could affect product shipments, be costly to correct or damage our reputation in the markets in which we operate, and could have a material adverse affect on our business, financial condition or results of operations.

    In addition, Intel Corporation acquired Dialogic Corporation in the summer of 1999. While Intel Corporation does not currently offer a product that competes with our EIC, Intel Corporation could potentially develop a competitive or superior product or attempt to affect our current relationship with Dialogic Corporation.

    In addition, Dialogic Corporation's CT Media™ offers some of the functionality that EIC provides and consequently could make it easier for competitors or potential competitors to provide products competitive with ours. If CT Media™ were to become an industry standard, our failure to adopt it could disadvantage us in competitive situations.

WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS ADEQUATELY, WHICH COULD ALLOW THIRD PARTIES TO COPY OR OTHERWISE OBTAIN AND USE OUR TECHNOLOGY WITHOUT AUTHORIZATION

    We regard our software products as proprietary. In an effort to protect our proprietary rights, we rely primarily on a combination of copyright, trademark and trade secret laws, as well as licensing and other agreements with consultants, suppliers, strategic partners, resellers and end-user customers, and employee and third-party non-disclosure agreements. These laws and agreements provide only limited protection of our proprietary rights. In addition, we have not signed agreements containing these types of protective provisions in every case, and the contractual provisions that are in place and the protection they provide

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vary and may not provide us with adequate protection in all circumstances. Although we have recently filed provisional patent applications directed to several inventions embodied in our software products, we currently have no patents or registered copyrights. Because our means of protecting our proprietary rights may not be adequate, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization. A third party could also develop similar technology independently. In addition, the laws of some countries in which we sell our products do not protect our software and intellectual property rights to the same extent as the laws of the United States. Unauthorized copying, use or reverse engineering of our products could materially adversely affect our business, results of operations or financial condition.

    We license technology that is embedded in our products from others. If one or more of these licenses terminates or cannot be renewed on satisfactory terms, we would have to modify the affected products to use alternative technology or eliminate the affected product function, either of which could have a material adverse effect on us.

INFRINGEMENT CLAIMS COULD ADVERSELY AFFECT US

    A third party could claim that our technology infringes its proprietary rights. As the number of software products in our target markets increases and the functionality of these products overlap, we believe that software developers may face infringement claims. For example, various patent rights have been asserted against interfaces between PBX hardware and computer network systems. Although we believe that our products do not infringe any of these patents because, among other reasons, our products are designed to replace PBXs and not to create such interfaces, if these patents were interpreted broadly, claims of infringement of these patents could have a material adverse affect on us.

    In June 1999 and September 1999, the Company received letters from a competitor in the call center market claiming that the Company's products utilize technologies pioneered and patented by that competitor. The Company's patent counsel has reviewed all of the patents listed in the letter dated June 1999 from the competitor and is in the process of reviewing the additional patents noted in the letter dated September 1999. Based on the advice of the Company's patent counsel, the Company believes that its products do not infringe any of the patents listed in either letter. The Company intends to continue to discuss its conclusion with the competitor, but cannot assure you that the competitor will concur with the Company's conclusion or that this matter can be resolved amicably, without infringement claims being made by the competitor or without a material adverse effect on the Company's business, financial condition or results of operations.

    Infringement claims, even if without merit, can be time consuming and expensive to defend. A third party asserting infringement claims against us or our customers with respect to our current or future products may require us to enter into costly royalty arrangements or litigation, or otherwise materially adversely affect us.

WE DEPEND ON KEY PERSONNEL AND WILL NEED TO RECRUIT ADDITIONAL SKILLED PERSONNEL, FOR WHICH COMPETITION IS INTENSE, TO CONDUCT AND GROW OUR BUSINESS EFFECTIVELY

    Our success depends in large part on the continued service of our key personnel, particularly Dr. Donald E. Brown, our co-founder, Chief Executive Officer and principal stockholder, and Dr. Michael D. Gagle, our Chief Scientist. The loss of the services of either of these individuals or any key personnel could have a material adverse effect on our business, financial condition or results of operations. Our future success also depends on our ability to attract, train, assimilate and retain additional qualified personnel. Competition for persons with skills in the software industry is intense, particularly for those with relevant technical and/or sales experience. We cannot assure you that we will be able to retain our key employees or that we can attract, train, assimilate or retain other highly qualified personnel in the future.

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WE MAY PURSUE ACQUISITIONS THAT BY THEIR NATURE PRESENT RISKS AND THAT MAY NOT BE SUCCESSFUL

    In the future we may pursue acquisitions to diversify our product offerings and customer base or for other strategic purposes. We have no prior history of making acquisitions and we cannot assure you that any future acquisitions will be successful. The following are some of the risks associated with acquisitions that could have a material adverse effect on our business, financial condition or results of operations:

—

We cannot ensure that any acquired businesses will achieve anticipated revenues, earnings or cash flow.



—

We may be unable to integrate acquired businesses successfully and realize anticipated economic, operational and other benefits in a timely manner, particularly if we acquire a business in a market in which we have limited or no current expertise, or with a corporate culture different from our own. If we are unable to integrate acquired businesses successfully, we could incur substantial costs and delays or other operational, technical or financial problems.



—

Acquisitions could disrupt our ongoing business, distract management, divert resources and make it difficult to maintain our current business standards, controls and procedures.



—

We may finance future acquisitions by issuing common stock for some or all of the purchase price. This could dilute the ownership interests of our stockholders. We may also incur additional debt or be required to recognize amortization expense related to goodwill and other intangible assets purchased in future acquisitions.



—

We would be competing with other firms, many of which have greater financial and other resources, to acquire attractive companies. We believe this competition will increase, making it more difficult to acquire suitable companies on acceptable terms.

OUR INTERNATIONAL OPERATIONS AND EXPANSION INVOLVE FINANCIAL AND OPERATIONAL RISKS

    The expansion of our international operations will require significant management attention and financial resources to establish additional foreign operations, hire additional personnel and recruit additional international resellers. Non-North American revenues accounted for 19%, 16%, and 17% of our total revenues in 1999, 1998, and 1997, respectively. To date, our products have been licensed outside North America primarily in Western Europe, South Africa and Australia. We are also expanding our marketing efforts in Japan, Korea, China and Central and South America. We intend to continue to expand our international operations and enter additional international markets. Revenues from international expansion may be inadequate to cover the expenses of international expansion. In addition to foreign currency fluctuation risks described in Part I, Item 3, other risks inherent in our international business activities, in the countries in which we have licensed our products to date and in those countries in which we intend to expand, generally could include the following:

—

economic and political instability;



—

unexpected changes in foreign regulatory requirements and laws;



—

tariffs and other trade barriers;



—

timing, cost and potential difficulty of adapting our software products to the local language in those foreign countries that do not use the alphabet that English uses, such as Japan, Korea and China;



—

lack of acceptance of our products in foreign countries;



—

longer sales cycles and accounts receivable payment cycles;

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—

potentially adverse tax consequences; and



—

restrictions on the repatriation of funds.

OUR PRODUCTS COULD HAVE DEFECTS FOR WHICH WE ARE POTENTIALLY LIABLE AND WHICH COULD RESULT IN LOSS OF REVENUE, INCREASED COSTS OR LOSS OF OUR CREDIBILITY OR DELAY IN ACCEPTANCE OF OUR PRODUCTS IN THE MARKET

    Our products, including components supplied by others, may contain errors or defects, especially when first introduced or when new versions are released. Despite internal product testing, we have in the past discovered software errors in some of our products after their introduction. Errors in new products or releases could be found after commencement of commercial shipments, and this could result in additional development costs, diversion of technical and other resources from our other development efforts, or the loss of credibility with current or future end-user customers. This could result in a loss of revenue or delay in market acceptance of our products, which could have a material adverse effect on our business, financial condition or results of operations.

    Our license agreements with our end-user customers typically contain provisions designed to limit our exposure to potential product liability and some contract claims. However, not all of these agreements contain these types of provisions and, where present, these provisions vary as to their terms and may not be effective under the laws of some jurisdictions. A product liability, warranty, or other claim brought against us could have a material adverse effect on our business, financial condition or results of operations.

    Because our solution consists of our software running on a Windows NT® server and Dialogic Corporation voice processing boards, it is inherently more prone to performance interruptions for our end-user customers than traditional non-software based products. Performance interruptions at our end-user customer sites, most of which currently do not have back-up systems, could affect demand for our products or give rise to claims against us.

IF OUR END-USER CUSTOMERS DO NOT PERCEIVE OUR PRODUCTS OR THE RELATED SERVICES PROVIDED BY OURSELVES OR OUR RESELLERS TO BE EFFECTIVE OR OF HIGH QUALITY, OUR BRAND AND NAME RECOGNITION WILL SUFFER

    We believe that establishing and maintaining brand and name recognition is critical for attracting, retaining and expanding end-user customers in our target markets. We also believe that the importance of reputation and name recognition will increase as competition in our market increases. Promotion and enhancement of our name will depend on the effectiveness of our marketing and advertising efforts and on our success in providing high-quality products and related services, neither of which can be assured. If our end-user customers do not perceive our product or related services to be effective or of high quality, our brand and name recognition would suffer which could have a material adverse effect on our business, financial condition or results of operations.

THE GROWTH OF OUR BUSINESS MAY BE IMPEDED WITHOUT INCREASED USE OF THE INTERNET

    The use of the Internet as a commercial marketplace is at an early stage of development. Demand and market acceptance for recently introduced products and services available over the Internet are still uncertain. In addition, governmental regulation of the Internet, such as imposing sales and other taxes, access charges, and pricing controls and inhibiting cross-border commerce, may reduce the use of the Internet by businesses for their electronic commerce and customer service needs. To date, governmental regulations have not materially restricted commercial use of the Internet. However, the legal and regulatory environment that pertains to the Internet is uncertain and may change. New regulations could reduce the use of the Internet by our end-user customers and, in turn, their customers. The lack of

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acceptance of the Internet as a forum for conducting business could reduce growth in demand for our products and limit the growth of our revenue.

OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WEB-BASED ELECTRONIC BUSINESS SOLUTIONS ARE NOT WIDELY ADOPTED

    Our products address a new and emerging market for Web-based, interactive electronic business solutions. Therefore, our future success depends upon the widespread adoption of the Web as a primary medium for commerce and business applications. The failure of this market to develop, or a delay in the development of this market, could have a material adverse effect on our business, financial condition or results of operations. The Web has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. The Web infrastructure may not be able to support the demands placed on it by the continued growth upon which our success depends. Moreover, critical issues concerning the commercial use of the Web, such as security, reliability, cost, accessibility and quality of service, remain unresolved and may negatively affect the growth of Web use or the attractiveness of commerce and business communication over the Web. In addition, the Web could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased activity or due to increased government regulation and taxation of Internet commerce.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

    We develop products in the United States and sell licenses in North America, Europe, the Asia/Pacific region, South Africa, and Central and South America. As a result, our financial results could be affected by various factors, including changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets.

    We manage our interest rate risk by maintaining an investment portfolio with debt instruments of high credit quality and relatively short average maturities. We also manage interest rate risk by maintaining sufficient cash and cash equivalent balances such that we are typically able to hold our investments to maturity.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

    In June 1999 and September 1999, the Company received letters from a competitor in the call center market claiming that the Company's products utilize technologies pioneered and patented by that competitor. The Company's patent counsel has reviewed all of the patents listed in the letter dated June 1999 from the competitor and is in the process of reviewing the additional patents noted in the letter dated September 1999. Based on the advice of the Company's patent counsel, the Company believes that its products do not infringe any of the patents listed in either letter. The Company intends to continue to discuss its conclusion with the competitor, but cannot assure you that the competitor will concur with the Company's conclusion or that this matter can be resolved amicably, without infringement claims being made by the competitor or without a material adverse effect on the Company's business, financial condition or results of operations.

    We are also subject to ordinary and routine claims, lawsuits and proceedings incidental to our business, none of which is expected to be material to our results of operations, financial condition or cash flows.

Item 2. Changes in Securities and Use of Proceeds.

Sales of Unregistered Securities During the Quarter

    None.

Use of Proceeds

    The shares of our common stock issued in our initial public offering were registered on a Registration Statement on Form S-1 (Registration No. 333-79509) which was declared effective on September 22, 1999. From the effective date of such Registration Statement to March 31, 2000, the proceeds generated by our initial public offering have been used as described in our report on Form 10-Q for the quarter ended September 30, 1999 and, in addition approximately $5.0 million has been used for working capital.

Item 6. Exhibits and Reports on Form 8-K.

(a)

Exhibits

10.19(ii)	Lease Modification Agreement, dated December 8, 1999, between the Company and College Park Plaza Associates, Inc.
27.1	Financial Data Schedule

(b)

Reports on Form 8-K

    No reports on Form 8-K were filed during the quarter covered by this Form 10-Q.

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SIGNATURES

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

	Interactive Intelligence, Inc. (Registrant)
Date: May 12, 2000	By:	/s/ MICHAEL J. TAVLIN Michael J. Tavlin Chief Financial Officer and Secretary (Principal Financial Officer and Duly Authorized Officer)

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EX-10.19(II)

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Exhibit 10.19(ii)

LEASE MODIFICATION AGREEMENT

    THIS LEASE MODIFICATION AGREEMENT is made this 8th day of December, 1999, by and between College Park Plaza, LLC, a Delaware limited liability company herein called "Lessor" and Interactive Intelligence, Inc., an Indiana corporation herein called "Lessee".

RECITALS

    WHEREAS, by a lease dated September 16, 1998, College Park Plaza Associates, Inc. did lease to Lessee Suite 300 on the 3rd floor in that certain office building known as College Park Plaza, located at 8909 Purdue Road, Indianapolis, Indiana, 46268. Said space consists of approximately 36,797 rentable square feet, is shown in Exhibit B attached to said lease, and is herein called the "Premises"; and

    WHEREAS, Lessor is the successor to the interest of College Park Plaza Associates, Inc. under said lease; and

    WHEREAS, the term of said lease is scheduled to expire on February 29, 2004; and

    WHEREAS, the parties wish to add certain space to the premises and to make certain changes to said lease.

AGREEMENT

    NOW, THEREFORE, in consideration of the mutual covenants contained herein and in said lease, the parties hereto agree as follows:

    1.  Enlargement of Premises:  Effective as of March 1, 2000 the description of the premises contained in said lease is amended so as to add Suite 250 consisting of approximately 8,593 rentable square feet and hereinafter called the "additional space". As of March 1, 2000, , the total space (hereinafter called the "enlarged premises") leased to Lessee under said lease shall consist of a total area of approximately 45,390 rentable square feet. The enlarged premises are generally shown on the floor plan(s) attached hereto as Exhibit "B", which exhibit is made a part hereof by this reference. As of March 1, 2000, that certain Exhibit "B" attached to said lease is hereby superseded by Exhibit "B" attached hereto and of no further force and effect.

    2.  Rent:  As of March 1, 2000, the monthly base rent payable under Section 1.02 (E) of said lease shall be increased by $7,071.33, to a new total of $67,633.06 per month. The monthly base rent shall be further increased as follows: as of June 1, 2000, the monthly base rent shall be increased by $7,071.32, to a new total of $74,704.38 per month. The base rent, as increased herein, shall continue to be payable in advance by the first of each month and subject to adjustment pursuant to Article 4 of said lease, as amended in Paragraph 3 of this Agreement. If the additional space is added to the premises on a date other than the first or last day of the month, the resulting increase in rent shall be prorated for such partial month.

    3.  Base Years and Percentages for Rental Adjustment:  With respect to the rental adjustment pursuant to Section 4.03 of said lease, the operating expense stop for the additional space shall be $5.25 per rentable square foot and the percentage allocable to the additional space representing Lessee's share of the increase in Lessor's operating costs and property taxes (both of which are defined in Article 4 of said lease) shall be 4.79%. The operating expense stop and percentage with respect to the existing space shall continue to be $5.25 and 20.44%, respectively.

    4.  Lessee shall furnish to Lessor a confirmed, irrevocable letter of credit ("Letter of Credit") in effect for eleven (11) months designating Lessor as the sole beneficiary in the initial amount of One Hundred Fifty-five Thousand Dollars ($155,000.00) which Letter of Credit shall be issued by a financial

1

institution approved by Lessor (the "Issuer"). The Letter of Credit shall be reduced monthly by amortizing the Initial Amount at Twelve Percent (12.00%) per annum over the eleven (11) months. The Letter of Credit shall also provide that the Issuer shall notify Lessor at least sixty (60) days prior to the early termination of such Letter of Credit if the Issuer has determined that the Letter of Credit shall be terminated before the end of the term and, if it is to be terminated, then the Letter of Credit may be drawn upon by the Lessor.

    5.  Authority:  If Lessee is a corporation, each individual executing this Agreement on behalf of such corporation represents and warrants that Lessee is a duly authorized and existing corporation, that such corporation has (and is qualified to do) business in the State of Indiana, that such corporation has full right and authority to enter into this Agreement, and that each person signing this Agreement on behalf of such corporation is authorized to do so.

    If Lessee is a division or subsidiary of a corporation:

    (a) Each of the persons executing this Agreement on behalf of Lessee does hereby covenant and warrant that the parent corporation is a duly authorized and existing corporation, that Lessee or the parent corporation has (and is qualified to do) business in the State of Indiana, that Lessee has full right and authority to enter into this Agreement on behalf of the parent corporation as well as on its own behalf, and that each person signing this Agreement on behalf of Lessee was authorized to do so; and

    (b) Lessee shall, within 30 days after request by Lessor, deliver to Lessor a certified copy of a resolution of the Board of Directors of the parent corporation authorizing or ratifying the execution of this Agreement.

    If Lessee is a partnership, each individual executing this Agreement on behalf of said partnership represents and warrants that he or she is duly authorized to sign and deliver this Agreement on behalf of said partnership and that this Agreement is binding upon said partnership in accordance with its terms.

    If this Agreement is signed by only one person on behalf of Lessee, that person represents and warrants to Lessor that his or her signature alone is sufficient to bind Lessee to the provisions of this Agreement.

    6.  Miscellaneous:

    a.  The provisions of this Lease Modification Agreement shall be fully applicable to the enlarged premises and shall remain in full force and effect for the duration of the term of said lease.

    b.  Except as otherwise set forth herein, all of the terms and conditions of said lease shall remain in full force and effect, and shall be fully applicable to the additional space as well as the existing space, throughout the duration of the term of said lease. Said lease, as amended herein, constitutes the entire agreement between the parties hereto, and no further modification of said lease shall be binding unless evidenced by an agreement in writing signed by Lessor and Lessee.

    c.  The captions and paragraph numbers appearing in this Agreement are inserted only as a matter of convenience and in no way define, limit, construe, affect or describe the scope or intent of the provisions in this Agreement.

    7.  This Lease Modification Agreement will not be in effect until duly signed by Lessor and Lessee.

    8.  Exhibit C Leasehold Improvements to Built-Out Space is attached hereto and made a part of this Lease Modification Agreement.

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    IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease Modification Agreement as of the day and year first above written.

LESSOR	LESSEE
College Park Plaza, LLC	Interactive Intelligence, Inc.
By /s/ DAVID K HUBBS	By /s/ JOHN R. GIBBS
Printed David K. Hubbs	Printed John R. Gibbs
Its President	Its Executive Vice President
By /s/ PATRICK M. SCRUGGS	By
Printed Patrick M. Scruggs	Printed
Its Vice President	Its

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EXHIBIT B
College Park Plaza
Leased Premises

Diagram

Diagram

4

EXHIBIT C

LEASEHOLD IMPROVEMENTS TO BUILT-OUT SPACE

    In addition to the mutual covenants contained in the Lease Modification Agreement of which this Exhibit is a part, Lessor and Lessee further mutually agree as follows:

1.

PLANS AND SPECIFICATIONS FOR THE PREMISES

(a)

Lessor agrees to cooperate with Lessee's Space Planner (DesignPlan, Inc.), who shall prepare (at Lessor's expense) Space Plans and Specifications for the Premises (hereinafter sometimes called "Space Plans"). Such Space Plans may include (to the extent required by Lessor) architectural, mechanical, and electrical engineering drawings for the Leasehold Improvements, which drawings shall indicate some or all of the following: locations of doors, partitioning, reflected ceiling, electrical fixtures, outlets and switches, telephone outlets, plumbing fixtures, extraordinary floor loads, and other special requirements. Lessee shall approve any such Space Plans in writing, on or before December 17, 1999 (hereinafter called the "Space Plan Approval Date").

(b)

Lessee shall select all interior finish items (if they are not shown on the space plan), and Lessee shall notify Lessor of all such selections in writing within five days following the Space Plan Approval Date.

(c)

All plans and specifications referred to in this Paragraph are subject to Lessor's prior written approval, which approval shall not be unreasonably withheld.

(d)

All plans and specifications prepared in connection with any Leasehold Improvements or Additional Leasehold Improvements shall be in full compliance with all applicable building codes and with all insurance regulations for a fire resistive Class A building. All plans and specifications shall be in a form satisfactory for filing with appropriate governmental authorities for permits and licenses required for construction.

(e)

Whether (and the extent to which) any of Lessee's requirements constitute Additional Leasehold Improvements (as opposed to Leasehold Improvements) shall be determined by Lessor, whose determination shall be binding.

2.

LEASEHOLD IMPROVEMENTS AT LESSOR'S COST

Lessor will provide Leasehold Improvements to be mutually agreed upon by Lessor and Lessee at Lessor's cost not to exceed $156,393.00 ($18.20 per rentable square foot).

Such agreement shall be reached by December 17, 1999 or the possession date may be delayed at no penalty to Lessor. If the costs of the Leasehold Improvements exceed $156,393.00, Lessee shall pay the difference to Lessor ("Excess Improvement Costs"). If the costs of the Leasehold Improvements do not exceed $156,393.00, Lessee may apply the remaining balance to Suite 300 Leasehold Improvements, incurred within six (6) months after Lessee takes possession of the Additional Space. Lessor shall reimburse such cost after Lessee provides paid receipts and lien waivers for Leasehold Improvements to Suite 300.

3.

LEASEHOLD IMPROVEMENTS, AT LESSEE'S COST

    After Lessee's Space Plans for any Leasehold Improvements have been approved in writing by Lessor, Lessor shall cause Lessee's Leasehold Improvements to be installed by Lessor's contractor in accordance with the schedule in this Paragraph. Prior to commencing such Leasehold Improvements, Lessor shall submit to Lessee an itemized statement of the cost of such work if the cost of such work exceeds $156,393.00, which cost shall include space planning expenses (Lessee shall cause its space planner to submit its cost for space plans no later than December 17, 1999) and the contractor's fee. Lessor shall endeavor to provide Lessee with such itemized statement within ten (10) business days following Lessor's approval of Lessee's proposed Space Plans. If Lessee approves such statement, Lessee shall sign the

5

statement and return same to Lessor (along with the dollar amount of the total Excess Improvement Costs indicated in the statement) within three days after Lessee's receipt of such statement. Promptly following Lessor's receipt of such payment and signed statement from Lessee, Lessor shall sign a copy of the statement and return same to Lessee, and Lessor shall direct its contractor to proceed with such Leasehold Improvements and any Leasehold Improvements affected thereby. Any difference between Lessee's pre-payment for the Excess Improvement Costs (based on the aforementioned itemized statement) and the actual final cost of same shall be reconciled between Lessor and Lessee, promptly following completion of such work and occupancy of the Premises by Lessee. If Lessee fails to sign such itemized statement and return same to Lessor (along with the aforementioned pre-payment) within three days after Lessee's receipt of such statement from Lessor, such failure shall be deemed a disapproval of such statement, Lessor shall no longer be bound by any of the cost figures for such Leasehold Improvements indicated in such statement, and Lessor's contractor shall not proceed with such Leasehold Improvements or with any Leasehold Improvements affected thereby. In addition, Lessee shall be responsible for the resulting delay and increased cost, if any, in completing any Leasehold Improvements affected thereby.

4.

CHANGES TO APPROVED SPACE PLANS

    If Lessee shall request any change(s), addition(s) or deletion(s), hereinafter collectively called "change(s)", to approved Space Plans for the Leasehold Improvements, Lessor shall promptly (following written request by Lessee) give Lessee a written estimate of (i) the maximum cost of engineering and design services to prepare revised Space Plans in accordance with such request and (ii) the time delay expected because of such request. Once Lessee has approved such estimate in writing (or has indicated in writing that it is willing to pay the full amount of such costs for revised Space Plans and will accept any time delay caused by such change(s), without an estimate of the amount of such costs or delay), Lessor shall have revised Space Plans prepared (if needed), and Lessee shall reimburse Lessor for the cost thereof, promptly following Lessee's receipt of an invoice or notice from Lessor indicating the actual final cost of the revised Space Plans. Lessor shall endeavor to provide Lessee with an itemized statement indicating the cost (in addition to the cost of revising the Space Plans) which will be chargeable to Lessee by reason of such change(s). If Lessee approves such statement, Lessee shall sign the statement and return same to Lessor (along with the dollar amount of the total cost of the change(s) indicated in the aforementioned statement and the reimbursement for the cost of the revised Space Plans, if such reimbursement has not already been made) within three days after Lessee's receipt of such statement, if the cost of the changes plus the original cost of the Leasehold Improvements exceeds $156,393.00. Promptly following Lessor's receipt of such payment and signed statement from Lessee, Lessor shall sign a copy of the statement and return same to Lessee, and Lessor shall direct its contractor to proceed with such change(s) and any Leasehold Improvements affected thereby. Any difference between Lessee's pre-payment (based on the aforementioned statement) for the change(s) and the actual final cost of such change(s) shall be reconciled between Lessor and Lessee, promptly following completion of such change(s) and occupancy of the Premises by Lessee. If Lessee fails to sign such statement and return same to Lessor, along with the aforementioned payment(s), within three (3) days after Lessee's receipt of such statement from Lessor, then (i) such failure shall be deemed a disapproval of such statement, (ii) Lessor shall no longer be bound by any of the cost figures for such change(s) indicated in such statement, (iii) Lessor's contractor shall not proceed with such change(s) or with any Leasehold Improvements affected thereby, and (iv) Lessee shall promptly reimburse Lessor for the cost of the revised Space Plans for such change(s), if Lessee has not already done so. In addition, Lessee shall be responsible for the resulting delay and increased cost, if any, in completing any Leasehold Improvements affected thereby.

5.

COMPLETION OF WORK AND COMMENCEMENT OF LEASE TERM

    The Commencement Date of the Lease term shall not be delayed by any of the following:

(i)

Lessee's failure to approve or furnish Space Plans on or before the Space Plan Approval Date; or

6

(ii)

Lessee's request for Additional Leasehold Improvements and/or for materials, finishes, or installations other than those set forth in Paragraph 2 hereof; or



(iii)

Lessee's changes in Space Plans after approval thereof by Lessee or submission thereof to Lessor, even if the initial Space Plans were approved or submitted on or before the Space Plan Approval Date; or



(iv)

A delay in performance of Leasehold Improvements as a result of Lessee's failure to timely approve and pay all costs for Excess Improvement Costs or changes to the Leasehold Improvements.

Accordingly, Lessor may tender the Premises to Lessee on or after the Commencement Date (set forth in Paragraph 1 of the Lease Modification Agreement) not less than seven (7) days after Lessee is served with a written notice stating that if it had not been for delay(s) which this Paragraph 5 states shall not postpone the Commencement Date of the Lease term, the Premises would be or would have been ready for occupancy on the date specified in such notice, which date shall be prior to or within said seven (7) day period. In such event, Lessor's obligations under this Exhibit shall be deemed completed, for the purpose of determining the Commencement Date and for any other purpose, as of the date on which the Premises are tendered to Lessee.

6.

LEASEHOLD IMPROVEMENT COST ALLOWANCE

    If Lessee's requirements with respect to any of the Leasehold Improvements is less than the stated allowance, the cost savings which accrue therefrom may be applied to offset in whole or in part Lessee's cost of any other Leasehold Improvement(s) described in Paragraph 2 hereof which exceeds the stated allowance. However, in no event shall Lessee be entitled to a cash payment or credit against rent on account of allowances for Leasehold Improvements described in Paragraph 2 hereof which exceed Lessee's requirements.

    Notwithstanding any allowances set forth in Paragraph 2 hereof, Lessor's total contribution for Leasehold Improvements shall not exceed $156,393.00. All costs in excess of such amount are to be paid by Lessee, pursuant to the provisions of this Exhibit "C".

Lessor's Initials	/s/ DH
	/s/ PS
Lessee's Initials	/s/ JG

7

QuickLinks

LEASE MODIFICATION AGREEMENT
RECITALS
AGREEMENT

EX-27

 


<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2000 AND THE CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.

<MULTIPLIER> 1,000

                             
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-2000
<PERIOD-START>                             JAN-01-2000
<PERIOD-END>                               MAR-31-2000
<CASH>                                           1,340
<SECURITIES>                                    13,050
<RECEIVABLES>                                    5,284
<ALLOWANCES>                                       385
<INVENTORY>                                          0
<CURRENT-ASSETS>                                19,845
<PP&E>                                           8,633
<DEPRECIATION>                                   3,141
<TOTAL-ASSETS>                                  31,813
<CURRENT-LIABILITIES>                            8,881
<BONDS>                                            212
<PREFERRED-MANDATORY>                                0
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<COMMON>                                           140
<OTHER-SE>                                      22,580
<TOTAL-LIABILITY-AND-EQUITY>                    31,813
<SALES>                                          4,946
<TOTAL-REVENUES>                                 7,040
<CGS>                                            1,989
<TOTAL-COSTS>                                    6,936
<OTHER-EXPENSES>                                     0
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<INTEREST-EXPENSE>                                  23
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