10-K405

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2000

or

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

For the transition period from                to                

Commission File Number 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
(IRS Employer Identification No.)

8909 Purdue Road
Suite 300
Indianapolis, Indiana 46268
(Address of principal executive offices)

(317) 872-3000
(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.01 par value
(Title of class)

    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 / /

    Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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. Yes /x/

    As of March 15, 2001 there were 14,983,588 shares outstanding of the registrant's common stock, $0.01 par value. As of that date, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $85,986,890, assuming solely for the purposes of this calculation that all Directors and executive officers of the registrant are "affiliates".

DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the Registrant's Proxy Statement for its 2001 Annual Meeting of Shareholders are incorporated by reference in Part III hereof.

TABLE OF CONTENTS

		PAGE NO.
PART I.
Item 1.	Business	3
Item 2.	Properties	17
Item 3.	Legal Proceedings	17
Item 4.	Submission of Matters to a Vote of Security Holders	17
	Executive Officers of the Registrant	18
PART II.
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	20
Item 6.	Selected Financial Data	21
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7a.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 8.	Financial Statements and Supplementary Data	35
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	50
PART III.
Item 10.	Directors and Officers of the Registrant	50
Item 11.	Executive Compensation	50
Item 12.	Security Ownership of Certain Beneficial Owners and Management	51
Item 13.	Certain Relationships and Related Transactions	51
PART IV
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	51
SIGNATURES		54

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PART I.

Item 1. Business.

    We are a leading provider of software that manages a broad range of customer interactions including traditional telephone calls and faxes as well as Internet-based interactions such as e-mail, text chat, Web callback requests and voice over Net calls. We sell our products into three large and growing markets—call (or contact) centers, enterprises and service providers. Using our software, our end-user customers are able to replace a variety of traditional devices such as private branch exchange devices or PBXs, interactive voice response systems or IVRs, automatic call distributors or ACDs, voice mail systems, fax servers, call recorders and computer telephony integration or CTI middleware. In addition, we have announced plans for a new product that will allow organizations to quickly develop applications for wireless devices such as personal digital assistants and digital cell phones. We began licensing our products in 1997 and have grown our revenues from $1.6 million in 1997 to $9.0 million in 1998, $19.1 million in 1999 and $38.6 million in 2000.

    We believe that our products provide our end-user customers with integrated, software-based interaction management solutions that have several advantages over traditional communications devices, including:

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greater ability to utilize the Internet for e-commerce and customer service;



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broader range of functions than can typically be found in traditional systems;



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reduced need to integrate disparate technologies and the elimination of costly CTI middleware;



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open architecture and better compatibility with leading e-mail systems, Web servers and customer relationship management, or CRM, applications;



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lower total cost of ownership; and



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greater ability to customize communications to meet specific needs.

    We have licensed our products to over 700 end-user customers, including Abbott Laboratories, Aether Systems, Inc., Ameritech Corporation, Digital River, Inc., E.piphany, Inc., Kemper Insurance Companies, The Leo Burnett Advertising Agency, Marathon Ashland Petroleum, LLC, Minnesota Life Insurance Company, Net2Phone, Inc., and Toshiba America Consumer Products. We market our software products and services through an extensive distribution network consisting of over 140 independent resellers located primarily in North America, Europe and the Asia/Pacific region. Our resellers range from relatively small, local organizations to large regional and international firms, such as Bell South Communication Systems, Inc., Deutsche Telekom, NEC, KPN Telecom B.V. and Unisys Corporation. We also provide our end-user customers and resellers with a variety of related services.

    We are an Indiana corporation formed in 1994, and we maintain our executive offices in Indianapolis, Indiana.

Industry Overview

    The continued growth of Internet-based commerce is causing many organizations to investigate interaction management technology as a means of gaining a competitive advantage, increasing efficiency and providing better service. As a result, the communications industry is experiencing significantly new

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interaction management demands from these organizations. We believe we are well positioned to take advantage of the following major trends affecting interaction management within many industries:

Growth of Internet-based interactions

    In addition to more traditional communications media such as telephone, fax and voice mail, the growth of the Internet has expanded the number and complexity of communications media to include e-mail, Internet chat sessions, Web callback requests and voice over Net calls. Enterprises are increasingly utilizing the Internet as an important channel for sales, distribution and customer service. Because of their reliance on the Internet, these enterprises generally require more than simple dial tone and voice mail from their communications infrastructure. These organizations are rapidly deploying e-mail management and Web collaboration products in order to provide advanced Web-based customer service. Additionally, most enterprises currently interact through these media using separate devices, resulting in inefficient communication. These circumstances are forcing organizations to re-evaluatqe their systems in order to address the requirements of a more complex communications environment.

Convergence of Voice and Data

    Voice traffic is increasingly moving from traditional, circuit-switched networks and devices to networks and devices based on the popular TCP/IP protocol. This transition is referred to as the voice over IP, or VoIP, movement. Traditional PBXs are being replaced by so-called "softswitches" from vendors such as Cisco Systems, Inc., Nortel Networks Corporation, Tundo Corporation, and many others. This transition is causing many organizations to look for application platforms that can work effectively with these new IP-based systems in order to provide a wide range of communication services.

Acceptance of customer relationship management (CRM)

    Businesses are increasingly purchasing and deploying software systems for customer relationship management, or CRM. These systems allow businesses to better track and understand their customers. CRM systems must often be integrated with communications systems in order to effectively monitor customer interactions and provide real-time information to employees. With more customer interactions arriving by means of the Internet, existing products that integrate CRM with traditional communications systems are no longer sufficient. A broad new class of interaction management software is emerging to consolidate the processing of all customer interactions regardless of media type to provide integration with leading CRM products.

Growth of call (contact) centers

    In an increasingly competitive environment, businesses are attempting to differentiate themselves with their customer service and support. They are also trying to improve the level of service they offer over the Internet. To consolidate customer contact points and focus on customer service, organizations frequently implement formal call (contact) centers, which are designed to meet voice-based and Internet-based customer interactions. Putting a call (contact) center into place often requires organizations to purchase several different communications devices to simply handle voice-based interactions, such as a private branch exchange or PBX, an interactive voice response system or IVR, an automatic call distributor or ACD, a predictive dialer and a call logger, and then spend time and money attempting to integrate these disparate devices.

Increasing need to integrate telecommunications and information systems

    Historically, telecommunications systems and information systems have been separate and distinct. To more effectively and efficiently interact, both internally and externally, we believe that enterprises need to seamlessly access and utilize these two systems. Products, often referred to as middleware, have been

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designed to integrate various types of telecommunications devices with information technology. For example, an application called screen pop makes a window pop up on an agent's monitor with information about a call at about the same time that the agent's telephone or headset begins to ring. This allows the agent to see all the information necessary to assist the customer. With middleware, even simple applications, such as screen pop, are often difficult and expensive to implement.

    We believe that the traditional approach of using middleware software products to integrate communications and information systems suffers from a number of fundamental problems. Implementing this type of solution is both expensive and time consuming, and the total cost of ownership over time is high due to the multiple points of configuration, administration and maintenance. Modification and management of a traditional integrated infrastructure are also difficult since each device is configured independently by different vendors. For instance, hiring a new agent may require configuring a new extension in the PBX, defining a new mail box in the voice mail system and creating a new agent entry in the ACD. This process is expensive, time consuming, and may even result in information being lost or inconsistently entered into each device. We also believe that this traditional multi-device approach will make it more difficult for enterprises to interact over the Internet and will require additional devices and more integration, further complicating the current situation.

Entrance of new service providers

    For years, the regional Bell operating companies and other telephone companies have provided voice mail, caller ID and other communications services to consumers and small businesses. The Telecommunications Act of 1996 deregulated many aspects of the communications market and resulted in a rapid increase in the number and types of organizations seeking to provide communications services. These new service provider entrants include local exchange carriers, cable companies, Internet service providers and wireless companies.

    Generally, these organizations provide some sort of communications connection into homes and businesses that they charge for on a regular basis. As the price for connectivity declines rapidly, we believe that these organizations may want to differentiate their offerings based on the enhanced services they can provide. Examples of these services include unified messaging, fax, interactive voice response, speech recognition, paging, conferencing, phone numbers that follow the recipient of the call, and appointment scheduling. We also expect service providers to implement Web-based services such as Web callback, Internet chat sessions and voice over Net.

    Traditionally, providing a wide range of voice and data interaction services required service providers to interface different proprietary systems and incur significant integration fees. We believe this creates the need for a new platform for service providers that is flexible enough to deliver a variety of enhanced services under a common administration and design architecture, while at the same time lowering both the cost of entry and ongoing operation.

    In our opinion, the traditional multi-device approach to communications and interaction by organizations is inadequate to address the needs created by these trends. We believe that the shortcomings of this approach create a significant opportunity for an interaction management solution based on standard hardware and software technology, such as a Windows® 2000 server, that enables organizations to efficiently and effectively interact with all of their constituents. We believe that we have developed such a solution.

Interactive Intelligence Solution

    The Interactive Intelligence solution for call (contact) centers, enterprises and service providers is an open software platform that, when installed on a server running Windows NT® or Windows® 2000, provides a comprehensive set of communications and interaction management services and requires little or no integration. Our Interaction Center Platform™ products are capable of processing thousands of

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interactions per hour, including telephone calls, e-mails, faxes, voice mail messages, Internet chat sessions, Web call-back requests and voice over Net calls.

    We believe that the differentiating characteristics of the Interactive Intelligence solution enable our end-user customers to more effectively communicate and interact with their constituencies at a lower total cost of ownership than through the use of traditional computer telephony integration products. The strategic advantages of our single system approach are:

    Greater ability to utilize the Internet.  Our products allow organizations to offer Internet-based interaction options to their customers. These interaction options include e-mail, text chat, Web callback requests, and voice over Net calls. Such options are typically not available from traditional communications systems yet are critical for effective e-commerce and Web-based customer service.

    Broader range of functions.  Unlike traditional systems that require end-user customers to purchase separate products to attain broader functionality, our products offer a broad, integrated suite of communications features, including telephony, inbound and outbound fax, e-mail processing, automatic call distribution, interactive voice response, conferencing, call recording, call monitoring and text chat processing. Our products also include facilities that allow supervisors to obtain numerous reports and to view communications statistics in real time. We believe that, collectively, these capabilities allow our customers to improve customer service and increase internal efficiency.

    Reduced need to integrate disparate technologies.  Traditional communications systems generally require significant integration efforts to get their different components to work together effectively. This integration often involves the purchase of expensive hardware, middleware and services. Our products pre-assemble all of the necessary components into one software solution, allowing end-user customers to concentrate their efforts on improving business operations. Additionally, our products can be used to supplement the capabilities of a PBX to provide Web-based interaction management, unified messaging, IVR or departmental call (contact) center services.

    Open architecture and better compatibility with leading technologies.  Traditional telecommunications devices are based on proprietary, closed architecture, which often limits the end-user customer's ability to change or customize the products. Frequently, even simple changes such as adding a new employee or changing an employee's location require intervention by the vendor. Our products are built around industry standard hardware and software components such as Intel microprocessors and the Microsoft Windows NT® and Windows® 2000 operating systems. Our open architecture allows end-user customers to configure our system to meet their customized communications needs and to make hardware or software modifications as necessary. For example, if one of our end-user customers needs more space for voice mail recordings, it can simply purchase a larger disk drive on the open market. Our products also interoperate easily with popular information technology products, including:

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e-mail servers, including Microsoft® Exchange Server, Lotus® Notes, Novell® GroupWise® and iPlanet™ Messaging Server;



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database systems, including those from Oracle Corporation, Sybase, Inc., Microsoft Corporation and IBM Corporation;



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mainframe systems, including those that support 3270 and 5250 terminal emulation;



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Web servers, including those from Microsoft Corporation, Netscape Communications Corporation and Apache Digital Corporation;



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network management systems, including Hewlett-Packard Company's HP OpenView, Tivoli System Inc.'s NetView® and Computer Associates International, Inc.'s Unicenter TNG;

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customer relationship management systems, including those from Pivotal Corporation, The Vantive Corporation (acquired by Peoplesoft, Inc.), Clarify, Inc. (acquired by Nortel Networks Corporation), Remedy Corporation, Octane Software, Inc. (acquired by E.piphany, Inc.), Onyx Software Corporation, Siebel Systems, Inc. and Silknet Software, Inc. (acquired by Kana Communications, Inc.); and



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enterprise directories, including Microsoft® Active Directory™, Novell® NDS® e-Directory™ and iPlanet™ Directory Server.

    Lower total cost of ownership.  We believe that our software solutions result in a lower total cost of ownership in comparison to traditional communication systems with similar functionality, which typically consist of multiple, disparate add-on components. For example, our products' capabilities reside in a single Windows NT® or Windows® 2000 server with a software interface designed for ease of use. As a result, all configuration and maintenance of our products are confined to a single system. This results in a lower total cost of ownership due to the reduced time and expense typically required to maintain a centralized software-based interaction management system.

    Greater ability to customize communications to meet specific needs.  While our products can be deployed quickly with minimal configuration, organizations can also customize many aspects of their communications processing using our graphical application generator, Interaction Designer™. This means that our products can serve as a platform upon which organizations can build highly tailored communications processes for their customers, employees or subscribers. It also means that end-user customers need to learn only a single tool in order to customize their dial plans, call distribution rules, interactive voice response menus, fax applications, Web services, voice mail systems and other communications applications.

Growth Strategy

    Our primary business objective is to become the leading provider of interaction management software solutions that allow call (contact) centers, enterprises and service providers to automate virtually every aspect of their business communications. Our strategy for achieving this objective incorporates the following key elements:

    Continue to expand our leading technology position.  We have significant technical expertise in Internet, call (contact) center, telecommunications and software technologies. We intend to use our expertise to add new features to our products to increase their marketability in our three target markets. We are improving the ability of our current and future products to handle the needs of larger organizations. We are currently deploying a new version of our products that works effectively with the new H.100 standard. This new voice bus offers four times the capacity of the SC voice bus that we have used in the past. We believe this new version can meet the needs of call (contact) centers with up to 500 agents per site and enterprises with up to 1,000 employees per site.

    Operate across a range of hardware platforms including softswitches and legacy PBXs.  We have designed our products to work well on several different hardware platforms, including voice processing boards from Dialogic or Aculab plc as well as small office PBXs from Vertical Networks, Inc. In addition, we are currently working with Cisco Systems, Inc. to enable our software to work with the Cisco AVVID voice over IP platform. We plan to work with vendors of legacy PBXs to enable our software to work with their circuit-switched devices as well. We believe that the ability of our products to run across a variety of voice switching platforms will provide investment protection to our end-user customers and increase our market.

    Broaden our current product offerings.  We plan to broaden our current product offerings by developing additional features and capabilities for our target markets. For the call (contact) center market, we are now testing a new version of our I3 Customer Interaction Center™, or CIC, that includes more sophisticated routing of e-mail messages, Web call-back requests, and other Internet-based interactions. For

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enterprises, we are now testing a new version of our Enterprise Interaction Center®, or EIC, that includes new features including one-number "follow-me", pager notification of new messages, and many others. For the service provider market, we are now testing a new version of our Service Interaction Center™, or SIC, that allows subscribers to access their personal calendars, easily and quickly set up conference calls and otherwise better manage their personal communications.

    Develop new products.  We have announced and are developing a new product called Mobilité™. Mobilité™ is a wireless application server that can be used by all types of organizations to quickly create custom applications that run on mobile devices with wireless data connections such as the Palm™ VII from Palm Corporation, the BlackBerry™ from Research In Motion Limited, and devices based on the Pocket PC platform from Microsoft Corporation. Mobilité™ is based on the same software platform as CIC, EIC, and SIC, but adds extensions necessary to communicate with and control wireless devices.

    Further expand our global distribution channel.  We plan to further expand our existing distribution channel, which currently consists of over 140 resellers in more than 30 countries. Our expansion efforts include a significant focus on broadening our distribution channel in North America and we also plan to expand our distribution channel in Europe, the Asia/Pacific region, and Latin America. Currently, we have over 100 resellers and a 50-person field sales force that manages, supports and develops our distribution channel in North America and more than 30 resellers and a 15-person field sales force in Europe and the Asia/Pacific region. We have also signed a reseller in each of India, South Africa, Turkey, and Central and South America. We intend to continue to broaden our geographic and market presence through our reseller coverage to enhance our market share position.

    Develop our strategic business relationships.  We have strategic relationships with both emerging and leading technology companies, including Aculab plc, Cisco Systems, Inc., Dialogic (a division of Intel Corporation), Microsoft Corporation, Nuance Communications, Inc., Talisma Corporation and Tundo Corporation. We are one of 11 providers in the Cisco AVVID Open Systems Program. As evidence of our commitment to growth, Microsoft Corporation recognized us in 1999 as the ninth fastest growing independent software vendor using Microsoft Windows®. In addition to these technical and marketing relationships, we have entered into strategic OEM agreements with companies such as Cisco Systems, Inc., Pivotal Corporation and Vertical Networks, Inc. Under the terms of these agreements, our OEM partners incorporate portions of our technology within their products. We are currently pursuing OEM relationships with network equipment vendors, developers of customer relationship management (CRM) software, and other high tech companies. We also intend to evaluate strategic acquisitions and investment opportunities for products and technologies to complement or extend our existing products, offer access to additional distribution channels or increase our customer base.

Products

    We currently market and license:

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I3 Customer Interaction Center™ or CIC, our comprehensive interaction management solution for call (contact) centers;



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Enterprise Interaction Center® or EIC, our comprehensive interaction management solution for enterprises;



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Service Interaction Center™ or SIC, our interaction management platform for service providers;



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Interaction Recorder®, a complementary product that allows the user to easily log, record and retrieve any call;



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Interaction Dialer™, a predictive dialing product that is complementary to CIC;



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Interaction Director™, a pre and post-call routing product for multi-site call centers; and

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e-FAQ™, an e-mail response management solution.

I3 Customer Interaction Center™ or CIC

    CIC turns a Windows NT® or Windows® 2000 server containing the appropriate voice processing boards into a comprehensive interaction management solution. Customers connect their telephone trunk lines, handsets and headsets to the CIC server and gain an integrated communications system, capable of meeting an organization's specific interaction processing requirements. We allow our end-user customers to license all or some specific combinations of the features of CIC. CIC provides organizations with a broad array of communications and interaction processing capabilities, including:

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Telephone system—allows end-users to place and receive telephone calls just like a private branch exchange or PBX. Analog trunks and digital trunks, such as T1/E1, ISDN and PRI, from the telephone company can be connected to an CIC server as well as the twisted pair connections to desktop phones. In addition to basic hold and transfer operations, CIC provides text-to-speech, speech recognition and support for conference calls with up to 32 participants.



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Web services—allows organizations to queue and distribute incoming Internet text chats as they do with telephone calls. For example, while browsing a company's Web site, a potential customer can click a button and use text chat to pose a question to a call (contact) center agent. CIC also includes tools that allow organizations to process incoming e-mail messages, Web callback requests and voice over Net calls.



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Unified messaging—stores voice mail messages and faxes in electronic mailboxes, from which end-users can retrieve them by phone, desktop computer or remotely over the Internet.



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Fax server—provides inbound and outbound fax services for the entire organization. Automatically detects incoming fax calls and includes support for fax broadcast, fax on demand, optical character recognition and other fax applications.



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Auto attendant—allows callers to locate specific individuals and departments and direct their own calls without involving receptionists.



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IVR or interactive voice response—allows organizations to create self-service applications that their customers can access from their touch-tone phones. These applications can read and update information stored in databases and mainframe systems to perform account lookups and other operations.



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Speech recognition capabilities.



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ACD or automatic call distributor—organizes incoming calls into queues and distributes them to agents as they become available. Calls can be distributed on a first-come, first-served basis or make use of more complex methods such as skills-based routing. For example, some organizations may wish to service calls from important customers before servicing other calls.



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Call recording—allows end-users to record their own calls and supervisors to record agent calls. CIC can also automatically record specified calls according to pre-defined rules—for example, every third call coming into a particular toll-free number or every call from a customer with a past-due balance.



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Graphical application generator—allows organizations to tailor CIC's call and interaction management functions to meet their specific needs and to integrate CIC into their information systems. CIC includes a graphical application generator called Interaction Designer™ that can be used to customize dial plans, call distribution rules, IVR scripts, fax services, Web interactions and other functions.

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    CIC also includes software that runs on desktop computers and provides individuals with the following capabilities:

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A software phone that allows individuals to visually manage calls from their desktop computer, including dialing, transferring, conferencing and recording. CIC includes both Win32 and Java versions to support a wide range of desktop operating systems.



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Complete remote agent support that allows remote employees to handle calls, receive screen pops, send faxes, access phone directories, and otherwise communicate just as if they were in the office.



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Clustering of multiple servers for automatic recovery from failures.



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On-screen company and department directories that allow individuals to quickly locate addresses, phone numbers and other employee information.



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Real-time in-out boards that display the status of other employees, such as on the phone, at lunch or in a meeting.



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Management windows that allow supervisors to record and monitor calls as well as view real-time information for every queue, line, user, workgroup and station.



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Desktop fax support that allows individuals to send and receive faxes from their desktop computers.



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Screen pops that allow CIC to activate a particular application, such as a customer relationship management program, whenever an incoming call arrives. The activated application can display all the call information collected by CIC and provide call handling options including hold, transfer and conference.



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Optical character recognition to automatically convert faxes into documents.



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Branch office connection that allows branch office employees to be a part of the headquarters telecommunication systems.

    We have developed local language versions of CIC Version 1.3, our most recent version, for those countries that currently have localized language for Version 1.2, our prior version.

Enterprise Interaction Center® or EIC

    EIC utilizes the same technology underlying CIC but in a formulation specifically targeted at e-businesses and general enterprises. It does not include the graphical application generator and advanced contact center features of CIC. Organizations can use EIC as their complete communications system, eliminating the need for separate phone systems, voice mail systems, fax servers, auto attendants, and other devices.

Service Interaction Center™ or SIC

    SIC utilizes the same technology underlying CIC, but includes extensions designed specifically for service providers. In particular, SIC makes use of a large-scale [LDAP] directory to allow local phone companies, wireless communications companies, Internet service providers, and application service providers to offer a wide range of voice and data services to large numbers of subscribers. These services include unified messaging, one-number "follow me", call screening, call recording, and conference calling.

Interaction Recorder®

    Interaction Recorder is a complementary product that enhances CIC's call recording capabilities by providing recording management for organizations, such as call (contact) centers and banks, that generate large numbers of recordings. First, Interaction Recorder logs complete information about every recording, such as customer name, account number and transactions selected, to a database. Next, it compresses

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recordings by 87.5% to reduce storage requirements. Interaction Recorder allows organizations to periodically archive groups of recordings onto compact discs or other media and provides a user interface from which supervisors and other employees can later search for particular recordings and access them at any time.

Interaction Dialer™

    Interaction Dialer™ is a predictive dialing product that is complementary to CIC. Predictive dialing is the process of automatically making outbound calls to a list of phone numbers and quickly connecting to call (contact) center agents any calls answered by a person. We developed Interaction Dialer™ to provide call list management and answering machine detection. We have created a sophisticated predictive algorithm that decides exactly how many calls to place and when to make them in order to maximize the probability that an agent will be available when a person answers a call.

    Interaction Dialer™ builds entirely upon CIC's facilities for automatic call distribution, reporting and supervision, giving it blended capabilities for call (contact) centers wishing to use agents for both inbound and outbound call processing. A client-side component allows end-user customers to create visual call flow scripts using any Web page editor. When an outbound call connects to an agent, Interaction Dialer™ automatically pops a script that can display customer information and lead the agent through the current call.

Interaction Director™

    Interaction Director™ provides pre and post-call routing across sites for multi-site call (contact) centers. Given a data connection to the CIC server at each call (contact) center, Interaction Director™ builds an in-memory database of near real-time information, including current expected hold times at each site, queue lengths, number of agent available and specific skills available. It then distributes incoming calls based on this information and customized routing rules.

    Pre-call routing is the process of looking at a call while it is still in the public switched telephone network and deciding to which location it should be sent. Interaction Director™ currently supports the signaling system 7 or SS7 protocol and can thus be notified about new calls before they leave the telephone network. Interaction Director™ can examine specific information about a call and then use the up-to-date information in the in-memory database to decide to which site to route the call. Once it has chosen a destination site, Interaction Director™ signals its choice back to the telephone network. Pre-call routing allows calls to be distributed efficiently across a collection of sites and helps make effective use of agent resources. It also allows multi-site organizations to provide superior customer service by minimizing wait times and making sure that calls are routed to the sites best able to handle them. As an example, Interaction Director™ could route calls from Spanish speaking customers to a site with Spanish speaking agents. The end-user customer can create the logic that determines where a given call is routed by using Interaction Designer®. AT&T Corporation has tested Interaction Director™ and determined that it is interoperable with AT&T's Intelligent Call Processing Service, which utilizes SS7. We have also added support for MCI WorldCom Inc. and are now working with other carriers.

    In addition to pre-call routing, Interaction Director™ also supports post-call routing, which routes a call to another location after it has already been delivered to a particular call (contact) center. For example, after a caller has been on hold for more than a specified period of time, the end-user customer could configure its CIC system to ask Interaction Director™ if another site would be able to handle the call sooner. If so, the CIC system could then transfer the call to that other location.

e-FAQ™

    e-FAQ™ allows organizations to quickly and easily make use of knowledge in the form of "Frequently Asked Questions" (FAQs) to automatically service incoming e-mail messages. The product uses advanced

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artificial intelligence and linguistic techniques to examine e-mail inquiries, look for matches in a database of frequently asked questions, and automatically respond if an appropriate match is found. e-FAQ™ also allows employees to add knowledge by simply e-mailing common questions and related answers to a designated mailbox.

Technology

    We have developed a number of innovative technologies that underlie our family of products, including:

    Universal interaction engine.  At the core of CIC, EIC, and SIC is an event-processing engine that determines how different types of communications events are handled. This engine makes use of the Java virtual machine to dispatch events, such as incoming telephone calls, to software objects that process them. This approach allows us to maximize our use of a widely used, multi-threaded interpreter to handle large numbers of communications events under Windows NT® and Windows® 2000. It also provides an architectural control point around which we can create new services.

    Notifier messaging component.  We have invented a sophisticated, publish-subscribe messaging component called Notifier which allows all the different portions of our products to communicate with each other using the TCP/IP protocol. Different subsystems and applications register with Notifier for events in which they are interested. As events flow through Notifier, it forwards them on to the interested parties. This approach is more efficient than simpler schemes which broadcast all events to all components. Our Notifier architecture works especially well in wide area networks where efficient use of bandwidth is critical. Notifier also allows components to be widely distributed and to run over any TCP/ IP connection, including the Internet. As a result, our software phone and end-user fax tools can be installed on a work-at-home agent's home computer and used over an Internet connection.

    Graphical application generator.  Underlying our entire suite of products is a single graphical application generator called Interaction Designer®. This development tool allows users to visually lay out logic that determines how different types of events are to be processed. Interaction Designer® includes a tool palette of over one hundred objects that can be dragged into a workspace and linked together. Once the handler for a particular event is complete, Interaction Designer® generates a Java class file, compiles it and executes it in the universal interaction engine. This means that organizations can change the ways in which different interactions are processed without restarting devices.

    Graphical administrative console.  A single graphical application called Interaction Administrator® can be used to configure many different aspects of our products. Supervisors can configure analog or digital telephone trunks, change user profiles, define queues, add skills and perform many other common administrative tasks from simple dialog boxes. Interaction Administrator® automatically sends out change notifications that are propagated via Notifier to the various components that comprise our products. Thus, when a new employee is added, his or her name automatically appears on agent and supervisor screens.

    Database and mainframe connectivity.  We have written software components that provide access to information stored in most common relational database systems, including those from Oracle Corporation, Sybase, Inc., Informix Corporation, Microsoft Corporation and IBM Corporation, and mainframe systems supporting 3270 and 5250 emulation. These software components use advanced techniques like connection caching to handle large numbers of transactions.

    Programming interfaces.  We have created interfaces that allow customers to integrate other software applications with CIC, EIC, and SIC. On the server side, we have DLL and TCP/IP socket-level interfaces that allow customers to add new functionality and to communicate with applications running on other systems. On the client side, we have both DDE and COM interfaces that make it possible to embed our capabilities into desktop applications.

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    Multi-site call routing and SS7 support.  We have created software that allows us to communicate directly with public switched telephone networks using the SS7 protocol. This allows us to receive advance notification from the phone company of incoming calls and to tell the phone company where each call should be sent in a multi-site environment. This is especially important for call (contact) centers with multiple sites. If each site is running our CIC product and is connected to a wide area network, we can collect near real-time information, including number of calls in queue and number of agents available, and decide which site is best able to handle new incoming calls.

Research and Development

    We believe that strong product development capabilities are essential to our strategy of building on our position as a technological leader in our industry, maintaining the competitiveness of our current products and adding new features, functions and products. Our product development team consists of professionals with expertise in software, telecommunications and computer hardware, many of whom have years of experience at industry leading companies in these segments, such as Microsoft Corporation, Lucent Technologies Inc. and Nortel Networks Corporation. We believe that this combination of diverse technical and communications expertise contributes to the highly integrated functionality of our software products and provides us with a significant competitive advantage.

    Currently, we are both a Microsoft Certified Developer as well as a Microsoft Certified Solutions Provider. These designations give us early access to Microsoft technology, allowing us to develop products more quickly and make them interoperate more effectively with Microsoft products.

    Research and development expenses were approximately $4.1 million in 1998, $7.0 million in 1999 and $10.8 million in 2000. Our research and development staff has grown from 27 employees as of December 31, 1997 to 49 employees as of December 31, 1998, 69 employees as of December 31, 1999 and 117 employees as of December 31, 2000. We believe that investment in research and development is important for us to maintain our position in the industry and, therefore, intend to increase our spending for research and development in the future.

Customer Services and Support

    We recognize the importance of offering quality service and support to our resellers, OEM partners, and end-user customers. Therefore, we provide a wide range of services and support to all of these groups, including technical support for our products, educational services, and professional services for implementing and customizing our products. These services include the following:

    Technical support services.  Our support services staff provides technical support for both our resellers and end-user customers 24 hours a day, seven days a week via phone, fax, e-mail and our Web site. We have support personnel in Indianapolis, San Diego, France, and Australia. We currently plan to open a support center in the Asia/Pacific region. We utilize CIC, integrated with customer relationship management software, to maximize the effectiveness of our support services. Customer support services, along with product upgrades, are included in initial and ongoing maintenance. Initial software license fees generally include one year of maintenance. Generally, to continue using our software after this initial period, our end-user customers must purchase annual ongoing product maintenance.

    Educational services.  We place primary emphasis on providing a comprehensive technical and sales education program to our resellers and OEM partners. We have formal certification programs covering pre- and post-sales engineering, installation and trouble shooting, implementation and project management, system administration and application development. Several credits for our supplementary or advanced educational offerings are included in our annual reseller agreement and each subsequent annual renewal. For resellers, OEM partners, and end-user customers who would like additional supplementary or advanced training, we offer classes that we bill on a per class basis.

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    Professional services.  Our professional services staff supplements the implementation and customization personnel of our resellers. We offer a wide range of professional services for our end-user customers, including project management, data systems integration and host connectivity. To further expedite their implementation projects, end-user customers and resellers can select from several pre-packaged fixed fee offerings. If desired, we also provide our professional services on a time and materials basis.

Sales and Marketing

    We distribute our software products primarily through our network of resellers. We also maintain a field sales force to support our resellers, as well as engage in some direct sales efforts. In addition, we engage in a number of marketing activities to support our sales efforts. As of December 31, 2000, we employed 94 people in sales and marketing.

    Resellers.  We have a network of over 140 resellers that distribute our software products in North America, Europe, and the Asia/Pacific region. Our resellers have a presence in more than 30 countries and 30 states. We intend to continue to broaden our geographic and market presence through our reseller coverage in order to enhance our market share position.

    OEM partners.  We have six OEM partners who currently plan to incorporate or market portions of our software solutions in conjunction with their technology. These OEM partners currently plan to target both call (contact) center and enterprise prospects.

    Sales force.  To help our resellers and OEM partners be as productive as possible, we have developed a field sales force that manages, supports and assists in the development of our reseller network and reseller and OEM opportunities. Our North American field sales force also makes direct sales to end-user customers. In North America, our field sales force is located in Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Minnesota, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Virginia, Washington and Wisconsin. Internationally, our field sales force is located in Australia, Belgium, France, Germany, Japan, Korea, Malaysia, the Netherlands, Sweden and the United Kingdom.

    Marketing.  Our marketing programs are designed to:

•

build market awareness of our communications and interaction management software;



•

generate qualified end-user customer leads; and



•

establish end-user customer preference for our products.

    To accomplish these goals, we engage in a variety of marketing activities, including seminars, tradeshows, direct mailings, public relations activities, advertisements and Web site marketing.

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Customers

    We license our products to more than 700 end-user customers in North America, Europe, the Asia/Pacific region, Central and South America, and South Africa, including:

Abbott Laboratories	Humana Emphasys
Aether Systems, Inc.	Jardine Chase (Hong Kong)
American Family Insurance	Kemper Insurance Companies
Ameritech Corporation	Leo Burnett Advertising Agency
Blue Cross Blue Shield of Rochester	Los Alamos National Laboratory
BMW Financial Services Italia (Italy)	Marathon Ashland Petroleum LLC
Boeing	Mark Facey & Co.
Bridgestone/Firestone	Minnesota Life Insurance Company
Carlson Travel Group, Inc.	Net2Phone, Inc.
Ceridian Corporation	Robert Half International
Consolidated Paper	Sony Music (Australia)
Cray Research	Student Loan Finance
Dongbu Fire & Marine Insurance (Korea)	US Robotics
E.piphany	Volvo Commercial Finance
First Internet Bank of Indiana	Zyan Communications, Inc.

No end-user customer or reseller accounted for 10% or more of our revenues in 2000, 1999 or 1998.

Competition

    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. We cannot assure you that we will be able to compete effectively against current and future competitors. Our competition currently comes from several different market segments, including computer telephony platform developers, interaction management solution providers and telecommunications equipment vendors.

    These competitors include Apropos Technology, Inc., Aspect Communications Corporation, Avaya Inc. (which acquired Quintus Corporation), CELLIT, Inc., Cisco Systems, Inc. (which acquired Active Voice Corporation and Webline Communications Corporation), Davox Corporation, eGain Communications Corporation, eShare Communications, Inc. (formerly eShare Technology, Inc. and Melita International Corporation), Genesys Telecommunications Laboratories, Inc. (acquired by Alcatel), Kana Communications, Inc., Lucent Technologies Inc., Nortel Networks Corporation, Rockwell International Corporation and Siemens Nixdorf Informations Systems AG/FI. We also compete with new or recent entrants to the marketplace.

    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. Recently, a number of our competitors have been acquired by large, well-capitalized companies. As a result, these competitors may be able to respond to new or emerging technologies and changes in client requirements faster and more effectively than we can, and to devote greater resources to the development, promotion and sale of products than we can. Current competitors have merged with or acquired other competitors or established cooperative relationships with other competitors to increase the ability of their products to address the needs of our current or prospective clients. If these competitors were to acquire additional market share, it could have a material adverse effect on our business, financial condition and results of operations.

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Intellectual Property and Other Proprietary Rights

    To protect our proprietary rights, we rely primarily on a combination of:

–

copyright, trade secret and trademark laws;



–

confidentiality agreements with employees and third parties; and



–

protective contractual provisions such as those contained in license and other agreements with consultants, suppliers, strategic partners, resellers and end-user customers.

    We have not signed agreements containing protective contractual provisions in every case and the contractual provisions that are in place and the protection they provide vary and may not provide us with adequate protection in all circumstances. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. Other parties may breach confidentiality agreements and other protective contracts we have entered into, and we may not become aware of these breaches or have adequate remedies for them.

    We generally require our employees to enter into confidentiality agreements containing non-disclosure, non-competition and non-solicitation provisions. When they begin employment, our employees also generally sign offer letters specifying the basic terms and conditions of their employment.

    We currently do not hold any patents. However, we have filed numerous patent applications relating to technology embodied in our software products. We hold the registered trademarks for Interactive Intelligence®, Enterprise Interaction Center®, Interaction Client®, Interaction Designer®, Interaction Administrator®, Interaction Recorder®, and the Spirograph logo in the U.S. and have trademark applications pending in the U.S. for the following marks: Interaction Dialer, Interaction Director, Interaction Web, Multimedia Queuing, E-FAQ, I3 Customer Interaction Center, Interactive Intelligence Customer Interaction Center, Interaction Center Platform, Interaction FAQ, Mobilité, Service Interaction Center, Wireless Interaction Center, and Wireless Interaction Client.

    In addition, we have trademark applications pending in several foreign countries for the marks Interactive Intelligence and Enterprise Interaction Center®. All other trademarks and trade names referred to in this prospectus are the property of their owners.

    We license some components of our products from third parties. If we were to lose those licenses, we believe that we could obtain licenses from other sources for similar components. However, 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 components or technology or eliminate the affected product function, either of which could have a material adverse effect on us.

Employees

    As of December 31, 2000, we had 350 employees worldwide, including 117 in research and development, 100 in client services, 94 in sales and marketing and 39 in administration. Our future performance depends in significant part upon the continued service of our key sales and marketing, technical and senior management personnel and our continuing ability to attract and retain highly qualified personnel. Competition for these personnel is intense and we cannot assure you that we will be successful in attracting or retaining these personnel in the future.

    We believe that we have a unique corporate culture that attracts highly qualified and motivated employees. We emphasize teamwork, flexible work arrangements, local decision making and open communications. Every employee has been granted stock options. None of our employees is represented by a labor union and, except for 20 employees working in France who are required by French law to be subject

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to a collective bargaining agreement, none of our employees is subject to a collective bargaining agreement. We have not experienced any work stoppages and we consider our relations with our employees to be excellent.

Item 2. Properties.

    We lease approximately 45,000 square feet of office space in our headquarters building in Indianapolis, Indiana. As of December 31, 2000, the lease required payments of approximately $2.8 million over the remaining term of the lease, which expires on February 29, 2004. We also lease approximately 49,000 square feet in other office buildings in Indianapolis, Indiana, for use mainly by our services organization. The leases under which we lease these office spaces expire on December 31, 2001 and March 1, 2004.

    We lease space for our research and development facility in Deerfield Beach, Florida, which consists of approximately 11,000 square feet. The lease for that facility ends on December 31, 2005. We also lease space for our various sales, services and development offices located throughout the United States and in many of the international markets that we serve. The majority of these leases are short-term leases.

    We believe that our existing facilities are adequate for our current needs and that additional space will be available as needed.

Item 3. 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 letters. 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 has discussed its conclusion with the competitor and has also discussed possible licensing of certain technologies from the competitor. The Company cannot assure you that this matter can be resolved amicably without litigation, or that it will be able to enter into a licensing arrangement on terms and conditions that would not have a material adverse effect on the Company's business, financial condition or results of operations.

    In June 2000 and July 2000 the Company received letters from two other competitors in the call center market claiming that the Company's products utilize technologies pioneered and patented by those competitors. Although the Company's patent counsel has not determined the validity of these patents, the Company is discussing the possible licensing of certain technologies with these competitors. The Company cannot assure you that these claims can be resolved amicably without litigation, or that it will be able to enter into licensing arrangements on terms and conditions that would not have 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 4. Submission of Matters to a Vote of Security Holders.

    None.

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Executive Officers of the Registrant

    The following table sets forth information about our executive officers and significant employees:

Name	Age	Position
Donald E. Brown, M.D.	45	Chairman of the Board, President and Chief Executive Officer
John R. Gibbs	50	Executive Vice President of Administration and Corporate Development, Treasurer and Director
Michael J. Tavlin	54	Senior Vice President, Chief Financial Officer and Corporate Secretary
Jeremiah J. Fleming	43	Vice President of Sales, The Americas
Michael E. Ford	48	Vice President of Operations, Europe, Middle East and Africa
Douglas T. Shinsato	51	Vice President of Operations, Asia/Pacific
Keith A. Midkiff	38	Vice President of Finance and Controller
Pamela Jo Hynes (1)	39	Vice President of North American Client Services
Joseph M. Adams (1)	45	Vice President of Market Development
Michael D. Gagle, Ph.D. (1)	50	Chief Scientist

(1)

Significant employees, but not executive officers.

Donald E. Brown, M.D. co-founded his third software company, Interactive Intelligence, in October 1994 and has served as Chief Executive Officer since April 1995 and President since inception. Dr. Brown also serves as Chairman of the Board, a position he has held since July 1998. Dr. Brown has been a director since inception. In March 1988, Dr. Brown co-founded Software Artistry, Inc., a developer of customer support software that became a public company in March 1995 and was subsequently acquired by IBM Corporation in January 1998. At Software Artistry, Dr. Brown served as Chief Executive Officer and director from inception through September 1994. Dr. Brown's first software company was acquired by Electronic Data Systems, Inc. in September 1987. Dr. Brown graduated from the Indiana University School of Medicine in 1985. He also holds two additional degrees from Indiana University, a M.S. in computer science and a B.S. in physics.

John R. Gibbs co-founded Interactive Intelligence in October 1994 and has served as Executive Vice President of Administration and Corporate Development since January 1995 and Treasurer since April 1995. Mr. Gibbs also served as Secretary from April 1995 to January 1997. Mr. Gibbs has been a director since April 1995. From March 1992 until October 1994, Mr. Gibbs was an independent management consultant, serving mostly entrepreneurial and emerging growth companies. He also has prior experience as an executive for high technology companies. While a consultant, Mr. Gibbs served as the first Executive Director of the Indiana Software Association. Mr. Gibbs holds a B.S. degree in business economics and public policy from Indiana University. He also attended M.B.A. school at Indiana University.

Michael J. Tavlin has served as Chief Financial Officer since joining Interactive Intelligence in June 1999, as Corporate Secretary since November 1999, and as Senior Vice President and Chief Financial Officer since May 2000. From June 1986 to June 1999, Mr. Tavlin served as Vice President-Treasurer and Secretary of Aliant Communications Inc., a regional telecommunications company, which was acquired by ALLTEL Corporation in June 1999. From January 1979 until June 1986, Mr. Tavlin served as a Senior Tax Manager with Coopers & Lybrand, which is now known as PricewaterhouseCoopers, and Touche Ross &

18

Co., which is now known as Deloitte & Touche. Prior to that time, Mr. Tavlin was engaged in the practice of law. Mr. Tavlin holds a B.A. degree in education from Oklahoma City University, a J.D. degree from the University of Nebraska College of Law, and a LL.M. in Taxation degree from the Washington University Law School in St. Louis, Missouri.

Jeremiah J. Fleming has served as Vice President of Sales, The Americas, since joining Interactive Intelligence in March 1997. From January 1995 to February 1997, Mr. Fleming served as Vice President, Domestic Sales of Software Artistry. From 1992 to December 1994, he held sales positions of increasing responsibility at Software Artistry, including Manager, Central Region Sales from January 1993 to December 1994. He performed various sales capacities at Pansophic Systems, Inc., a developer of business software, from 1989 to 1991, concluding as the Midwest Regional Manager. Mr. Fleming holds both a M.B.A. degree and a B.A. degree in political science and philosophy from the University of Missouri.

Michael E. Ford has served as Vice President of Operations, Europe, Middle East and Africa, since September 1998. Mr. Ford also served as Director of Sales, Europe, Middle East and Africa from the time he joined Interactive Intelligence in July 1997 until September 1998. From March 1994 to April 1997, he served as Vice President of Sales of Enhanced Systems, Inc., a developer of voice processing software. From March 1993 to March 1994, Mr. Ford served as Vice President of Sales for Futurus Corporation, a developer of unified messaging software. Mr. Ford's previous experience also includes establishing and managing subsidiaries in Europe and Asia for Computer Corporation of America and serving as Director of International Business for Hayes MicroComputer Corporation. Mr. Ford holds a Masters in international business degree from the University of South Carolina and a B.S. in business administration and economics from the University of Pittsburgh in Kansas.

Douglas T. Shinsato has served as Vice President of Operations, Asia/Pacific, since joining Interactive Intelligence in May 1998. From April 1997 until April 1998, Mr. Shinsato served as Vice President of Asia Pacific of Genesys Telecommunications Laboratories, a developer of computer telephony integration software. From December 1995 to April 1997, he served as Executive Vice President-Japan for AT Kearney, a subsidiary of Electronic Data Systems, Inc., an information technology services and systems integrator. From December 1988 until December 1995, Mr. Shinsato was a senior partner in Deloitte Touche, Tohmatsu's management consulting operations in Japan. Mr. Shinsato holds a M.B.A. degree from the University of Southern California and a J.D. degree from the Stanford Law School.

Keith A. Midkiff has served as Vice President of Finance since March 1999 and as Controller since joining Interactive Intelligence in February 1997. Mr. Midkiff was Vice President of Finance and Chief Financial Officer of Alta Analytics, Inc., a developer of data analysis software, from December 1996 to February 1997. From June 1993 to December 1996, he served as Controller of Software Artistry, which became a public company in March 1995. Mr. Midkiff holds a M.B.A. degree from Indiana University and a dual B.S. degree in accounting and finance from Ohio State University.

Pamela Jo Hynes has served as Vice President of North American Client Services since September 1999 and as Director of Client Services since joining Interactive Intelligence in November 1996. Mrs. Hynes was an Account Manager at Software Artistry from July 1996 to October 1996 and the Support Services Manager of Software Artistry from August 1992 to July 1996. Prior to August 1992, she served in a number of technical roles at Software Artistry, including Application Development, Technical Instructor and Field Engineer. Before joining Software Artistry, she served as Technical Support Engineer at American Financial Resources, a software development company. Mrs. Hynes holds a B.S. degree in management information systems from New Hampshire College.

Joseph M. Adams has served as Vice President, Market Development since September 2000. From December 1996 until September 2000, Mr. Adams served as Vice President of Market Communications. In 1988, Mr. Adams co-founded Software Artistry with Dr. Brown. From 1988 to November 1995, Mr. Adams served in a number of senior roles at Software Artistry, including Vice President of Market Communications. From November 1995 to December 1996, Mr. Adams was retired. He also previously served as a

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director at Software Artistry and three separate Indianapolis based charities. Mr. Adams holds a B.S. degree in business economics from Indiana University.

Michael D. Gagle, Ph.D. has served as Chief Scientist since March 1998. From the time Dr. Gagle joined Interactive Intelligence in March 1995 until March 1998, he served as our Principal Software Engineer and Project Leader. Before joining Interactive Intelligence, Dr. Gagle spent five years working on a variety of applied projects at AT&T Bell Labs. Dr. Gagle's previous experience also includes co-founding and serving as Vice President for Research and Development for Micro Data Base Systems, Inc., a developer of PC database systems, working on the technical staff of Microsoft Corporation and serving from January 1994 to September 1994 as a senior developer with the Regenstrief Institute for Health Care Research. Dr. Gagle holds a Ph.D. in management information systems and a B.S. in industrial management from Purdue University.

    (Pursuant to General Instruction G(3) of Form 10-K, the foregoing information regarding executive officers and significant employees is included as a separate Item in Part I of this Annual Report on Form 10-K in lieu of being included in our Proxy Statement for our 2001 Annual Meeting of Shareholders.)

PART II.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

(a)  Price Range of our Common Stock and Dividends

    Our common stock began trading on The Nasdaq Stock Market® under the symbol ININ on September 23, 1999. Prior to that date, there was no public market for the common stock. The following table sets forth, for the fiscal quarters indicated, the high and low sale prices of our common stock as reported by The Nasdaq Stock Market®.

	High		Low
Quarter ended September 30, 1999 (beginning September 23, 1999)	$	40.000	$	18.500
Quarter ended December 31, 1999	$	33.875	$	20.250
Quarter ended March 31, 2000	$	54.500	$	22.125
Quarter ended June 30, 2000	$	44.125	$	19.875
Quarter ended September 30, 2000	$	48.938	$	30.938
Quarter ended December 31, 2000	$	42.000	$	20.000

    As of March 15, 2001, we had 126 shareholders of record of our common stock. In addition, we believe we have approximately 4,700 beneficial owners, whose shares of common stock are held in the names of brokers, dealers, and clearing agencies.

    We have never paid cash dividends on our capital stock and do not expect to pay cash dividends in the foreseeable future. In addition, our bank credit agreement currently restricts our ability to pay cash dividends without the bank's consent.

(b)  Sales of Unregistered Securities

    The following information is furnished as to our securities sold during 2000 and 2001 that were not registered under the Securities Act of 1933, as amended.

     (i) On January 25, 2001, we sold 515,517 shares of common stock at a price of $29.00 per share in a private offering to Cisco Systems, Inc. The total gross proceeds from the sale were $14,949,993. The net proceeds from the sale will be used for general corporate purposes. The shares were exempt from the registration requirements of the Securities Act of 1933 (the "Act") under Section 4(2) of the Act.

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(c)  Use of Proceeds

    The shares of our common stock issued in the 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 December 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 $13.5 million has been used for working capital.

Item 6. Selected Financial Data.

    The following selected consolidated financial data is qualified in its entirety by, and should be read in conjunction with, our Consolidated Financial Statements and the Notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this Form 10-K. The selected consolidated financial data has been derived from our audited Consolidated Financial Statements.

	Year Ended December 31,
	2000			1999			1998			1997			1996
	(In thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues:
Software	$	28,121		$	14,231		$	7,662		$	1,265		$	—
Services		10,475			4,850			1,349			325			—
Total revenues		38,596			19,081			9,011			1,590			—
Costs and expenses:
Costs of software		540			194			59			38			—
Costs of services		10,118			5,728			3,381			1,258			—
Sales and marketing		17,486			10,175			6,623			2,519			157
Research and development		10,835			6,967			4,065			2,118			987
General and administrative		5,158			2,773			1,407			742			192
Total costs and expenses		44,137			25,837			15,535			6,675			1,336
Operating loss		(5,541	)		(6,756	)		(6,524	)		(5,085	)		(1,336	)
Interest income (expense), net		1,108			(361	)		(868	)		(361	)		(43	)
Net loss before income taxes		(4,433	)		(7,117	)		(7,392	)		(5,446	)		(1,379	)
Income taxes		180			—			—			—			—
Net loss	$	(4,613	)	$	(7,117	)	$	(7,392	)	$	(5,446	)	$	(1,379	)
Basic and diluted net loss
per share	$	(0.33	)	$	(0.62	)	$	(0.84	)	$	(0.71	)	$	(0.33	)
Shares used in per share
computation		14,171			11,469			8,816			7,642			4,216

	December 31,
	2000		1999		1998			1997			1996
	(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	1,999	$	2,235	$	2,021		$	390		$	23
Working capital (deficit)		10,497		10,709		1,731			(1,575	)		(544	)
Total assets		33,651		32,370		8,239			3,141			438
Long-term debt		—		377		9,490			5,872			593
Total shareholders' equity (deficit)		20,805		24,155		(5,154	)		(6,217	)		(803	)

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Information

    Certain statements in this Form 10-K 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 can be identified by their use of such verbs as "expects," "anticipates," and "believes" or similar verbs or conjugations of such verbs. 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 Future Operating Results" described herein.

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, $19.1 million in 1999 and $38.6 million in 2000.

    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/or 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 sets forth, for the periods indicated, our consolidated financial information expressed as a percentage of total revenues.

	Year ended December 31,
	2000		1999		1998
Revenues:
Software	73	%	75	%	85	%
Services	27		25		15
Total revenues	100		100		100
Costs and expenses:
Costs of software	2		1		1
Costs of services	26		30		38
Sales and marketing	45		53		73
Research and development	28		36		45
General and administrative	14		15		16
Total costs and expenses	115		135		172
Operating loss	(15	)	(35	)	(72	)
Interest income (expense), net	3		(2	)	(10	)
Loss before income taxes	(12	)	(37	)	(82	)
Income taxes	0		—		—
Net loss	(12	)%	(37	)%	(82	)%

Comparison of Fiscal Years Ended December 31, 2000, 1999, and 1998

Revenues

    Our total revenues increased to $38.6 million in 2000 from $19.1 million in 1999 and $9.0 million in 1998. Non-North American revenues were $9.7 million, $3.6 million, and $1.4 million in 2000, 1999, and 1998, respectively. Our revenues are derived primarily from software license fees and related 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 license fees will continue to represent a majority of our revenues for the foreseeable future.

    Software.  Our software revenues increased to $28.1 million in 2000 from $14.2 million in 1999 and $7.7 million in 1998. The increase in software revenues in 2000 from 1999 resulted from continued market acceptance for our products, increased production from our worldwide reseller channel, increased direct end-user transactions in North America and OEM initiatives. The increase in software revenues in 1999 from 1998 resulted from continued market acceptance for our Interaction Center Platform™ products, initial market acceptance for our other related products, and a growing geographic presence in North America, Europe, and the Asia/Pacific region.

    Services.  Services revenues increased to $10.5 million in 2000 from $4.9 million in 1999 and $1.3 million in 1998. The increase in services revenues in 2000 from 1999 and 1998 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

    As a percentage of total revenues, our costs and expenses decreased to 115% in 2000 from 135% in 1999 and 172% in 1998. This decrease resulted primarily from revenues increasing faster than expenses. Our total costs and expenses increased to $44.1 million in 2000 from $25.8 million in 1999 and $15.5 million in 1998, primarily reflecting substantial increases in investments in our research and development, marketing, sales and services efforts over the comparison period.

    Costs of software.  Costs of software consist primarily of product and software 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 $540,000 in 2000 from $194,000 in 1999 and $59,000 in 1998, representing 2% of software revenues in 2000, and 1% of software revenues for both 1999 and 1998. The increase in amount is due to royalties owed as a result of higher software revenues and software packaging costs associated with the releases of our Interaction Center Platform™ products and other related products. We expect product and software royalties to continue to increase as we release additional products, release additional versions of our existing 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 $10.1 million in 2000 from $5.7 million in 1999 and $3.4 million in 1998. As a percentage of total services revenues, cost of services represented 97%, 118%, and 251% in 2000, 1999 and 1998, respectively. The increase in amount reflects 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 increased to $17.5 million in 2000 from $10.2 million in 1999 and $6.6 million in 1998. The increase reflects the expansion of our worldwide sales and marketing organizations, higher sales compensation expenses associated with higher software revenues, and increases in worldwide marketing activities such as marketing communication efforts, 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 and allowing our products to effectively run with alternative hardware configurations. Research and development expenses increased to $10.8 million in 2000 from $7.0 million in 1999 and $4.1 million in 1998. 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 products, investigate, design and develop new products, and localize our products into other languages, including French, German, Italian, Japanese, Korean, Portugese, Spanish, and Taiwanese. We believe that a significant investment in research and development has been, and will continue to be, critical to the ongoing 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 $5.2 million in 2000 from $2.8 million in 1999 and $1.4 million in 1998. The increases in 2000 from 1999 and 1998 were primarily due to the addition of personnel necessary to support our growing operations and

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an increased amount of 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 additional legal and other professional service fees.

Interest income (expense), net

    Interest income, net was $1.1 million in 2000 and interest expense, net was $361,000 in 1999 and $868,000 in 1998. The change to net interest income in 2000 from net interest expense in 1999 was due to investing the proceeds from our initial public offering in interest-bearing securities after repaying all outstanding debt except for capital lease lines. The decrease in net interest expense from 1999 to 1998 resulted primarily from a reduction in notes payable to our principal shareholder as we used a portion of our initial public offering proceeds in September 1999 to extinguish this debt, and interest income generated from the investment of the remaining proceeds. See Notes 3 and 4 of our notes to consolidated financial statements.

Income taxes

    For income tax accounting purposes, we did not recognize a tax benefit related to U.S. federal or state income taxes during 2000, 1999 or 1998 because of the uncertainty of eventually realizing these benefits. However, we did recognize a tax expense related to our international operations of $180,000 in 2000. No income tax expense related to our international operations was incurred prior to 2000.

Liquidity and Capital Resources

    As of December 31, 2000, we had $2.0 million in cash and cash equivalents, $10.7 million in short-term investments, a working capital balance of $10.5 million, and $1.0 million in long-term investments.

    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. Prior to our initial public offering, we funded our operations primarily through equity and debt infusions from our principal shareholder, Dr. Donald E. Brown, a $5.0 million equity investment by Dialogic Investment Corporation (now owned by Intel Corporation), and borrowings under commercial lines of credit.

    On January 25, 2001, we received an equity investment from Cisco Systems. The investment was not recorded in our 2000 year end financial statements. We sold 515,517 shares of common stock at a price of $29.00 per share, yielding approximately $15.0 million in cash.

    Our operating activities resulted in net cash outflows of $2.9 million in 2000, $2.6 million in 1999, and $7.1 million in 1998. The operating cash outflows for these periods resulted from significant investments in research and development, sales, marketing and services, which led to operating losses in all periods. In 2000, the operating cash outflow increased slightly due to a significant increase in accounts receivable that was offset by increases in accounts payable and depreciation.

    In 2000, our investing activities consisted primarily of selling, net of purchases, $9.4 million of short-term and long-term investments with the remaining proceeds from our initial public offering. We also invested heavily in property and equipment in 2000, 1999, and 1998, including $6.8 million in 2000. These capital expenditures consisted primarily of hardware, software, equipment, and furniture for our growing employee headcount, and our research and development needs including test equipment. At December 31, 2000, we did not have any material commitments for future capital expenditures.

    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). At December 31, 2000, we had no amounts outstanding on our line of credit and were in compliance with all related financial covenants and restrictions. This line of credit is currently scheduled to expire on April 30, 2001. In addition, we also used a portion of the net proceeds to repay the note payable and accrued interest, totaling $8.0 million, to Dr. Brown.

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    We believe that the remaining proceeds from our initial public offering, existing cash and cash equivalents and the equity investment made by Cisco on January 26, 2001, 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 we 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 that may affect our future operating results are set forth below:

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 an Interaction Center Platform™-based product 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 $4.6 million, $7.1 million, and $7.4 million in 2000, 1999, and 1998, respectively. At December 31, 2000, we had accumulated losses since inception of $26.4 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 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 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.

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    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



–

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 $38.6 million in 2000 from $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.

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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.

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.

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

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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 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.

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

    Our products currently run only on Microsoft Windows NT® and Windows® 2000 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

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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 three 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 Interaction Center Platform™ 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 our products is high, and demand has grown in recent years, particularly among call centers, the market for our products and services is still emerging. Further, our growth plans require us to successfully attract enterprise and service provider end-user customers.

IF OUR END-USER CUSTOMERS DO NOT PERCEIVE OUR PRODUCTS OR THE RELATED SERVICES PROVIDED BY US OR OUR RESELLERS OR OEM PARTNERS 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.

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

    Our products cannot currently meet the communications needs of organizations with more than 500 users at a single call center location and cannot currently meet the communication needs of organizations with more than 1,000 users at a single enterprise location. As these organizations expand to include multiple locations, our products can be customized to increase the number of telephone lines, extensions and users. We will need to adapt our software to serve larger single-site organizations. Although we are currently developing and testing solutions that would enable our software to significantly increase the number of users that our products 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 our products. 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.

OUR MAIN SUPPLIERS OF VOICE PROCESSING BOARDS 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, a subsidiary of Intel Corporation, and AcuLab plc are our primary suppliers of the voice processing boards that are necessary for the operation of the currently available versions of our products. If these suppliers become unable or unwilling to continue to manufacture and supply these voice

30

processing boards in the volume, price and technical specifications we require, then we would have to adapt our products to a substitute supplier. We may not be able to successfully introduce voice processing boards made by a substitute supplier into the available versions of our products. In addition, introducing a substitute 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. We cannot assure you that these issues will not affect product shipments, will not be costly to correct, will not damage our reputation in the markets in which we operate, or will not have a material adverse affect on our business, financial condition or results of operations.

    In addition, Dialogic Corporation's CT Media™ offers some of the functionality that our Interaction Center Platform™ products provide 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. In addition, although neither of our primary suppliers of voice processing boards nor their affiliates currently offer a product that competes with our Interaction Center Platform™ products, they could potentially develop a competitive or superior product.

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 and OEM 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 vary and may not provide us with adequate protection in all circumstances. Although we have filed patent applications directed to several inventions embodied in our software products, we currently hold no patents. We hold one registered copyright. 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

    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 letters. 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 has discussed its conclusion with the competitor and has also discussed possible licensing of certain technologies from the competitor. The Company cannot assure you that this matter can be resolved amicably without litigation, or that it will be able to enter into a licensing arrangement on terms and conditions that would not have a material adverse effect on the Company's business, financial condition or results of operations.

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    In June 2000 and July 2000 the Company received letters from two other competitors in the call center market claiming that the Company's products utilize technologies pioneered and patented by those competitors. Although the Company's patent counsel has not determined the validity of these patents, the Company is discussing the possible licensing of certain technologies with these competitors. The Company cannot assure you that these claims can be resolved amicably without litigation, or that it will be able to enter into licensing arrangements on terms and conditions that would not have a material adverse effect on the Company's business, financial condition or results of operations.

    Other third parties could claim that our technology infringes their 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.

    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. We do not have key man life insurance on any of our employees. Our future success also depends upon 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.

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

32

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 25%, 19%, and 16% of our total revenues in 2000, 1999, and 1998, 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 the next risk factor, 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;



–

potentially adverse tax consequences; and

–

restrictions on the repatriation of funds.

FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN LOSSES

    Our international revenues are generally denominated in U.S. Dollars, but our international expenses are generally denominated in local foreign currencies. Although foreign currency translation gains and losses have been immaterial to date, fluctuations in exchange rates between the U.S. Dollar and other currencies could have a material adverse effect on our business, financial condition or results of operations, and particularly on our operating margins. To date, we have minimally sought to hedge the risks associated with fluctuations in exchange rates, but we may more actively undertake to do so in the future. Any hedging techniques we implement may not be successful. Exchange rate fluctuations could also make our products more expensive than competitive products not subject to these fluctuations, which could adversely affect our revenues and profitability in international markets.

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

33

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 currently consists of our software running on a Windows NT® or Windows® 2000 server and 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.

WE MAY NOT BE ABLE TO OBTAIN ADEQUATE FINANCING TO IMPLEMENT OUR GROWTH STRATEGY

    Successful implementation of our growth strategy may require continued access to capital. If we do not generate sufficient cash from operations, our growth could be limited unless we are able to obtain capital through additional debt or equity financings. We cannot assure you that debt or equity financings will be available as required for acquisitions or other needs. Even if financing is available, it may not be on terms that are favorable to us or sufficient for our needs. If we are unable to obtain sufficient financing, we may be unable to fully implement our growth strategy.

OUR STOCK PRICE HAS BEEN AND COULD CONTINUE TO BE HIGHLY VOLATILE

    Our stock price has been and could continue to be highly volatile due to a number of factors, including:

•

actual or anticipated fluctuations in our operating results;



•

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



•

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



•

technological innovations by others;



•

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



•

the low number of our shares typically traded in any trading session;



•

the availability for future sale, or sales, of a substantial number of shares of our common stock in the public market; and



•

general market or economic conditions.

    This risk may be heightened because our industry is new and evolving, characterized by rapid technological change and susceptible to the introduction of new competing technologies or competitors.

    In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the trading prices of equity securities of many technology companies, including us. These price and volume fluctuations often have been unrelated to the operating performance of the affected companies. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against that company. This type of litigation, regardless of the outcome, could result in substantial costs and a diversion of management's

34

attention and resources, which could materially and adversely affect our business, financial condition or results of operations.

Item 7a. 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.

Item 8. Financial Statements and Supplementary Data.

Report of Independent Auditors

The Board of Directors
Interactive Intelligence, Inc.

    We have audited the accompanying consolidated balance sheets of Interactive Intelligence, Inc. as of December 31, 2000 and 1999 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

    In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Interactive Intelligence, Inc. at December 31, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

Indianapolis, IN
January 19, 2001

35

Interactive Intelligence, Inc.

Consolidated Balance Sheets

As of December 31, 2000 and 1999

(in thousands, except share amounts)

	December 31,
	2000			1999
Assets
Current assets:
Cash and cash equivalents	$	1,999		$	2,235
Short-term investments		10,710			12,141
Accounts receivable, net of allowance for doubtful accounts accounts of $631 in 2000 and $437 in 1999		9,478			3,578
Prepaid expenses		970			513
Other current assets		186			80
Total current assets		23,343			18,547
Property and equipment, net		8,389			4,472
Long-term investments		1,012			8,989
Other assets, net		907			362
Total assets	$	33,651		$	32,370
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities	$	3,920		$	1,806
Accrued compensation and related expenses		1,128			484
Deferred revenue		7,421			4,988
Current portion of capital lease obligations		377			560
Total current liabilities		12,846			7,838
Capital lease obligations, net of current portion		—			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; 14,343,907 issued and outstanding at December 31, 2000, 13,831,486 issued and outstanding at December 31, 1999		143			138
Additional paid-in capital		46,995			45,775
Accumulated other comprehensive income		38			—
Accumulated deficit		(26,371	)		(21,758	)
Total shareholders' equity		20,805			24,155
Total liabilities and shareholders' equity	$	33,651		$	32,370

See accompanying notes.

36

Interactive Intelligence, Inc.

Consolidated Statements of Operations

For the Years Ended December 31, 2000, 1999, and 1998

(in thousands, except per share amounts)

	Year Ended December 31,
	2000			1999			1998
Revenues:
Software	$	28,121		$	14,231		$	7,662
Services		10,475			4,850			1,349
Total revenues		38,596			19,081			9,011
Costs and expenses:
Costs of software		540			194			59
Costs of services		10,118			5,728			3,381
Sales and marketing		17,486			10,175			6,623
Research and development		10,835			6,967			4,065
General and administrative		5,158			2,773			1,407
Total costs and expenses		44,137			25,837			15,535
Operating loss		(5,541	)		(6,756	)		(6,524	)
Interest income (expense), net		1,108			(361	)		(868	)
Loss before income taxes		(4,433	)		(7,117	)		(7,392	)
Income taxes		180			—			—
Net loss	$	(4,613	)	$	(7,117	)	$	(7,392	)
Net loss per share:
Basic and diluted	$	(0.33	)	$	(0.62	)	$	(0.84	)
Shares used to compute net loss per share:
Basic and diluted		14,171			11,469			8,816

See accompanying notes.

37

Interactive Intelligence, Inc.

Consolidated Statements of Shareholders' Equity (Deficit)

For the Years Ended December 31, 2000, 1999, and 1998

(in thousands)

	Common Stock							Accumulated Other Comprehensive Income
					Additional Paid-in Capital					Accumulated Deficit
	Shares		Amount										Total
Balances, January 1, 1998	7,742		$	77	$	955		$	—	$	(7,249	)	$	(6,217	)
Conversion of shareholder debt to equity	1,000			10		2,990			—		—			3,000
Issuances of common stock	711			7		5,326			—		—			5,333
Repurchase of common stock	(3	)		—		(12	)		—		—			(12	)
Exercise of stock options	626			7		127			—		—			134
Net loss	—			—		—			—		(7,392	)		(7,392	)
Balances, December 31, 1998	10,076			101		9,386			—		(14,641	)		(5,154	)
Conversion of shareholder obligations to equity	130			1		1,083			—		—			1,084
Issuances of common stock	3,014			30		35,042			—		—			35,072
Repurchase of common stock	(7	)		—		(74	)		—		—			(74	)
Exercise of stock options	618			6		276			—		—			282
Amortization of deferred stock based compensation	—			—		62			—		—			62
Net loss	—			—		—			—		(7,117	)		(7,117	)
Balances, December 31, 1999	13,831			138		45,775			—		(21,758	)		24,155
Issuances of common stock	10			—		317			—		—			317
Exercise of stock options	503			5		818			—		—			823
Amortization of deferred stock based compensation	—			—		85			—		—			85
Unrealized gain on investments	—			—		—			38		—			38
Net loss	—			—		—			—		(4,613	)		(4,613	)
Balances, December 31, 2000	14,344		$	143	$	46,995		$	38	$	(26,371	)	$	20,805

See accompanying notes.

38

Interactive Intelligence, Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2000, 1999, and 1998

(in thousands)

	Year Ended December 31,
	2000			1999			1998
Operating activities
Net loss	$	(4,613	)	$	(7,117	)	$	(7,392	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation		2,871			1,639			774
Amortization of deferred stock based compensation		85			62			—
Changes in operating assets and liabilities:
Accounts receivable, net		(5,900	)		(309	)		(1,916	)
Prepaid expenses		(457	)		(244	)		(121	)
Other current assets		(106	)		(5	)		(55	)
Accounts payable and accrued liabilities		2,114			209			812
Accrued compensation and related expenses		644			219			108
Deferred revenue		2,433			3,488			597
Accounts payable and deferred compensation—shareholder		—			(584	)		97
Net cash used by operating activities		(2,929	)		(2,642	)		(7,096	)
Investing activities
Purchases of property and equipment, net		(6,788	)		(3,671	)		(697	)
Purchases of available-for-sale securities		(2,461	)		(26,428	)		—
Sales of available-for-sale securities		11,907			5,298			—
Change in other assets		(545	)		(197	)		(132	)
Net cash provided (used) by investing activities		2,113			(24,998	)		(829	)
Financing activities
Borrowings under lines of credit		—			2,762			—
Repayment of lines of credit		—			(2,762	)		(1,500	)
Principal payments on capital lease obligations		(560	)		(541	)		(284	)
Borrowings under notes payable and accrued interest—shareholder		—			1,084			5,885
Repayments under notes payable and accrued interest—shareholder		—			(7,969	)		—
Proceeds from issuances of common stock		317			35,072			5,333
Repurchases of common stock		—			(74	)		(12	)
Proceeds from stock options exercised		823			282			134
Net cash provided by financing activities		580			27,854			9,556
Net increase (decrease) in cash and cash equivalents		(236	)		214			1,631
Cash and cash equivalents, beginning of year		2,235			2,021			390
Cash and cash equivalents, end of year	$	1,999		$	2,235		$	2,021

See accompanying notes.

39

Interactive Intelligence, Inc.

Notes to Consolidated Financial Statements

December 31, 2000, 1999, and 1998

1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

The Company

    Interactive Intelligence, Inc. ("I3" or the "Company") is a leading provider of software that manages a broad range of customer interactions including traditional telephone calls and faxes as well as Internet-based interactions such as e-mail, text chat, Web callback requests, and voice over Net calls. The Company's products provide a complete communications solution including PBX (private branch exchange), ACD (automated call distributor), IVR (interactive voice response), unified messaging, and Internet functionality. The Company currently derives substantially all of its revenues from licenses of its Interaction Center Platform™ products 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. In 2000, the Company established a wholly-owned subsidiary in Australia. The Company's products are marketed in North America, Central America, South America, Europe, the Asia/Pacific region, Australia, and South Africa.

Principles of Consolidation

    The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all significant intercompany accounts and transactions.

Revenue Recognition

    The Company generates software revenues from licensing the right to use its software products and also generates service revenues primarily from ongoing maintenance (post-contract technical support and product upgrades), educational services, and professional services.

    Revenue from software license agreements is recognized on shipment of the software if:

•

persuasive evidence of an arrangement exists;

•

sufficient vendor-specific objective evidence exists to support allocating the total fee to all elements of the arrangement;

•

the fee is fixed or determinable; and

•

collection is probable.

    Shipment is further defined in certain contracts as delivery of the product master or first copy for non-cancelable product licensing arrangements under which the recipient has certain software distribution rights. For these licensing arrangements, software revenues are generally recognized on placement of a binding order, as delivery has previously occurred through possession of a product master and the Company has no further delivery obligations. Revenue from ongoing end-user customer maintenance is recognized ratably over the post-contract support term, which is typically twelve months. Revenue from educational services and professional services is recognized when the services are performed.

Use of Estimates

    The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts

40

reported in the financial statements and accompanying notes. Despite management's best effort to establish good faith estimates and assumptions, actual results could differ from these estimates.

Cash and Cash Equivalents

    The Company considers all highly liquid investments with a maturity of three months or less from date of purchase to be cash equivalents. Cash and cash equivalents consist primarily of cash on deposit with banks and high quality money market instruments.

Investments

    The Company's investments, which consist primarily of taxable and tax-exempt corporate and government debt securities, are classified as available-for-sale and stated at fair value. Such investments are recorded at fair value and unrealized gains and losses are recorded as a separate component of equity until realized. Interest income is recorded using an effective interest rate, with associated premium or discount amortized to interest income. Realized gains and losses and declines in value of securities judged to be other than temporary are included in interest income. Interest and dividends on all securities are included

41

in interest income. The cost of securities sold is based on the specific identification method. Investments are summarized as follows at December 31 (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2000:
Short-term Investments
Corporate Notes	$	4,054	$	1	$	—		$	4,055
Government Notes		5,152		32		—			5,184
Other Asset Backed Securities		1,471		1		(1	)		1,471
Total Short-term Investments	$	10,677	$	34	$	(1	)	$	10,710
Long-term Investments
Other Asset Backed Securities	$	1,007	$	5	$	—		$	1,012
Total Long-term Investments	$	1,007	$	5	$	—		$	1,012
December 31, 1999:
Short-term Investments
Corporate Notes	$	7,080	$	—	$	—		$	7,080
Government Notes		1,426		—		—			1,426
Other Asset Backed Securities		3,635		—		—			3,635
Total Short-term Investments	$	12,141	$	—	$	—		$	12,141
Long-term Investments
Corporate Notes	$	2,019	$	—	$	—		$	2,019
Government Notes		4,990		—		—			4,990
Other Asset Backed Securities		1,980		—		—			1,980
Total Long-term Investments	$	8,989	$	—	$	—		$	8,989

    The Company also owns a 19% interest in Interactive Portal, Inc., an application service provider. This investment is accounted for under the cost method.

    Interest income was approximately $1,173,000 in 2000, $321,000 in 1999, and $18,000 in 1998.

Financial Instruments

    The fair value of financial instruments, including cash and cash equivalents and accounts receivable approximate the carrying values.

Property and Equipment

    Property and equipment are stated at cost. Leasehold improvements are amortized using the straight-line method over the lesser of the term of the related lease or the estimated useful life. Depreciation, which includes amortization on capital leases, is calculated using the straight-line method over the estimated useful lives of the assets.

42

Impairment of Long-Lived Assets

    The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. The Company does not have any long-lived assets it considers to be impaired.

Research and Development

    Research and development expenditures are generally charged to operations as incurred. Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. Through December 31, 2000, all research and development costs have been expensed.

Stock Options

    In accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), the Company uses the intrinsic value method to account for stock options, consistent with the existing rules established by Accounting Principles Board No. 25, Accounting for Stock Issued to Employees.

Loss Per Share

    Basic loss per share is calculated based on the weighted-average number of outstanding common shares in accordance with Statement of Financial Accounting Standard No. 128, Earnings per Share. 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 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 issuable upon the exercise of stock options.

Comprehensive Income

    The only items of other comprehensive income (loss) which the Company currently reports are unrealized gains (losses) on marketable securities. Total comprehensive loss for the year ended December 31, 2000 was approximately $4,575,000.

Derivatives

    In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which is required to be adopted in years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company.

43

2. PROPERTY AND EQUIPMENT

    Property and equipment, including capital leases, are summarized as follows at December 31 (in thousands):

	December 31,
	2000		1999
Computer equipment	$	9,429	$	4,513
Furniture & fixtures		1,596		924
Office equipment		259		230
Leasehold improvements		932		405
Software		1,376		774
Trade show equipment		256		214
		13,848		7,060
Less accumulated depreciation		5,459		2,588
	$	8,389	$	4,472

3. BANK LINES OF CREDIT

    The Company currently has an unsecured line of credit with a bank in the amount of $5,000,000 which bears interest at the bank's prime rate (9.5% at December 31, 2000). As of December 31, 2000, the Company had no outstanding balance under the line of credit. This line of credit expires April 30, 2001.

    The Company paid $70,518, $624,988, and $199,433, of interest in 2000, 1999, and 1998, respectively.

4. RELATED PARTY TRANSACTIONS

    At December 31, 1998 the Company had notes payable of $7,056,000 with its primary shareholder. The notes payable were due on December 31, 2001. Interest was accrued on the notes payable at a rate of 10% per annum. Accrued interest totaled $913,367 at December 31, 1998. These notes and related accrued interest were paid with proceeds from the Company's initial public offering in September 1999. Interest expense on the notes payable was $523,882 in 1999 and $685,505 in 1998. The notes payable were subordinated to the outstanding lines of credit.

    On July 31, 1998, the Company converted $3,000,000 of debt owed to its primary shareholder into 1,000,000 shares of Common Stock. On February 12, 1999, the Company converted $1,100,000 of amounts owed to its primary shareholder into 130,079 shares of Common Stock.

44

4. RELATED PARTY TRANSACTIONS (Continued)

    The Company's primary shareholder is a director and 25% shareholder in a telemarketing company that provides both telemarketing and fulfillment services to the Company. The Company paid approximately $423,000 in 2000, $263,000 in 1999, and $110,000 in 1998 for these services to the telemarketing company.

    The Company holds a 19% interest in Interactive Portal, Inc., an application service provider, which offers a wide variety of subscription based, enhanced communications and application services. The investment as of December 31, 2000 was $475,000. The remaining 81% interest is owned by the majority shareholder of the Company (71%) and a Director of the Company (10%). During November 2000, the Company agreed to provide an additional $475,000 of equity funding to Interactive Portal, Inc. in 2001. In 2000 the Company received a software order from Interactive Portal totaling approximately $40,000, received payment for miscellaneous services totaling approximately $6,000, and paid Interactive Portal approximately $3,000 for various expenses.

    On August 17, 2000 the Company entered into a software development agreement with NoInk Communications Ltd., a wireless communications software company. NoInk Communications Ltd.'s majority shareholder is a Director of the Company and the Company's primary shareholder is a 10% shareholder. In 2000, the Company paid NoInk Communications Ltd. approximately $29,000 for development work and related expenses.

5. SHAREHOLDERS' EQUITY

    On April 16, 1999, the Company authorized an increase in the authorized common stock to 100,000,000 and established a par value of $.01 on the common stock. At the same time, the Company authorized 10,000,000 shares of no par value preferred stock. In addition, on April 16, 1999, the Company adopted the 1999 Stock Option Plan and the Directors' Stock Option Plan. In conjunction with the adoption of these 1999 Stock Option Plans the Company will no longer issue stock options under the 1995 Stock Option Plans.

    On September 23, 1999 the Company completed an initial public offering of 3,000,500 shares at an offering price of $13.00 per share, including the underwriters' exercise of its overallotment option to purchase 300,500 shares. The net proceeds to the Company from the public offering and the exercise of the overallotment option by the underwriters, after deducting the underwriting discounts and commissions and offering expenses payable by the Company, were approximately $34.9 million. The Company used approximately $8.1 million of its initial public offering proceeds to repay interest-bearing and non-interest bearing amounts due its principal shareholder.

    Common Stock Options  The Company's Stock Option Plans, adopted in 1995 and 1999, authorize the granting of incentive and nonqualified stock options. The Board of Directors has approved up to an aggregate of 3,900,000 shares for issuance under the 1999 Stock Option Plans. The exercise price of the options must not be less than the fair market value of the common stock for incentive options at the date of grant. Options granted to employees under the 1999 Stock Option Plans generally vest over four years. Options generally become exercisable in equal installments on each of the first through the fourth anniversaries of the date of grant. The term of each option is ten years from the date of grant. However, in the case of an option granted to an employee who, at the time the option is granted, owns stock representing more than ten percent of the voting power of all classes of stock of the Company, the term of

45

the option shall be five years from the date of grant. The plans may be terminated by the Board of Directors at anytime. The Board of Directors has also issued 97,500 nonqualified stock options outside of the 1995 and 1999 Stock Option Plans.

    The Company recognized compensation expense of approximately $85,000 and $62,000 in 2000 and 1999, respectively. No compensation expense was recognized in 1998.

    Stock Option Activity is summarized as follows:

	2000					1999					1998
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Options outstanding, beginning of year		2,236,904		$	3.96		2,348,903		$	1.25		2,331,683		$	0.39
Options granted		622,875			30.64		599,325			11.25		730,500			3.13
Options exercised		(502,451	)		1.64		(617,614	)		0.46		(626,280	)		0.21
Options canceled		(124,512	)		19.85		(93,710	)		5.72		(87,000	)		1.37
Options outstanding, end of year		2,232,816		$	11.03		2,236,904		$	3.96		2,348,903		$	1.25
Option price range at end of year	$	0.13 - $50.50				$	0.13 - $30.75				$	0.13 - $8.33
Options available for grant at year end		2,995,487					3,522,800					908,317
Weighted average fair value of options granted during the year	$	26.14				$	5.11				$	1.16

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

			Options Outstanding			Options Exercisable
Range of Exercise Prices		Number Outstanding at December 31, 2000	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable at December 31, 2000	Weighted Average Exercise Price
$	0.13-$0.87	690,655	6.2 years	$	0.54	261,325	$	0.39
$	2.67-$3.00	487,916	7.5 years	$	2.86	152,036	$	2.95
$	8.33-$21.00	486,170	8.5 years	$	10.73	106,794	$	11.39
$	21.75-$38.94	449,450	9.4 years	$	27.99	16,014	$	25.27
$	39.00-$50.50	118,625	9.5 years	$	42.61	—		—

    Pro forma information regarding net income is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions for 2000 and 1999, respectively:

•

a risk-free interest rate of 5.2% and 6.0%,

•

a volatility factor of 98.2% and 74.5%,

46

•

a dividend yield of 0% for both years, and

•

a weighted-average expected life of the option of 7.5 years for both years.

    The minimum value pricing model was used for 1998 with the following weighted average assumptions: a risk-free interest rates of 5.0%, a dividend yield of 0%, and a weighted average expected life of the option of 7.5 years. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

    For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands):

	2000			1999			1998
Pro forma net loss	$	(8,154	)	$	(7,825	)	$	(7,730	)
Pro forma loss per share	$	(0.58	)	$	(0.68	)	$	(0.88	)

    2000 Employee Stock Purchase Plan  In May 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the "2000 Purchase Plan"). A total of 500,000 shares of common stock has been reserved for issuance under the 2000 Purchase Plan. The 2000 Purchase Plan permits eligible employees to acquire shares of Interactive Intelligence common stock through periodic payroll deductions of up to 20% of their total compensation. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of Interactive Intelligence common stock on the first or last business day of the immediately preceding calendar quarter. An employee may set aside no more than $25,000 to purchase shares annually. The initial offering period commenced on April 1, 2000. A total of 9,970 shares were issued in 2000 under the 2000 Purchase Plan at an average price of $31.80.

6. LEASE AGREEMENTS

    The Company leases its headquarters facilities under non-cancelable operating lease agreements which expire in 2004. In September 1998, the Company entered into a five year lease agreement commencing in March 1999 for 36,797 square feet of office space for its corporate headquarters in Indianapolis, Indiana. In December 1999, the Company amended its original lease agreement to include an additional 8,593 square feet, increasing the total corporate headquarters office space to 45,390 square feet.

    The Company had approximately $1,809,000 of primarily computer equipment at December 31, 2000 and 1999 under a capital lease line. The capital lease line expires in December 2001, is secured by the purchased assets and is also guaranteed by the Company's primary shareholder. The Company acquired approximately $1,320,000 of this equipment in 1998, and did not utilize the lease line in 1999 or 2000.

47

    Minimum future lease payments under non-cancelable capital and operating leases as of December 31, 2000 are summarized as follows (in thousands):

	Capital Leases			Operating Leases
2001	$	394		$	1,871
2002		—			1,598
2003		—			1,644
2004		—			529
2005		—			267
Thereafter		—			148
Total minimum lease payments		394		$	6,057
Less: amount representing interest		(17	)
Present value of lease payments		377
Less: current portion		(377	)
Long-term portion	$	—

    The Company also rents office space for sales offices under month-to-month leases and leases with terms generally less than one year. Rent expense was approximately $2,085,000, $1,204,000, and $441,000 in 2000, 1999, and 1998, respectively.

7. CONCENTRATION OF CREDIT RISK

    One entity represented 22% and five other entities represented an additional 18% of the accounts receivable balance at December 31, 2000. Six entities represented approximately 27% of the accounts receivable balance at December 31, 1999. No entity accounted for 10% or more of revenues in 2000, 1999 or 1998. The Company evaluates the credit worthiness of its customers on a periodic basis. The Company generally does not require collateral.

    The Company has one primary supplier of voice processing boards that are necessary for the operation of the Company's software product. If the primary supplier becomes unable or unwilling to continue to manufacture and supply these voice processing boards in the volume, price and technical specifications the Company requires, then the Company would have to rely on its single current alternative supplier and/or adapt its products to a substitute supplier.

8. 401(K) RETIREMENT SAVINGS PLAN

    The Company maintains a 401(k) retirement savings plan to provide retirement benefits for substantially all of its North American employees. Participants in the plan may elect to contribute up to 20% of their annual compensation to the plan, limited to the maximum amount allowed by the Internal Revenue Code. The Company, at its discretion, may make annual contributions to the plan. The Company has made no contributions to the plan through December 31, 2000.

48

9. INCOME TAXES

    Effective November 5, 1998, the Company terminated its S-corporation status for income tax purposes. From that date forward, the taxable income or loss from operations is includable in the federal and state income tax returns of the Company.

    FASB Statement No. 109, Accounting for Income Taxes, requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Accordingly, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities. The Company has a net operating loss carryforward of approximately $15 million at December 31, 2000 available to offset future taxable income for federal income tax purposes. The carryforward will expire beginning in 2018. Due to the uncertainty of the realization of the benefits of its favorable tax attributes in the future, the Company has established a valuation allowance against its deferred tax assets as of December 31, 2000 and 1999.

    Significant components of the Company's net deferred taxes at December 31 are as follows (in thousands):

	1999			1998
Deferred tax assets:
Net operating loss	$	4,549		$	3,042
Other		1,979			1,003
Total deferred tax assets		6,528			4,045
Valuation allowance		(6,528	)		(4,045	)
Net deferred taxes	$	—		$	—

    The Company did not record any tax benefit for any of the periods presented due to experiencing operating losses since inception.

    Income taxes presented in the statement of operations consist of current expense related to foreign operations.

10. SEGMENT DISCLOSURES

    Revenues derived from non-North American customers accounted for approximately 25% in 2000, 19% in 1999, and 16% in 1998 of the Company's total revenues.

    The Company attributes its revenues to countries based on the country in which the end-user customer is located. No individual non-North American country accounted for 10% of total revenues in 2000, 1999 or 1998. Approximately 12% of the Company's assets are located in foreign countries, of which approximately 7% are located in France.

11. 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 letters. 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 has discussed its conclusion with the competitor and has

49

also discussed possible licensing of certain technologies from the competitor. The Company cannot assure you that this matter can be resolved amicably without litigation, or that it will be able to enter into a licensing arrangement on terms and conditions that would not have a material adverse effect on the Company's business, financial condition or results of operations.

    In June 2000 and July 2000 the Company received letters from two other competitors in the call center market claiming that the Company's products utilize technologies pioneered and patented by those competitors. Although the Company's patent counsel has not determined the validity of these patents, the Company is discussing the possible licensing of certain technologies with these competitors. The Company cannot assure you that these claims can be resolved amicably without litigation, or that it will be able to enter into licensing arrangements on terms and conditions that would not have a material adverse effect on the Company's business, financial condition or results of operations.

SELECTED QUARTERLY FINANCIAL DATA (unaudited)

(in thousands, except per share amounts)

	Year Ended December 31, 2000
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Total revenue	$	7,040		$	8,618		$	10,478		$	12,460
Operating loss		(1,885	)		(1,997	)		(1,236	)		(423	)
Net loss		(1,641	)		(1,747	)		(996	)		(229	)
Net loss per share (basic and fully diluted)	$	(0.12	)	$	(0.12	)	$	(0.07	)	$	(0.02	)

	Year Ended December 31, 1999
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Total revenue	$	3,019		$	4,289		$	5,230		$	6,543
Operating loss		(2,034	)		(1,770	)		(1,770	)		(1,182	)
Net loss		(2,223	)		(1,979	)		(1,997	)		(918	)
Net loss per share (basic and fully diluted)	$	(0.21	)	$	(0.19	)	$	(0.18	)	$	(0.07	)

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

    Not applicable.

Part III

Item 10. Directors and Executive Officers of the Registrant.

    Information with respect to Directors set forth under the caption "Election of Directors" and information with respect to any delinquent filers set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 15, 2001, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2000, are incorporated herein by reference.

    Information with respect to Executive Officers is set forth under the caption "Executive Officers of the Registrant" at the end of Part I of this report.

Item 11. Executive Compensation.

    Information with respect to remuneration of the Company's officers and Directors set forth under the caption "Executive Compensation" appearing in the Company's definitive Proxy Statement for the Annual

50

Meeting of Shareholders to be held on May 15, 2001, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2000, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

    Information set forth under the captions "Principal Shareholders" and "Security Ownership of Management" appearing in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 15, 2001, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2000, are incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

    Information set forth under the caption "Certain Transactions" appearing in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 15, 2001, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2000, is incorporated herein by reference.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

1.

Consolidated Financial Statements

    The following information appears in Item 8 of Part II of this Report:

•

Report of Independent Auditors

•

Consolidated Balance Sheets as of December 31, 2000 and 1999

•

Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998

•

Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years Ended December 31, 2000, 1999, and 1998

•

Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998

•

Notes to Consolidated Financial Statements

2.

Financial Statement Schedule

    The following financial statement schedule is included in this Report:

•

Schedule II—Valuation and Qualifying Accounts

    All other schedules are omitted because they are not required, not applicable, or the required information is otherwise shown in the consolidated financial statements or the notes thereto.

3.

Reports on Form 8-K

    No reports on Form 8-K were filed by the Company during the quarter ended December 31, 2000.

4.

Exhibits

    Documents listed below are being filed as exhibits herewith. Documents identified by parenthetical numbers are being incorporated herein by reference and, pursuant to Rule 12b-32 of the General Rules and Regulations promulgated by the Commission under the Securities Exchange Act of 1934, reference is made to such documents as previously filed as exhibits with the Commission.

Exhibit Number	Document
3.1	(1)	Restated Articles of Incorporation of the Company
3.2	(1)	By-Laws of the Company, as amended to date

51

10.1	(1)	*1995 Incentive Stock Option Plan, as amended
10.2	(1)	*1995 Nonstatutory Stock Option Incentive Plan
10.3	(3)	*1999 Stock Option and Incentive Plan, as amended February 22, 2000
10.4	(1)	*Outside Directors Stock Option Plan, as amended
10.5	(1)	Subscription Agreement for Shares of Common Stock between the Company and Dialogic Investment Corporation
10.6	(1)	Strategic Relationship Agreement between the Company and Dialogic Corporation
10.7	(1)	Support Services Agreement between the Company and Dialogic Corporation
10.8	(1)	*(i) Consulting and Employment Agreement between the Company and John R. Gibbs, dated January 2, 1995
	(1)	*(ii) Amendment A, dated May 14, 1999, to Consulting and Employment Agreement between the Company and John R. Gibbs, dated January 2, 1995
10.9	(1)	*Employment Agreement between the Company and Michael E. Ford, dated June 30, 1997
10.10	(1)	*Employment Agreement between the Company and Keith A. Midkiff, dated February 10, 1997
10.11	(1)	*Employment Agreement between the Company and Douglas T. Shinsato, dated May 1, 1998
10.12	(1)	*(i) Employment Agreement between the Company and Jeremiah J. Fleming, dated as of March 1, 1997
	(1)	*(ii) Amendment A, dated May 14, 1999, to Employment Agreement between the Company and Jeremiah J. Fleming, dated as of March 1, 1997
10.13	(1)	*Letter of Assignment between the Company and Michael E. Ford, effective August 1, 1998
10.14	(1)	*Stock Option Agreement between the Company and Donald E. Brown, M.D., dated September 22, 1998
10.15	(1)	Variable Rate Commercial Revolving or Draw Note, dated August 27, 1998, made by the Company in favor of People's Bank and Trust Company
10.16	(1)	Variable Rate Commercial Revolving or Draw Note, dated October 1, 1998, made by the Company in favor of People's Bank and Trust Company
10.17		Business Loan Agreement, dated December 21, 2000, between the Company and KeyBank National Association ("KeyBank"), and Promissory Note made by the Company in favor of Keybank, dated December 21, 2000.
10.18	(1)	Consolidated Subordinated Promissory Note made by the Company in favor of Donald E. Brown, M.D., dated May 1, 1999
10.19	(1)	(i) Office Lease, dated September 16, 1998, between the Company and College Park Plaza Associates, Inc.
	(4)	(ii) Lease Modification Agreement, dated December 8, 1999, between the Company and College Park Plaza Associates, Inc.

52

10.20	(1)	*(i) Employment Agreement between the Company and Michael J. Tavlin, dated June 1, 1999
	(1)	*(ii) Amendment A, dated June 1, 1999, to Employment Agreement between the Company and Michael J. Tavlin, dated June 1, 1999
10.21	(1)	*Stock Option Agreement between the Company and Jon Anton, D.Sc., dated May 26, 1999
10.22	(1)	*Stock Option Agreement between the Company and Michael P. Cullinane, dated May 26, 1999
10.23	(1)	Form of Indemnity Agreement between the Company and each of its directors and executive officers
10.24	(2)	Variable Rate Commercial Revolving or Draw Note, dated October 31, 1999, made by the Company in favor of People's Bank and Trust Company
10.25	(2)	Variable Rate Commercial Revolving or Draw Note, dated October 31, 1999, made by the Company in favor of People's Bank and Trust Company
10.26	(5)	Subscription Agreement, dated as of January 12, 2000, between the Company and Interactive Portal, Inc.
10.27	(5)	*Form of Amendment to Employment Agreement, dated March 15, 2000, between the Company and each of Messrs. John R. Gibbs, Michael E. Ford, Keith A. Midkiff, Douglas T. Shinsato, Jeremiah J. Fleming, and Michael J. Tavlin
10.28	(6)	*Interactive Inteligence, Inc. Employee Stock Purchase Plan
10.29	(7)	*Interactive Intelligence, Inc. 401(k) Savings Plan
10.30		Subscription Agreement, dated as of November 15, 2000, between the Company and Interactive Portal, Inc.
21		Subsidiaries of the Company
23		Consent of Ernst & Young LLP

*

The indicated exhibit is a management contract, compensatory plan or arrangement required to be filed by Item 601 of Regulation S-K.

(1)

The copy of this exhibit filed as the same exhibit number to the Company's Registration Statement on Form S-1 (Registration No. 333-79509) is incorporated herein by reference.

(2)

The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 is incorporated herein by reference.

(3)

The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 is incorporated herein by reference.

(4)

The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 is incorporated herein by reference.

(5)

The copy of this exhibit filed as the same exhibit number to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 is incorporated herein by reference.

(6)

The copy of this exhibit filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (Registration No. 333-33734) is incorporated herein by reference.

(7)

The copy of this exhibit filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (Registration No. 333-33772) is incorporated herein by reference.

53

SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 2001	By	/s/ MICHAEL J. TAVLIN Michael J. Tavlin Senior Vice President, Chief Financial Officer and Secretary (Principal Financial Officer)

    Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE	CAPACITY	DATE
/s/ DONALD E. BROWN, M.D. Donald E. Brown, M.D.	Chairman, President, Chief Executive Officer and Director (Principal Executive Officer)	March 30, 2001
/s/ JOHN R. GIBBS John R. Gibbs	Executive Vice President of Administration and Corporate Development and Director	March 30, 2001
/s/ MICHAEL J. TAVLIN Michael J. Tavlin	Senior Vice President Chief Financial Officer and Secretary (Principal Financial Officer)	March 30, 2001
/s/ KEITH A. MIDKIFF Keith A. Midkiff	Vice President of Finance and Controller (Principal Accounting Officer)	March 30, 2001
/s/ JON ANTON, D.SC. Jon Anton, D.Sc.	Director	March 30, 2001
/s/ ROBERT A. COMPTON Robert A. Compton	Director	March 30, 2001
/s/ MICHAEL P. CULLINANE Michael P. Cullinane	Director	March 30, 2001

54

Schedule II—Valuation and Qualifying Accounts
Interactive Intelligence, Inc. and Subsidiaries

			Additions
Description	Balance at Beginning of Period		Charged to Costs and Expenses	Charged to Other Accounts—Describe	Deductions— Describe		Balance at End of Period
Year ended December 31, 1998
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts	$	148,000	188,000	—	64,000	(1)	$	272,000
Year ended December 31, 1999
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts	$	272,000	192,000	—	27,000	(1)	$	437,000
Year ended December 31, 2000
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts	$	437,000	383,000	—	189,000	(1)	$	631,000

(1)

Uncollectible accounts written off, net of recoveries.

55

QuickLinks

TABLE OF CONTENTS
PART I.
Item 1. Business.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Part III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
SIGNATURES
Schedule II—Valuation and Qualifying Accounts Interactive Intelligence, Inc. and Subsidiaries

EX-10.17

                                                                  Exhibit 10.17


                            BUSINESS LOAN AGREEMENT


- ----------------------------------------------------------------------------------------------------------
                                                                          
PRINCIPAL       LOAN DATE     MATURITY     LOAN NO     CALL   COLLATERAL    ACCOUNT     OFFICER   INITIALS
$5,000,000.00   12-21-2000    04-30-2001    10001      403        000      N100429074    MKA02
- ----------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- ----------------------------------------------------------------------------------------------------------


BORROWER: INTERACTIVE INTELLIGENCE, INC.   LENDER: KEYBANK NATIONAL ASSOCIATION
          8909 PURDUE ROAD                         202 S. MICHIGAN STREET
          INDIANAPOLIS, IN 46268                   SOUTH BEND, IN 46601


THIS BUSINESS LOAN AGREEMENT BETWEEN INTERACTIVE INTELLIGENCE, INC. ("BORROWER")
AND KEYBANK NATIONAL ASSOCIATION ("LENDER") IS MADE AND EXECUTED ON THE
FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS
FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER
FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT
OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM
LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN"
AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (A) IN
GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S
REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (B)
THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE
SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL
BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS
AGREEMENT.

TERM. This Agreement shall be effective as of DECEMBER 21, 2000, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.

DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.

     AGREEMENT. The word "Agreement" means this Business Loan Agreement, as this
     Business Loan Agreement may be amended or modified from time to time,
     together with all exhibits and schedules attached to this Business Loan
     Agreement from time to time.

     BORROWER. The word "Borrower" means Interactive Intelligence, Inc.. The
     word "Borrower" also includes, as applicable, all subsidiaries and
     affiliates of Borrower as provided below in the paragraph titled
     "Subsidiaries and Affiliates."

     CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
     Compensation, and Liability Act of 1980, as amended.

     COLLATERAL. The word "Collateral" means and includes without limitation all
     property and assets granted as collateral security for a Loan, whether real
     or personal property, whether granted directly or indirectly, whether
     granted now or in the future, and whether granted in the form of a security
     interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
     chattel trust, factor's lien, equipment trust, conditional sale, trust
     receipt, lien, charge, lien or title retention contract, lease or
     consignment intended as a security device, or any other security or lien
     interest whatsoever, whether created by law, contract, or otherwise.

     ERISA. The word "ERISA" means the Employee Retirement Income Security Act
     of 1974, as amended.

     EVENT OF DEFAULT. The words "Event of Default" mean and include without
     limitation any of the Events of Default set forth below in the section
     titled "EVENTS OF DEFAULT."

     GRANTOR. The word "Grantor" means and includes without limitation each and
     all of the persons or entities granting a Security Interest in any
     Collateral for the Indebtedness, including without limitation all Borrowers
     granting such a Security Interest.

     GUARANTOR. The word "Guarantor" means and includes without limitation each
     and all of the guarantors, sureties, and accommodation parties in
     connection with any Indebtedness.

     INDEBTEDNESS. The word "Indebtedness" means and includes without limitation
     all Loans, together with all other obligations, debts and liabilities of
     Borrower to Lender, or any one or more of them, as well as all claims by
     Lender against Borrower, or any one or more of them; whether now or
     hereafter existing, voluntary or involuntary, due or not due, absolute or
     contingent, liquidated or unliquidated; whether Borrower may be liable
     individually or jointly with others; whether Borrower may be obligated as
     a guarantor, surety, or otherwise; whether recovery upon such Indebtedness
     may be or hereafter may become barred by any statute of limitations; and
     whether such Indebtedness may be or hereafter may become otherwise
     unenforceable.

     LENDER. The word "Lender" means KeyBank National Association, its
     successors and assigns.

     LOAN. The word "Loan" or "Loans" means and includes without limitation any
     and all commercial loans and financial accommodations from Lender to
     Borrower, whether now or hereafter existing, and however evidenced,
     including without limitation those loans and financial accommodations
     described herein or described on any exhibit or schedule attached to this
     Agreement from time to time.

     NOTE. The word "Note" means and includes without limitation Borrower's
     promissory note or notes, if any, evidencing Borrower's Loan obligations in
     favor of Lender, as well as any substitute, replacement or refinancing note
     or notes therefor.

     PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
     interests securing Indebtedness owed by Borrower to Lender; (b) liens for
     taxes, assessments, or similar charges either not yet due or being
     contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
     or carriers, or other like liens arising in the ordinary course of business
     and securing obligations which are not yet delinquent; (d) purchase money
     liens or purchase money security interests upon or in any property acquired
     or held by Borrower in the ordinary course of business to secure
     indebtedness outstanding on the date of this Agreement or permitted to be
     incurred under the paragraph of this Agreement titled "Indebtedness and
     Liens"; (e) liens and security interests which, as of the date of this
     Agreement, have been disclosed to and approved by the Lender in writing;
     and (f) those liens and security interests which in the aggregate
     constitute an immaterial and insignificant monetary amount with respect to
     the net value of Borrower's assets.

     RELATED DOCUMENTS. The words "Related Documents" mean and include without
     limitation all promissory notes, credit agreements, loan agreements,
     environmental agreements, guaranties, security agreements, mortgages, deeds
     of trust, and all other instruments, agreements and



12-21-2000                  BUSINESS LOAN AGREEMENT                      PAGE 2
                                  (CONTINUED)

     documents, whether now or hereafter existing, executed in connection with
     the Indebtedness.

     SECURITY AGREEMENT. The words "Security Agreement" mean and include without
     limitation any agreements, promises, covenants, arrangements,
     understandings or other agreements, whether created by law, contract, or
     otherwise, evidencing, governing, representing, or creating a Security
     Interest.

     SECURITY INTEREST. The words "Security Interest" mean and include without
     limitation any type of collateral security, whether in the form of a lien,
     charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
     chattel trust, factor's lien, equipment trust, conditional sale, trust
     receipt, lien or title retention contract, lease or consignment intended as
     a security device, or any other security or lien interest whatsoever,
     whether created by law, contract, or otherwise.

     SARA. The word "SARA" means the Superfund Amendments and Reauthorization
     Act of 1986 as now or hereafter amended.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions
set forth in this Agreement and in the Related Documents.

     LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory to
     Lender the following documents for the Loan: (a) the Note, (b) Security
     Agreements granting to Lender security interests in the Collateral, (c)
     Financing Statements perfecting Lender's Security Interests; (d) evidence
     of insurance as required below; and (e) any other documents required under
     this Agreement or by Lender or its counsel.

     BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
     substance satisfactory to Lender properly certified resolutions, duly
     authorizing the execution and delivery of this Agreement, the Note and the
     Related Documents, and such other authorizations and other documents and
     instruments as Lender or its counsel, in their sole discretion, may
     require.

     PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees,
     charges, and other expenses which are then due and payable as specified in
     this Agreement or any Related Document.

     REPRESENTATIONS AND WARRANTIES. The representations and warranties set
     forth in this Agreement, in the Related Documents, and in any document or
     certificate delivered to Lender under this Agreement are true and correct.

     NO EVENT OF DEFAULT. There shall not exist at the time of any advance a
     condition which would constitute an Event of Default under this Agreement.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:

     ORGANIZATION. Borrower is a corporation which is duly organized, validly
     existing, and in good standing under the laws of the State of Indiana and
     is validly existing and in good standing in all states in which Borrower is
     doing business. Borrower has the full power and authority to own its
     properties and to transact the businesses in which it is presently engaged
     or presently proposes to engage. Borrower also is duly qualified as a
     foreign corporation and is in good standing in all states in which the
     failure to so qualify would have a material adverse effect on its
     businesses or financial condition.

     AUTHORIZATION. The execution, delivery, and performance of this Agreement
     and all Related Documents by Borrower, to the extent to be executed,
     delivered or performed by Borrower, have been duly authorized by all
     necessary action by Borrower; do not require the consent or approval of any
     other person, regulatory authority or governmental body; and do not
     conflict with, result in a violation of, or constitute a default under (a)
     any provision of its articles of incorporation or organization, or bylaws,
     or any agreement or other instrument binding upon Borrower or (b) any law,
     governmental regulation, court decree, or order applicable to Borrower.

     FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
     Lender truly and completely disclosed Borrower's financial condition as of
     the date of the statement, and there has been no material adverse change in
     Borrower's financial condition subsequent to the date of the most recent
     financial statement supplied to Lender. Borrower has no material contingent
     obligations except as disclosed in such financial statements.

     LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
     required hereunder to be given by Borrower when delivered will constitute,
     legal, valid and binding obligations of Borrower enforceable against
     Borrower in accordance with their respective terms.

     PROPERTIES. Except as contemplated by this Agreement or as previously
     disclosed in Borrower's financial statements or in writing to Lender and as
     accepted by Lender, and except for property tax liens for taxes not
     presently due and payable, Borrower owns and has good title to all of
     Borrower's properties free and clear of all Security Interests, and has not
     executed any security documents or financing statements relating to such
     properties. All of Borrower's properties are titled in Borrower's legal
     name, and Borrower has not used, or filed a financing statement under, any
     other name for at least the last five (5) years.

     HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
     "disposal," "release," and "threatened release," as used in this Agreement,
     shall have the same meanings as set forth in the "CERCLA," "SARA," the
     Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
     the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
     seq., or other applicable state or Federal laws, rules, or regulations
     adopted pursuant to any of the foregoing. Except as disclosed to and
     acknowledged by Lender in writing, Borrower represents and warrants that:
     (a) During the period of Borrower's ownership of the properties, there has
     been no use, generation, manufacture, storage, treatment, disposal, release
     or threatened release of any hazardous waste or substance by any person on,
     under, about or from any of the properties. (b) Borrower has no knowledge
     of, or reason to believe that there has been (i) any use, generation,
     manufacture, storage, treatment, disposal, release, or threatened release
     of any hazardous waste or substance on, under, about or from the properties
     by any prior owners or occupants of any of the properties, or (ii) any
     actual or threatened litigation or claims of any kind by any person
     relating to such matters. (c) Neither Borrower nor any tenant, contractor,
     agent or other authorized user of any of the properties shall use,
     generate, manufacture, store, treat, dispose of, or release any hazardous
     waste or substance on, under, about or from any of the properties; and any
     such activity shall be conducted in compliance with all applicable federal,
     state, and local laws, regulations, and ordinances, including without
     limitation those laws, regulations and ordinances described above. Borrower
     authorizes Lender and its agents to enter upon the properties to make such
     inspections and tests as Lender may deem appropriate to determine
     compliance of the properties with this section of the Agreement. Any
     inspections or tests made by Lender shall be at Borrower's expense and for
     Lender's purposes only and shall not be construed to create any
     responsibility or liability on the part of Lender to Borrower or to any
     other person. The representations and warranties contained herein are based
     on Borrower's due diligence in investigating the properties for hazardous
     waste and hazardous substances. Borrower hereby (a) releases and waives any
     future claims against Lender for indemnity or contribution in the event
     Borrower becomes liable for cleanup or other costs under any such laws, and
     (b) agrees to indemnify and hold harmless Lender against any and all
     claims, losses, liabilities, damages, penalties, and expenses which Lender
     may directly or indirectly sustain or suffer resulting from a breach of
     this section of the Agreement or as a consequence of any use, generation,
     manufacture, storage, disposal, release or threatened release of a
     hazardous waste or substance on the properties. The provisions of this
     section of the Agreement, including the obligation to indemnify, shall
     survive the payment of the Indebtedness and the termination or expiration
     of this Agreement and shall not be affected by Lender's acquisition of any
     interest in any of the properties, whether by foreclosure or otherwise.

     LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
     proceeding or similar action (including those for unpaid taxes) against



12-21-2000                   BUSINESS LOAN AGREEMENT                      PAGE 3
                                   (CONTINUED)

     Borrower is pending or threatened, and no other event has occurred which
     may materially adversely affect Borrower's financial condition or
     properties, other than litigation, claims, or other events, if any, that
     have been disclosed to and acknowledged by Lender in writing.

     TAXES. To the best of Borrower's knowledge, all tax returns and reports of
     Borrower that are or were required to be filed, have been filed, and all
     taxes, assessments and other governmental charges have been paid in full,
     except those presently being or to be contested by Borrower in good faith
     in the ordinary course of business and for which adequate reserves have
     been provided.

     LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
     Borrower has not entered into or granted any Security Agreements, or
     permitted the filing or attachment of any Security Interests on or
     affecting any of the Collateral directly or indirectly securing repayment
     of Borrower's Loan and Note, that would be prior or that may in any way be
     superior to Lender's Security Interests and rights in and to such
     Collateral.

     BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
     or indirectly securing repayment of Borrower's Loan and Note and all of the
     Related Documents are binding upon Borrower as well as upon Borrower's
     successors, representatives and assigns, and are legally enforceable in
     accordance with their respective terms.

     COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
     business or commercial related purposes.

     EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
     have any liability complies in all material respects with all applicable
     requirements of law and regulations, and (i) no Reportable Event nor
     Prohibited Transaction (as defined in ERISA) has occurred with respect to
     any such plan, (ii) Borrower has not withdrawn from any such plan or
     initiated steps to do so, (iii) no steps have been taken to terminate any
     such plan, and (iv) there are no unfunded liabilities other than those
     previously disclosed to Lender in writing.

     LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
     or Borrower's Chief executive office, if Borrower has more than one place
     of business, is located at 8909 Purdue Road, Indianapolis, IN 46268. Unless
     Borrower has designated otherwise in writing this location is also the
     office or offices where Borrower keeps its records concerning the
     Collateral.

     YEAR 2000. Borrower warrants and represents that all software utilized in
     the conduct of Borrower's business will have appropriate capabilities and
     compatiblity for operation to handle calendar dates falling on or after
     January 1, 2000, and all information pertaining to such calendar dates, in
     the same manner and with the same functionality as the software does
     respecting calendar dates falling on or before December 31, 1999. Further,
     Borrower warrants and represents that the data-related user interface
     functions, data-fields, and data-related program instructions and functions
     of the software include the indication of the century.

     INFORMATION. All information heretofore or contemporaneously herewith
     furnished by Borrower to Lender for the purposes of or in connection with
     this Agreement or any transaction contemplated hereby is, and all
     information hereafter furnished by or on behalf of Borrower to Lender will
     be, true and accurate in every material respect on the date as of which
     such information is dated or certified; and none of such information is or
     will be incomplete by omitting to state any material fact necessary to make
     such information not misleading.

     SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
     that Lender, without independent investigation, is relying upon the above
     representations and warranties in extending Loan Advances to Borrower.
     Borrower further agrees that the foregoing representations and warranties
     shall be continuing in nature and shall remain in full force and effect
     until such time as Borrower's Indebtedness shall be paid in full, or until
     this Agreement shall be terminated in the manner provided above, whichever
     is the last to occur.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:

     LITIGATION. Promptly inform Lender in writing of (a) all material adverse
     changes in Borrower's financial condition, and (b) all existing and all
     threatened litigation, claims, investigations, administrative proceedings
     or similar actions affecting Borrower or any Guarantor which could
     materially affect the financial condition of Borrower or the financial
     condition of any Guarantor.

     FINANCIAL RECORDS. Maintain its books and records in accordance with
     generally accepted accounting principles, applied on a consistent basis,
     and permit Lender to examine and audit Borrower's books and records at all
     reasonable times.

     FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
     event later than one hundred twenty (120) days after the end of each fiscal
     year, Borrower's balance sheet and income statement for the year ended,
     reviewed by a certified public accountant satisfactory to Lender, and, as
     soon as available, but in no event later than forty five (45) days after
     the end of each fiscal quarter, Borrower's balance sheet and profit and
     loss statement for the period ended, prepared and certified as correct to
     the best knowledge and belief by Borrower's chief financial officer or
     other officer or person acceptable to Lender. All financial reports
     required to be provided under this Agreement shall be prepared in
     accordance with generally accepted accounting principles, applied on a
     consistent basis, and certified by Borrower as being true and correct.

     ADDITIONAL INFORMATION. Furnish such additional information and statements,
     lists of assets and liabilities, agings of receivables and payables,
     inventory schedules, budgets, forecasts, tax returns, and other reports
     with respect to Borrower's financial condition and business operations as
     Lender may request from time to time.

     INSURANCE. Maintain fire and other risk insurance, public liability
     insurance, and such other insurance as Lender may require with respect to
     Borrower's properties and operations, in form, amounts, coverages and with
     insurance companies reasonably acceptable to Lender. Borrower, upon request
     of Lender, will deliver to Lender from time to time the policies or
     certificates of insurance in form satisfactory to Lender, including
     stipulations that coverages will not be cancelled or diminished without at
     least ten (10) days' prior written notice to Lender. Each insurance policy
     also shall include an endorsement providing that coverage in favor of
     Lender will not be impaired in any way by any act, omission or default of
     Borrower or any other person. In connection with all policies covering
     assets in which Lender holds or is offered a security interest for the
     Loans, Borrower will provide Lender with such loss payable or other
     endorsements as Lender may require.

     INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
     each existing insurance policy showing such information as Lender may
     reasonably request, including without limitation the following: (a) the
     name of the insurer; (b) the risks insured; (c) the amount of the policy;
     (d) the properties insured; (e) the then current property values on the
     basis of which insurance has been obtained, and the manner of determining
     those values; and (f) the expiration date of the policy. In addition, upon
     request of Lender (however not more often than annually), Borrower will
     have an independent appraiser satisfactory to Lender determine, as
     applicable, the actual cash value or replacement cost of any Collateral.
     The cost of such appraisal shall be paid by Borrower.

     OTHER AGREEMENTS. Comply with all terms and conditions of all other
     agreements, whether now or hereafter existing, between Borrower and any
     other party and notify Lender immediately in writing of any default in
     connection with any other such agreements.

     LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
     operations, unless specifically consented to the contrary by Lender in
     writing.

     TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
     indebtedness and obligations, including without limitation all assessments,
     taxes, governmental charges, levies and liens, of every kind and nature,
     imposed upon Borrower or its properties, income, or profits, prior to the
     date on which penalties would attach, and all lawful claims that, if
     unpaid, might become a lien or charge upon any of Borrower's properties,
     income, or profits. Provided however, Borrower will not be required to pay
     and discharge any such assessment, tax, charge, levy, lien or claim so



12-21-2000                  BUSINESS LOAN AGREEMENT                      PAGE 4
                                  (CONTINUED)

     long as (a) the legality of the same shall be contested in good faith by
     appropriate proceedings, and (b) Borrower shall have established on its
     books adequate reserves with respect to such contested assessment, tax,
     charge, levy, lien, or claim in accordance with generally accepted
     accounting practices. Borrower, upon demand of Lender, will furnish to
     Lender evidence of payment of the assessments, taxes, charges, levies,
     liens and claims and will authorize the appropriate governmental official
     to deliver to Lender at any time a written statement of any assessments,
     taxes, charges, levies, liens and claims against Borrower's properties,
     income, or profits.

     PERFORMANCE. Perform and comply with all terms, conditions, and provisions
     set forth in this Agreement and in the Related Documents in a timely
     manner, and promptly notify Lender if Borrower learns of the occurrence of
     any event which constitutes an Event of Default under this Agreement or
     under any of the Related Documents.

     OPERATIONS. Maintain executive and management personnel with substantially
     the same qualifications and experience as the present executive and
     management personnel; provide written notice to Lender of any change in
     executive and management personnel; conduct its business affairs in a
     reasonable and prudent manner and in compliance with all applicable
     federal, state and municipal laws, ordinances, rules and regulations
     respecting its properties, charters, businesses and operations, including
     without limitation, compliance with the Americans With Disabilities Act and
     with all minimum funding standards and other requirements of ERISA and
     other laws applicable to Borrower's employee benefit plans.

     INSPECTION. Permit employees or agents of Lender at any reasonable time to
     inspect any and all Collateral for the Loan or Loans and Borrower's other
     properties and to examine or audit Borrower's books, accounts, and records
     and to make copies and memoranda of Borrower's books, accounts, and
     records. If Borrower now or at any time hereafter maintains any records
     (including without limitation computer generated records and computer
     software programs for the generation of such records) in the possession of
     a third party, Borrower, upon request of Lender, shall notify such party to
     permit Lender free access to such records at all reasonable times and to
     provide Lender with copies of any records it may request, all at Borrower's
     expense.

     COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
     at least annually and at the time of each disbursement of Loan proceeds
     with a certificate executed by Borrower's chief financial officer, or other
     officer or person acceptable to Lender, certifying that the representations
     and warranties set forth in this Agreement are true and correct as of the
     date of the certificate and further certifying that, as of the date of the
     certificate, no Event of Default exists under this Agreement.

     ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
     with all environmental protection federal, state and local laws, statutes,
     regulations and ordinances; not cause or permit to exist, as a result of an
     intentional or unintentional action or omission on its part or on the part
     of any third party, on property owned and/or occupied by Borrower, any
     environmental activity where damage may result to the environment, unless
     such environmental activity is pursuant to and in compliance with the
     conditions of a permit issued by the appropriate federal, state or local
     governmental authorities; shall furnish to Lender promptly and in any event
     within thirty (30) days after receipt thereof a copy of any notice,
     summons, lien, citation, directive, letter or other communication from any
     governmental agency or instrumentality concerning any intentional or
     unintentional action or omission on Borrower's part in connection with any
     environmental activity whether or not there is damage to the environment
     and/or other natural resources.

     ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
     notes, mortgages, deeds of trust, security agreements, financing
     statements, instruments, documents and other agreements as Lender or its
     attorneys may reasonably request to evidence and secure the Loans and to
     perfect all Security Interests.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:

     INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
     course of business and indebtedness to Lender contemplated by this
     Agreement, create, incur or assume indebtedness for borrowed money,
     including capital leases, (b) except as allowed as a Permitted Lien, sell,
     transfer, mortgage, assign, pledge, lease, grant a security interest in, or
     encumber any of Borrower's assets, or (c) sell with recourse any of
     Borrower's accounts, except to Lender.

     CONTINUITY OF OPERATIONS. (a) Engage in any business activities
     substantially different than those in which Borrower is presently engaged,
     (b) cease operations, liquidate, merge, transfer, acquire or consolidate
     with any other entity, change ownership, change its name, dissolve or
     transfer or sell Collateral out of the ordinary course of business, (c) pay
     any dividends on Borrower's stock (other than dividends payable in its
     stock), provided, however that notwithstanding the foregoing, but only so
     long as no Event of Default has occurred and is continuing or would result
     from the payment of dividends, if Borrower is a "Subchapter S Corporation"
     (as defined in the Internal Revenue Code of 1986, as amended), Borrower may
     pay cash dividends on its stock to its shareholders from time to time in
     amounts necessary to enable the shareholders to pay income taxes and make
     estimated income tax payments to satisfy their liabilities under federal
     and state law which arise solely from their status as Shareholders of a
     Subchapter S Corporation because of their ownership of shares of stock of
     Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
     alter or amend Borrower's capital structure.

     LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or
     assets, (b) purchase, create or acquire any interest in any other
     enterprise or entity, or (c) incur any obligation as surety or guarantor
     other than in the ordinary course of business.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.

FINANCIAL COVENANTS AND ADDITIONAL DEFINITIONS. Borrower covenants and agrees
with Lender that, while this Agreement is in effect, Borrower will:

CURRENT RATIO. Borrower shall maintain a ratio of Current Assets to Current
Liabilities in excess of 1.4 to 1 .0; calculated at the end of each quarterly.
The words Current Assets shall be as defined by GAAP, minus prepaid expenses.
The word Current Liabilities shall be as defined by GAAP.

SENIOR LIABILITIES TO ADJUSTED TANGIBLE CAPITAL RATIO. Borrower shall maintain a
ratio of Total Senior Liabilities to Adjusted Tangible Capital of not more than
1 to 1; calculated at the end of each quarter. The words "Total Senior
Liabilities" mean total liabilities less Subordinated Debt. The words "Adjusted
Tangible Capital" mean Tangible Capital less investments in, advances to,
promissory notes and any receivables from, any affiliate or other related entity
of Borrower. The words "Tangible Capital" mean Tangible Net Worth plus
Subordinated Debt. The words "Tangible Net Worth" mean Borrower's total assets
excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but including
leaseholds and leasehold improvements) less Total Debt. The words "Total Debt"
mean all of Borrower's liabilities including Subordinated Debt. The words
"Subordinated Debt" mean indebtedness and liabilities of Borrower which have
been subordinated by written agreement to indebtedness owed by Borrower to
Lender in form and substance acceptable to Lender.



12-21-2000                BUSINESS LOAN AGREEMENT                         PAGE 5
                                   (CONTINUED)

EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:

     DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
     on the Loans.

     OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
     perform when due any other term, obligation, covenant or condition
     contained in this Agreement or in any of the Related Documents, or failure
     of Borrower to comply with or to perform any other term, obligation,
     covenant or condition contained in any other agreement between Lender and
     Borrower.

     DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
     under any loan, extension of credit, security agreement, purchase or sales
     agreement, or any other agreement, in favor of any other creditor or person
     that may materially affect any of Borrower's property or Borrower's or any
     Grantor's ability to repay the Loans or perform their respective
     obligations under this Agreement or any of the Related Documents.

     FALSE STATEMENTS. Any Warranty, representation or statement made or
     furnished to Lender by or on behalf of Borrower or any Grantor under this
     Agreement or the Related Documents is false or misleading in any material
     respect at the time made or furnished, or becomes false or misleading at
     any time thereafter.

     DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
     ceases to be in full force and effect (including failure of any Security
     Agreement to create a valid and perfected Security Interest) at any time
     and for any reason.

     INSOLVENCY. The dissolution or termination of Borrower's existence as a
     going business, the insolvency of Borrower, the appointment of a receiver
     for any part of Borrower's property, any assignment for the benefit of
     creditors, any type of creditor workout, or the commencement of any
     proceeding under any bankruptcy or insolvency laws by or against Borrower.

     CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
     forfeiture proceedings, whether by judicial proceeding, self-help,
     repossession or any other method, by any creditor of Borrower, any creditor
     of any Grantor against any collateral securing the Indebtedness, or by any
     governmental agency. This includes a garnishment, attachment, or levy on or
     of any of Borrower's deposit accounts with Lender. However, this Event of
     Default shall not apply if there is a good faith dispute by Borrower or
     Grantor, as the case may be, as to the validity or reasonableness of the
     claim which is the basis of the creditor or forfeiture proceeding, and if
     Borrower or Grantor gives Lender written notice of the creditor or
     forfeiture proceeding and furnishes reserves or a surety bond for the
     creditor or forfeiture proceeding satisfactory to Lender.

     EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
     to any Guarantor of any of the Indebtedness or any Guarantor dies or
     becomes incompetent, or revokes or disputes the validity of, or liability
     under, any Guaranty of the Indebtedness. Lender, at its option, may, but
     shall not be required to, permit the Guarantor's estate to assume
     unconditionally the obligations arising under the guaranty in a manner
     satisfactory to Lender, and, in doing so, cure the Event of Default.

     CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
     or more of the common stock of Borrower.

     ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
     condition, or Lender believes the prospect of payment or performance of
     the Indebtedness is impaired.

     INSECURITY. Lender, in good faith, deems itself insecure.

     RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
     curable and if Borrower or Grantor, as the case may be, has not been given
     a notice of a similar default within the preceding twelve (12) months, it
     may be cured (and no Event of Default will have occurred) if Borrower or
     Grantor, as the case may be, after receiving written notice from Lender
     demanding cure of such default: (a) cures the default within fifteen (15)
     days; or (b) if the cure requires more than fifteen (15) days, immediately
     initiates steps which Lender deems in Lender's sole discretion to be
     sufficient to cure the default and thereafter continues and completes all
     reasonable and necessary steps sufficient to produce compliance as soon as
     reasonably practical.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies. All Loans shall be
repaid under all circumstances without relief from any Indiana or other
valuation and appraisement laws.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:

     AMENDMENTS. This Agreement, together with any Related Documents,
     constitutes the entire understanding and agreement of the parties as to the
     matters set forth in this Agreement. No alteration of or amendment to this
     Agreement shall be effective unless given in writing and signed by the
     party or parties sought to be charged or bound by the alteration or
     amendment.

     APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY
     LENDER IN THE STATE OF INDIANA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON
     LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF ST. JOSEPH
     COUNTY, THE STATE OF INDIANA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO
     ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER
     LENDER OR BORROWER AGAINST THE OTHER. THIS AGREEMENT SHALL BE GOVERNED BY
     AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF INDIANA.

     CAPTION HEADINGS. Caption headings in this Agreement are for convenience
     purposes only and are not to be used to interpret or define the provisions
     of this Agreement.

     MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
     this Agreement shall be joint and several, and all references to Borrower
     shall mean each and every Borrower. This means that each of the persons
     signing below is responsible for ALL obligations in this Agreement.

     CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
     sale or transfer, whether now or later, of one or more participation
     interests in the Loans to one or more purchasers, whether related or
     unrelated to Lender. Lender may provide, without any limitation whatsoever,
     to any one or more purchasers, or potential purchasers, any information or
     knowledge Lender may have about Borrower or about any other matter relating
     to the Loan, and Borrower hereby waives any rights to privacy it may have
     with respect to such matters. Borrower additionally waives any and all
     notices of sale of participation interests, as well as all notices of any
     repurchase of such participation interests. Borrower also agrees that the
     purchasers of any such participation interests will be considered as the
     absolute owners of such interests in the Loans and will have all the rights
     granted under the participation agreement or agreements governing the sale
     of such participation interests. Borrower further waives all rights of
     offset or counterclaim that it may have now or later against Lender or
     against any purchaser of such a participation interest and



12-21-2000                BUSINESS LOAN AGREEMENT                         PAGE 6
                                   (CONTINUED)

     unconditionally agrees that either Lender or such purchaser may enforce
     Borrower's obligation under the Loans irrespective of the failure or
     insolvency of any holder of any interest in the Loans. Borrower further
     agrees that the purchaser of any such participation interests may enforce
     its interests irrespective of any personal claims or defenses that Borrower
     may have against Lender.

     COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
     expenses, including without limitation attorneys' fees, incurred in
     connection with the preparation, execution, enforcement, modification and
     collection of this Agreement or in connection with the Loans made pursuant
     to this Agreement. Lender may pay someone else to help collect the Loans
     and to enforce this Agreement, and Borrower will pay that amount. This
     includes, subject to any limits under applicable law, Lender's attorneys'
     fees and Lender's legal expenses, whether or not there is a lawsuit,
     including attorneys' fees for bankruptcy proceedings (including efforts to
     modify or vacate any automatic stay or injunction), appeals, and any
     anticipated post-judgment collection services. Borrower also will pay any
     court costs, in addition to all other sums provided by law.

     NOTICES. All notices required to be given under this Agreement shall be
     given in writing, may be sent by telefacsimile (unless otherwise required
     by law), and shall be effective when actually delivered or when deposited
     with a nationally recognized overnight courier or deposited in the United
     States mail, first class, postage prepaid, addressed to the party to whom
     the notice is to be given at the address shown above. Any party may change
     its address for notices under this Agreement by giving formal written
     notice to the other parties, specifying that the purpose of the notice is
     to change the party's address. To the extent permitted by applicable law,
     if there is more than one Borrower, notice to any Borrower will constitute
     notice to all Borrowers. For notice purposes, Borrower will keep Lender
     informed at all times of Borrower's current address(es).

     SEVERABILITY. If a court of competent jurisdiction finds any provision of
     this Agreement to be invalid or unenforceable as to any person or
     circumstance, such finding shall not render that provision invalid or
     unenforceable as to any other persons or circumstances. If feasible, any
     such offending provision shall be deemed to be modified to be within the
     limits of enforceability or validity; however, if the offending provision
     cannot be so modified, it shall be stricken and all other provisions of
     this Agreement in all other respects shall remain valid and enforceable.

     SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
     provisions of this Agreement makes it appropriate, including without
     limitation any representation, warranty or covenant, the word "Borrower" as
     used herein shall include all subsidiaries and affiliates of Borrower.
     Notwithstanding the foregoing however, under no circumstances shall this
     Agreement be construed to require Lender to make any Loan or other
     financial accommodation to any subsidiary or affiliate of Borrower.

     SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
     behalf of Borrower shall bind its successors and assigns and shall inure to
     the benefit of Lender, its successors and assigns. Borrower shall not,
     however, have the right to assign its rights under this Agreement or any
     interest therein, without the prior written consent of Lender.

     SURVIVAL. All warranties, representations, and covenants made by Borrower
     in this Agreement or in any certificate or other instrument delivered by
     Borrower to Lender under this Agreement shall be considered to have been
     relied upon by Lender and will survive the making of the Loan and delivery
     to Lender of the Related Documents, regardless of any investigation made by
     Lender or on Lender's behalf.

     TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
     Agreement.

     WAIVER. Lender shall not be deemed to have waived any rights under this
     Agreement unless such waiver is given in writing and signed by Lender. No
     delay or omission on the part of Lender in exercising any right shall
     operate as a waiver of such right or any other right. A waiver by Lender of
     a provision of this Agreement shall not prejudice or constitute a waiver of
     Lender's right otherwise to demand strict compliance with that provision or
     any other provision of this Agreement. No prior waiver by Lender, nor any
     course of dealing between Lender and Borrower, or between Lender and any
     Grantor, shall constitute a waiver of any of Lender's rights or of any
     obligations of Borrower or of any Grantor as to any future transactions.
     Whenever the consent of Lender is required under this Agreement, the
     granting of such consent by Lender in any instance shall not constitute
     continuing consent in subsequent instances where such consent is required,
     and in all cases such consent may be granted or withheld in the sole
     discretion of Lender.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
DECEMBER 21, 2000.

BORROWER:

INTERACTIVE INTELLIGENCE, INC.

By: /s/ Donald E. Brown                 By: /s/ Michael J. Tavlin
    ----------------------------------     -------------------------------------
    DONALD E. BROWN, PRESIDENT AND CEO     MICHAEL J. TAVLIN SVP,CFO & SECRETARY

LENDER:

KEYBANK NATIONAL ASSOCIATION

By: /s/ Michael Ash
    ----------------------------------
    AUTHORIZED OFFICER



                                PROMISSORY NOTE


- ----------------------------------------------------------------------------------------------------------
                                                                          
PRINCIPAL       LOAN DATE     MATURITY     LOAN NO     CALL   COLLATERAL    ACCOUNT     OFFICER   INITIALS
$5,000,000.00   12-21-2000    04-30-2001    10001      403        000      N100429074    MKA02
- ----------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- ----------------------------------------------------------------------------------------------------------



BORROWER: INTERACTIVE INTELLIGENCE, INC.   LENDER:  KEYBANK NATIONAL ASSOCIATION
          8909 PURDUE ROAD                          202 S. MICHIGAN STREET
          INDIANAPOLIS, IN 46268                    SOUTH BEND, IN 46601

- --------------------------------------------------------------------------------

PRINCIPAL AMOUNT: $5,000,000.00     INITIAL RATE: 9.500%       DATE OF NOTE:
                                                               DECEMBER 21, 2000

PROMISE TO PAY. INTERACTIVE INTELLIGENCE, INC. ("BORROWER") PROMISES TO PAY TO
KEYBANK NATIONAL ASSOCIATION ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED
STATES OF AMERICA, THE PRINCIPAL AMOUNT OF FIVE MILLION & 00/100 DOLLARS
($5,000,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE
UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE
CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE.

PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL
PLUS ALL ACCRUED UNPAID INTEREST ON APRIL 30, 2001. In ADDITION, BORROWER WILL
PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING MARCH 31,
2001, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH
AFTER THAT. Interest on this Note is computed on a 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, times the outstanding principal balance, times the actual number of
days the principal balance is outstanding. Borrower will pay Lender at Lender's
address shown above or at such other place as Lender may designate in writing.
Unless otherwise agreed or required by applicable law, payments will be applied
first to accrued unpaid interest, then to principal, and any remaining amount to
any unpaid collection costs and late charges.

VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is the Key Bank Prime (the
"Index"). The interest rate will change on the date of each announced change of
the Index within KeyBank. The Index is not necessarily the lowest rate charged
by Lender on its loans and is set by Lender in its sole discretion. If the Index
becomes unavailable during the term of this loan, the Lender may designate a
substitute index after notifying Borrower. Lender will tell Borrower the current
Index rate upon Borrower's request. Borrower understands that Lender may make
loans based on other rates as well. The interest rate change will not occur more
often than each day that the rate changes. THE INDEX CURRENTLY IS 9.500% PER
ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS
NOTE WILL BE AT A RATE EQUAL TO THE INDEX, RESULTING IN AN INITIAL RATE OF
9.500% PER ANNUM. NOTICE: Under no circumstances will the interest rate on this
Note be more than the maximum rate allowed by applicable law.

PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.

LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged
5.000% OF THE UNPAID PORTION OF THE REGULARLY SCHEDULED PAYMENT OR $50.00,
WHICHEVER IS GREATER.

DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired. (i) Lender
in good faith deems itself insecure.

If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 3.000
percentage points over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO
LENDER AND ACCEPTED BY LENDER IN THE STATE OF INDIANA. IF THERE IS A LAWSUIT,
BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE
COURTS OF ST. JOSEPH COUNTY, THE STATE OF INDIANA. LENDER AND BORROWER HEREBY
WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM
BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF INDIANA.

LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested either orally or in writing by Borrower or



12-21-2000                       PROMISSORY NOTE                          PAGE 2
                                   (CONTINUED)

- --------------------------------------------------------------------------------

by an authorized person. Lender may, but need not, require that all oral
requests be confirmed in writing. All communications, instructions, or
directions by telephone or otherwise to Lender are to be directed to Lender's
office shown above. The following party or parties are authorized to request
advances under the line of credit until Lender receives from Borrower at
Lender's address shown above written notice of revocation of their authority:
DONALD E. BROWN, M.D., PRESIDENT; AND MICHAEL TAVLIN, SENIOR VICE PRESIDENT,
CFO, SECRETARY. Borrower agrees to be liable for all sums either: (a) advanced
in accordance with the instructions of an authorized person or (b) credited to
any of Borrower's accounts with Lender. The unpaid principal balance owing on
this Note at any time may be evidenced by endorsements on this Note or by
Lender's internal records, including daily computer print-outs. Lender will have
no obligation to advance funds under this Note if: (a) Borrower or any guarantor
is in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender; or (e) Lender in good faith
deems itself insecure under this Note or any other agreement between Lender and
Borrower.

LIBOR ADDENDUM ONE MONTH. An exhibit, titled "LIBOR Addendum One Month," is
attached to this Note and by this reference is made a part of this Note just as
if all the provisions, terms and conditions of the Exhibit had been fully set
forth in this Note.

LIBOR ADDENDUM TWO MONTH. An exhibit, titled "LIBOR Addendum Two Month," is
attached to this Note and by this reference is made a part of this Note just as
if all the provisions, terms and conditions of the Exhibit had been fully set
forth in this Note.

LIBOR ADDENDUM THREE MONTH. An exhibit, titled "LIBOR Addendum Three Month," is
attached to this Note and by this reference is made a part of this Note just as
if all the provisions, terms and conditions of the Exhibit had been fully set
forth in this Note.

GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.

BORROWER:

INTERACTIVE INTELLIGENCE, INC.

BY: /s/ Donald E. Brown               BY: /s/ Michael J. Tavlin
    -------------------------------       --------------------------------
     DONALD E. BROWN, M.D.,                MICHAEL J. TAVLIN, SVP,CFO
     PRESIDENT AND CEO                     & SECRETARY

- --------------------------------------------------------------------------------

EX-10.30

                             SUBSCRIPTION AGREEMENT

         THIS SUBSCRIPTION AGREEMENT (the "Agreement") is made as of November
15, 2000, by and between Interactive Portal, Inc., an Indiana corporation (the
"Company"), and Interactive Intelligence, Inc., an Indiana corporation (the
"Subscriber").

         WHEREAS, the Company desires to issue and sell to the Subscriber, and
the Subscriber desires to purchase and accept from the Company, 50,000 of the
Common Shares of the Company (the "Subscription Shares") from time to time prior
to June 29, 2001.

         WHEREAS, as consideration for the Subscription Shares, the Subscriber
desires to pay to the Company $9.50 per share, for an aggregate amount of
$475,000.00.

         NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, the parties hereto agree as follows:

         1. The Subscriber hereby agrees to purchase and accept from the Company
all of the Subscription Shares, at the time or times so requested by the
Company, on or before June 29, 2001. The Company shall notify the Subscriber, in
writing, at such time or times that it desires the Subscriber to purchase some
or all of the Subscription Shares (each, a "Notification"), and each
Notification shall specify the exact number of Common Shares that the Subscriber
shall purchase at such time. Within five (5) business days following the receipt
of each Notification, the Subscriber shall pay to the Company an amount equal to
(a) the number of Common Shares specified in such Notification, multiplied by
(b) $9.50. Upon receipt by the Company of such amount, the Company shall issue
to the Subscriber the number of Common Shares specified in that Notification.

         2. The Company may issue any number of Notifications to the Subscriber
at such time or times that it desires, on or before June 29, 2001. However, the
aggregate number of Common Shares specified in all Notifications provided to the
Subscriber pursuant to this Agreement on or before June 29, 2001, shall not
exceed the number of Subscription Shares as defined in this Agreement. In the
event that, prior to June 29, 2001, the Subscriber has not purchased all of the
Subscription Shares, then on June 29, 2001, the Subscriber shall pay to the
Company an amount equal to (a) the number of Subscription Shares not previously
purchased, multiplied by (b) $9.50, and, upon receipt of such amount, the
Company shall issue to the Subscriber that number of Subscription Shares not
previously purchased. No Notification is required for the purchase and issuance
described in the preceding sentence.

         3. The Subscriber represents and warrants to the Company that it will
acquire the Subscription Shares for investment only for its own account and not
with a view to the distribution or resale thereof.



         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.

                                                 INTERACTIVE INTELLIGENCE, INC.

                                            By: /S/ MICHAEL J. TAVLIN
                                                -------------------------------
                                                        Michael J. Tavlin
                                                        Chief Financial Officer

                                                 INTERACTIVE PORTAL, INC.


                                            By: /S/ DONALD E. BROWN
                                                -------------------------------
                                                        Donald E. Brown, M.D.
                                                        President


                                   -2-

IP Subscription Agreement Ex 10-30.doc

EX-21

                                  Subsidiaries





                  Name                             Jurisdiction of Organization

                                                         
Interactive Intelligence France S.A.R.L.                      France

ININ (Australia) Pty Ltd.                                   Australia

EX-23

                                                                     Exhibit 23

                    CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the following Registration
Statements:

     - Form S-8 No. 333-33772 pertaining to the Company's 401(K) Savings Plan,

     - Form S-8 No. 333-33734 pertaining to the Company's Employee Stock
       Purchase Plan,

     - Form S-8 No. 333-87919 pertaining to the Company's 1999 Stock Option
       and Incentive Plan, 1995 Nonstatutory Stock Option Incentive Plan, 1995
       Incentive Stock Option Plan, as amended, Outside Directors Stock Option
       Plan, as amended and Stock Option Agreements between the Company and
       Donald E. Brown, M.D., Jon Anton, D.Sc. and Michael P. Cullinane;

of our report dated January 19, 2001, with respect to the consolidated
financial statements of Interactive Intelligence, Inc. included in the Annual
Report on Form 10-K for the year ended December 31, 2000.

/s/ Ernst & Young LLP

Indianapolis, Indiana
March 27, 2001