10-K

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

FORM 10-K

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
o	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	35-1933097
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

7601 Interactive Way
Indianapolis, Indiana 46278
(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 ý    No o

        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. o

        Include by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o    No ý

        As of June 30, 2003, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $23,337,902, assuming solely for the purposes of this calculation that all Directors and executive officers of the registrant are "affiliates".

        As of February 29, 2004 there were 15,811,266 shares outstanding of the registrant's common stock, $0.01 par value.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Proxy Statement for its 2004 Annual Meeting of Shareholders are incorporated by reference in Part III hereof.

TABLE OF CONTENTS

PART I.
Item 1.	Business	3
Item 2.	Properties	14
Item 3.	Legal Proceedings	14
Item 4.	Submission of Matters to a Vote of Security Holders	15
PART II.
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	16
Item 6.	Selected Financial Data	17
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	36
Item 8.	Financial Statements and Supplementary Data	37
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	61
Item 9A.	Controls and Procedures	61
PART III.
Item 10.	Directors and Executive Officers of the Registrant	61
Item 11.	Executive Compensation	61
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	61
Item 13.	Certain Relationships and Related Transactions	61
Item 14.	Principal Accountant Fees and Services	62
PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	62
SIGNATURES		66

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PART I.

Item 1. Business.

Company Overview

        We are a leading provider of software applications for contact centers and are leveraging that leadership position to provide mission critical voice over Internet protocol (VoIP) applications to enterprises. We sell into four distinct markets, all of whose needs are increasing for VoIP-based systems:

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Contact Centers



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Enterprise IP Telephony



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Unified Communications, and



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Self-service Automation.

        Our principal competitors are hardware vendors who offer proprietary approaches using a combination of phone systems, call distributors, voicemail systems, and interactive voice response (IVR) systems equipment. We offer a software solution based on Microsoft Windows that resides on a customer's network and uses an open communications protocol called Session Initiation Protocol (SIP) for VoIP networking. This open approach typically results in lower overall costs for phone devices, system maintenance, and customer networking. Our software applications are also pre-integrated to many popular business applications such as financial, customer relationship management (CRM) and enterprise resource planning (ERP) software, thereby automating and tracking business transactions to customer interactions. We are best known for our bundled suite of contact center applications that includes multi-media customer contact management for phone calls, Web chat, Web callback, e-mail queuing, customer defined queues, and integrated speech recognition applications.

        We market our software applications around the globe both directly to customers and through over 135 value-added resellers. Our software applications are installed in over 30 countries and are available in 12 languages. We began licensing our software in 1997 and have experienced revenue growth from $1.6 million in 1997 to $51.5 million in 2003. Resellers and customers are certified through our professional education center and supported by a global support group.

        We were formed in 1994 as an Indiana corporation, and we maintain our executive offices at 7601 Interactive Way, Indianapolis, IN 46278. Our telephone number is 317-872-3000. We are on the Web at http://www.inin.com. Our periodic and current reports and all amendments to those reports required to be filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the investor relations e-mail address located on our Website.

Industry Overview and Current Developments

        The continued growth of high-speed Internet access and Internet-based commerce is causing organizations in many industries to shift from primarily phone-based communications to multi-media 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 demand for new interaction management solutions. We have developed our software applications to provide solutions for the following major trends affecting interaction management.

Growth of Internet-based Interactions

        In addition to more traditional communications media such as telephone, voicemail, and fax, 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 Internet conversations. Companies

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are increasingly utilizing the Internet as an important channel for sales, distribution and customer service. Because of the use of the Internet for communications, these companies are deploying e-mail management and Web collaboration products in order to provide advanced customer service. Most companies currently interact through these media using separate devices, resulting in inefficient communication. As a result, organizations are re-evaluating their existing systems in order to address the requirements for a more complete 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. This transition is referred to as the VoIP movement. Traditional PBXs are being replaced by so-called "softswitches" that are provided by us and other vendors such as Cisco Systems, Inc. (Cisco) and 3Com Corporation. This transition is causing many organizations to look for application platforms that can work effectively with these new IP-based systems to provide a wide range of communication services.

Evolution of Call Centers to Contact Centers

        In an increasingly competitive environment, businesses are attempting to differentiate themselves with superior customer service and support. They are also improving the level of service they offer over the Internet. Historically, businesses have had a call center dedicated to inbound and outbound phone calls. With the increase in multi-media communications in customer service and sales, organizations have begun implementing formal contact centers, which are designed to manage voice-based and Internet-based customer interactions. Historically, call centers often required organizations to purchase several different communications devices such as a PBX, an IVR system, an automated call distributor (ACD), a predictive dialer and a call logger to simply handle voice-based interactions, and then spend time and money to integrate these disparate devices.

Increasing Need to Integrate Telecommunications and Information Systems

        Typically, telecommunications systems and information systems have been separate and distinct. To more effectively and efficiently interact, both internally and externally, businesses need to seamlessly access and utilize these two systems. Products referred to as computer telephony integration (CTI) middleware have been designed to integrate various types of telecommunications devices with information technology. For example, an application "screen pop" makes a window pop up on a contact center agent's monitor with information about a call at the same time that the agent's telephone or headset rings. This allows the agent to see all the information, usually provided by a packaged CRM or ERP application, necessary to assist the customer. With CTI middleware, even simple applications, such as screen pops, can be difficult and expensive to implement.

        We believe the traditional approach of using CTI 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 independently configured 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 voicemail 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 makes it more difficult for businesses to interact over the Internet and requires additional devices and more integration, further complicating the current situation.

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Migration from Voicemail to Unified Messaging

        When voicemail, faxes and e-mail are combined into a unified "in-box" accessible via computer or telephone, the result is referred to as unified messaging. Although available for over ten years, unified messaging has yet to penetrate organizations extensively, despite the proven productivity gains. However, as many voicemail and fax systems reach end-of-life and as e-mail as a communication medium continues to gain momentum, businesses increasingly upgrade to unified messaging solutions that integrate with existing PBXs, are VoIP telephony ready, and natively support "best-of-breed" e-mail and directory servers, which are already part of most information technology and telecommunication infrastructures.

Target Markets

        Since the general communications technology marketplace is very diverse, we have specifically targeted the following broad markets with our solutions.

Contact Centers

        We have been at the forefront of the transition from multi-box CTI-based call center technology to pre-integrated bundled contact center suite solutions. Our self-service and agent-based solutions intelligently route, monitor, record, administer and report on phone, fax, e-mail and Web contacts across one or multiple locations.

Enterprise IP Telephony

        We are leveraging our strength in the contact center market to provide VoIP in the form of an IP-based PBX (IP-PBX) that meets the needs of the entire organization. Our application software is especially well suited to meet the growing communications demands of most enterprises and especially those based on Microsoft technology. We specifically target distributed organizations and those with mobile and remote workforces wishing to improve organizational efficiency and productivity. The IP-PBX market is a high growth market that is growing at over a 50% rate according to Gartner Research Group. We target organizations that can benefit from an IP-PBX or combined IP-PBX and contact center solution and have 50 to 5,000 stations.

Unified Communications

        The change in manufacturers for traditional voicemail systems, along with the popularity of unified communications, has opened the door for us to move into the unified communications market. Many existing voicemail systems are considered antiquated and are nearing end-of-life. As a result, companies are evaluating their messaging requirements. With the popularity of e-mail as well as mobile communications technology, businesses require more than simple voice messaging. Consequently, we offer the ability to deliver live communications to desk phones, mobile phones, and other telephony-enabled devices and only resort to offering voicemail to a caller when the called party is truly unavailable. We feel we are well positioned in this market with an open software approach that is also VoIP-enabled.

Self-Service Automation

        We offer customer self-service solutions such as speech-enabled IVR and e-mail and Web self-service technology that help organizations reduce cost while standardizing customer service options. Popular applications for self-service include order status inquiry, transportation route information and automated banking and financial transactions.

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Interactive Intelligence Single System Approach, Products and Customer Support and Services

Single System Approach

        We provide a comprehensive set of communications and interaction management solutions that require little or no integration. Our Interaction Center Platform®-based products are capable of processing thousands of interactions per hour, including telephone calls, e-mails, faxes, voicemail messages, Internet chat sessions, Web collaboration and call-back requests and VoIP calls.

        We believe that the differentiating characteristics of our software applications enable our customers to more effectively communicate and interact with their constituencies at a lower total cost of ownership compared to the use of traditional computer telephony integration products. The strategic advantages of our single system approach are described in the following sections.

Standards-based VoIP Capabilities

        Our software applications incorporate native VoIP capabilities based on SIP, an international standard developed by the Internet Engineering Task Force (IETF) and adopted by a number of industry leaders including Microsoft Corporation (Microsoft). These SIP capabilities allow our products to make use of a wide variety of telephones, gateways, and other telephony devices from many different vendors.

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 collaboration and callback requests, and VoIP calls. Such options are critical for effective e-commerce and Web-based customer service.

Broader Range of Functions

        Unlike traditional systems that require customers to purchase separate products to attain broader functionality, our products offer a broad, integrated suite of communications features, including telephony, e-mail processing, automatic call distribution, interactive voice response, inbound and outbound fax, conferencing, call recording, call monitoring and Web interaction and event 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 satisfaction and increase internal efficiency.

Reduced Need to Integrate Disparate Technologies

        Traditional communications systems generally require significant integration efforts for the different components to work together effectively. This integration often involves the purchase of expensive hardware, middleware and services. Our software application pre-assembles all of the necessary components, allowing customers to concentrate their efforts on improving business operations. Additionally, our software applications can be used to supplement the capabilities of a PBX to provide Web-based interaction management, unified messaging, IVR or departmental contact center services.

Open Architecture and Greater Compatibility with Leading Technologies

        Traditional telecommunications devices are based on proprietary, closed architecture, which often limits the 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 solutions are built around industry standard hardware and software components such as Intel Corporation (Intel) microprocessors and the Microsoft Windows operating system. Our open

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architecture allows customers to easily configure our software applications to meet their specific communications needs and to make hardware or software modifications as necessary. For example, if a customer needs more space for voicemail recordings, the customer 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 SunOne Messaging Server;



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Database systems, including those from Oracle Corporation, Sybase, Inc., Microsoft and International Business Machines Corporation (IBM);



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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, America Online, Inc. and Apache Digital Corporation;



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



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CRM and ERP systems, including those from Microsoft, Siebel Systems, Inc. (Siebel), Peoplesoft, Inc., SAP Corporation (SAP), Pivotal Corporation, E.piphany, Inc. and Onyx Software Corporation; and



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Enterprise directories, including Microsoft Active Directory, Novell NDS e-Directory and Sun/iPlanet Directory Server.

Lower Total Cost of Ownership

        We believe that our software applications can result in a lower total cost of ownership in comparison to traditional communication systems with similar functionality, which typically consist of multiple components. Our software applications are specifically built to reduce administration and configuration while delivering standard communications features. This results in a lower total cost of ownership due to the reduced training and time and expense typically required to maintain a multiple component interaction management system.

Greater Ability to Customize Communications to Meet Specific Needs

        While our software applications 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 our applications can serve as a platform upon which organizations can build highly tailored communications processes for their customers, employees or other users. It also means that our customers need to learn only a single tool in order to customize their dial plans, call distribution rules, IVR menus, Web services, voicemail systems, fax applications and other communications applications.

Products

        We have developed a comprehensive line of software applications to serve the communications and interaction needs of our customers. We currently market and license the following products.

Customer Interaction Center® or CIC

        CIC is a bundled software communications application suite specifically designed to meet the demanding performance requirements of customer-driven organizations and contact centers. CIC enables organizations to easily combine all types of customer interactions such as phone, fax, e-mail

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and Web contact. CIC includes the functionality of a PBX, ACD, IVR, fax server, voicemail/unified messaging system and digital recording system and includes application screen pop, support for various Web services, contact history tracking and the Interaction Designer graphical application builder. CIC's comprehensive all-in-one communications architecture eliminates the cost and time associated with multi-vendor integration found in traditional contact center environments and also meets the enterprise telecommunications, IP telephony and messaging needs of small to mid-sized organizations. CIC can be deployed at a single location or implemented as a multi-site communications solution.

Enterprise Interaction Center® or EIC

        We are leveraging our recognized technology leadership position for contact center applications to provide mission critical VoIP-based business communications solutions for the entire enterprise with the EIC IP-PBX which provides a complete VoIP solution based on the Microsoft platform and Intel's Netstructure Host Media Processing software. EIC is specifically targeted at small to medium sized businesses based on Microsoft software. Our software applications are an alternative to proprietary phone systems and vendor lock-in and are based on the industry-accepted open protocol SIP to lower costs of devices and VoIP networking. Unlike Cisco Systems, Inc. (Cicso), Nortel Networks Corporation (Nortel), Avaya Inc. (Avaya) and other PBX hardware manufacturers, EIC is pre-integrated with Microsoft applications such as Windows network operating system, Microsoft Exchange, SQL Server, Great Plains and Microsoft MS-CRM.

Communité™

        Communité is a unified messaging solution that connects to an existing PBX switching architecture and replaces legacy voicemail systems. It integrates with corporate e-mail systems such as Microsoft Exchange, iPlanet, and Lotus Notes to place voicemail messages and faxes into each user's e-mail inbox. Users can access their messages by means of an e-mail client, a Web browser or a touch-tone phone. In addition to these unified messaging capabilities, Communité provides one-number "follow me" features, call recording, and other personal communication management features. Communité also supports the customer's choice of telephony interface and allows the customer to migrate to VoIP telephony now or in the future. This investment protection is highly important to companies who are replacing outdated voicemail systems and will soon be faced with migration to VoIP-based phone systems.

Interaction Recorder®

        Interaction Recorder is a complementary product that enhances CIC's, EIC's and Communité's on-demand recording capabilities by providing recording management for organizations, such as contact centers that generate large numbers of recordings. Interaction Recorder not only manages phone calls but also e-mails, fax documents and Web chat sessions. Recording rules select which interactions to record. Information related to the recording, such as customer name, account number and transactions selected, is indexed in a database to be used for recording categorization and ad-hoc queries. Interaction Recorder also compresses recordings to reduce storage requirements. Interaction Recorder allows organizations to periodically archive groups of recordings onto CDs, DVDs 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 an outbound campaign management solution that is complementary to CIC. Interaction Dialer provides call list management to define what numbers to automatically dial and to determine how outbound work should be processed. Interaction Dialer calculates exactly how many calls to place and when to make them, plus provides answering machine detection and other call

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analysis techniques, in order to maximize agent talk time. When an outbound call connects to an agent, Interaction Dialer automatically pops a campaign script displaying customer information to lead the agent through the call. Outbound calls can also be "blended" with inbound calls to further maximize agent productivity. Alternatively, calls can be automatically processed (such as to leave a voice message, send a fax document, etc.) without involving agents.

Interaction Director™

        Interaction Director provides intelligent call routing across sites for multi-site contact centers. Interaction Director collects near real-time information from connected CIC systems, including current expected hold times at each site, queue lengths, number of agents available and specific skills available. It then distributes incoming calls based on this information and configured routing rules, which are usually based on specifically defined service level goals. Interaction Director supports carrier-based pre-call routing via certified interfaces to AT&T Corporation, MCI Communications Corp. and Sprint Corporation, and it also supports post-call routing between locations using CIC.

e-FAQ™

        e-FAQ is an e-mail and Web self-service solution that allows organizations to quickly and easily make use of knowledge and content in the form of "Frequently Asked Questions" (FAQs). e-FAQ is used to turn static FAQ documents into interactive, searchable FAQs. The software application uses advanced artificial intelligence and linguistic techniques to examine inquiries, look for matches in a database of frequently asked questions, and automatically respond if an appropriate match is found. e-FAQ also allows the user to add knowledge by simply entering common questions and related answers via a Web browser interface. e-FAQ seamlessly integrates CIC, EIC and Communité to allow agents and business users to directly access frequently asked questions and answers while on the phone or responding to an e-mail or Web interaction, thus improving productivity and the consistency of responses.

Mobilité™

        Mobilité is a platform for the rapid development and deployment of business applications that runs on wireless PDAs such as RIM Blackberries, Palm operating system devices and Pocket PC devices. Mobilité includes an engine that runs on the user's PDA and an application server. Graphical tools allow developers to design the user interface and application flow. The Mobilité server can access databases, mainframes, e-mail systems, on-line corporate directories, Web services and other corporate information technology assets. In addition, it can generate phone calls and otherwise integrate with PBXs and VoIP systems. Mobilité applications can be deployed on any supported wireless device and are fully encrypted for end-to-end security. Applications can be updated at any time and updates are automatically distributed to users whenever they run an application, eliminating version control and software distribution problems.

Vocalité™

        Vocalité is a speech-enabled IVR system. The software application leverages the capabilities of the Interaction Center Platform underlying all of our products to allow organizations to create a variety of self-service applications. Callers can make use of touch-tones or spoken responses to navigate menus and perform transactions. Applications can access databases, mainframes, e-mail systems, on-line corporate directories, Web services and other information sources. A graphical application generator allows developers to quickly create and modify applications. Applications can be deployed without taking the server out of production and can run on multiple servers for scalability and fault tolerance.

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Interaction SIP Proxy™

        Interaction SIP Proxy is SIP proxy server software compliant with the latest specification of the SIP standard and supporting all SIP methods and status codes. As a result, it functions as an intelligent router for various SIP-enabled devices such as SIP gateways, phones and computing platforms. It also supports an unlimited number of routing entries and destination entries with built-in retry capabilities for critical fault tolerance.

Customer Support and Services

        We recognize the importance of offering quality service and support to our resellers, partners, and customers. Our resellers and other partners provide some valuable initial support and services to our customers. We provide a wide range of services and support to all of these groups, including customer loyalty, technical support, education services and global professional services. These services are described in more detail in the following sections.

Customer Loyalty

        Customer Loyalty offers account management to customers and resellers. Customer Loyalty is responsible for coordinating issues within our internal structure and handling customer problems, including following up on the root cause of the problem to improve our business practices and our software applications.

Technical Support

        Our Technical Support staff offers global technical support for our resellers and customers 24 hours a day, seven days a week via phone, fax, e-mail and our Web site. Our engineers are located at our headquarters in Indianapolis, and in the United Kingdom, the Netherlands, Australia, Malaysia, Japan and Korea. We utilize our CIC product, leveraged with technologies such as knowledge base, CRM and the Web, to maximize the effectiveness of our support services and to offer superior services.

Educational Services

        Educational Services provides technical certification and advanced instruction via on-site courses, classroom presentations, and Web-based training. Education Services develops and maintains course curriculum for formal certification programs such as sales, product installation and troubleshooting, system administration and custom design. Web-based courses offer enhanced topics such as reporting, system administration, and computer-based user training. Resellers are required to maintain certifications to sell and support our products.

Global Professional Services

        Global Professional Services offers project management and implementation services. This group handles strategic accounts and augments reseller expertise on advanced offerings such as predictive dialing, speech recognition and third party CRM integrations. A series of packaged customer solutions are available from this group such as integration to SAP, Siebel, and Microsoft MS-CRM. These solutions allow partners to quickly install sophisticated applications for customers.

Business Strategy

        Our primary business objective is to leverage our leadership in the contact center marketplace with interaction management software in order to expand into the mainstream enterprise. Our strategy for achieving this mission is four-fold as described below.

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Continue our Leading Technology Position

        We have significant expertise in contact center, telecommunications, software, and Internet technologies. We use this expertise to improve our product line with product functionality, maintainability, and scalability to differentiate our offerings in the markets we serve. We continue to improve and add to our VoIP offerings by leveraging the SIP protocol. This allows us to offer a single, open software solution for a wide variety of business communications needs such as IP-based contact centers and IP-PBX for enterprises. Our applications provide simplified system administration through a single point of administration for a variety of add-on modules such as recording management, predictive dialing, and multi-site call routing for large-scale contact centers. We are also continually improving our technology to address the requirements of large-scale customers for voicemail replacement and unified communications.

Package Whole Product Solutions

        For all markets served, our strategy is to appeal to a broader audience of customers and partners by packaging whole solutions for each product. For customers and partners this means simplified configuration and pricing, easier ordering, pre-packaged hardware and software and easy to understand support options. Hardware packaging makes the system easier for our partners to license and support by offering pre-determined system sizes of servers, telephony resource boards, and third-party devices such as SIP-compliant gateways and telephones. The strategy of system packaging means enhanced competitiveness against proprietary hardware-oriented companies.

Leverage Industry-Specific Solutions to Build Market Share

        We have customers in many industry groups. Our strategy is to utilize the knowledge gained and relationships we have built with our current customers and partners in significant industry segments to build industry-specific market share. Partners with specific industry expertise are encouraged to package solutions and license through our entire partner base. Industry solutions include offerings for credit unions, government, healthcare, enterprise virtual office applications, and banking, as well as many others.

Continue to Build and Improve our Global Partner Network

        We have strategic marketing and technology partners, distribution and reseller partners, and original equipment manufacturer (OEM) partners. Strategic marketing and technology partners such as Intel, Microsoft, Nuance Communications, Inc., Polycom, Inc. (Polycom) and Aculab USA, Inc. help us gain advantage through differentiated product offerings. For instance, we introduced the first SIP-based IP-PBX based on Intel's Host Media Processing software in 2003. Tight integration to Microsoft products differentiates our contact center and enterprise offerings. The Polycom relationship offers our customers choice of quality VoIP station devices.

        We use master distributors to build our partner network globally. Master distributors attract and support partners with software and hardware packages.

Research and Development

        Since leveraging technology is part of our strategic position, we continue to invest a substantial percentage of our revenue in research and development. Our development group is comprised of professionals with backgrounds in telecommunications, software and hardware from leading companies such as Microsoft, Lucent Technologies Inc., and Nortel. The combination of diverse technical and communications expertise contributes to our competitive advantage with a differentiated technology approach.

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        We are both a Microsoft Certified Developer as well as a Microsoft Certified Solutions Provider. These designations provide us early access to Microsoft technology and the opportunity to develop products more quickly and which effectively interoperate with Microsoft products.

        Research and development expenses were $13.4 million, $15.1 million and $15.6 million in 2003, 2002 and 2001, respectively. The group is managed in technical teams with formal processes for enhancements, release management, technical reviews and quality assurance.

Global Distribution and Sales

Direct Sales

        We license direct in the U.S. and Canada primarily to the Fortune 1000 National accounts. We utilize our regional sales representatives as well as an inside sales force to generate potential opportunities in this market. Customers that directly licensed our software applications in 2003 included Peoplesoft, Chartway Federal Credit Union, University of Wisconsin, University of Texas, iTouchpoint, and Lockheed Martin.

OEM

        We have several OEM partners who sell and market our software applications as part of their product line. These partners leverage the Interaction Center platform technology to offer value to their customer base. OEM partners include Hitachi Information Technology in Japan and Perimeter Technology and Reynolds and Reynolds in the U.S.

Distribution

        Master distributors attract and support reseller partners. Master distributors typically offer value-added services to reseller partners to augment their services organizations. We currently partner with master distributors in the U.S., Latin America and the United Kingdom.

        Reseller partners sign directly with us or through the master distribution program. We have over 135 resellers globally with a presence in over 30 countries. We believe that we are unique in the industry with a prestigious network of "converged" resellers who understand voice and data networking. We continue to expand this partner network to cover geographic and product markets.

        In Europe, the Middle East and Africa (EMEA) we sell and distribute solely through partners across the region, with partners in the United Kingdom, Germany, the Netherlands, Sweden, Norway, South Africa, Turkey, Saudi Arabia and Israel. Our EMEA corporate headquarters are located near London, England.

        Our Asia/Pacific (APAC) region also sells and distributes solely through partners across the region, with partners in Japan, Korea, India, Malaysia, Australia, the Philippines and China. Our APAC corporate headquarters are located in Kuala Lumpur, Malaysia.

Marketing

        We have a formal marketing group that is organized by three departments: market communications, corporate marketing, and product marketing. Marketing staff are located in the United States, Malaysia, and the United Kingdom.

        Market communications manages public relations, technology analysts and trade publications. In order to increase our market awareness, we instituted an annual consultant/technology analyst summit that in 2003 was attended by Gartner, Yankee Group, Vanguard, and many other significant analyst firms.

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        Corporate marketing handles all brand awareness and lead generation activities including trade shows, seminars, and Web-based marketing programs. This group leverages local and regional seminars with joint partners such as Intel, Microsoft and Polycom to generate qualified leads for partners and direct sales representatives. We also sponsor annual customer conferences and partner conferences.

        Product marketing focuses on packaging products to meet market and competitive requirements and working with our development group as well as hardware and software vendors, to ensure that a complete solution is presented to the customer.

Customers

        As of December 31, 2003, we had licensed our products to more than 1,100 active customers in North America, Europe, the Asia/Pacific region, Central and South America, and South Africa, including:

Financial Institutions
First Internet Bank of Indiana
AIG Credit Card
BankBoston
BMW Financial Services
Irwin Mortgage
Motorola Employee Credit Union
Shinsei Bank
Student Loan Consolidation
Waterfield Mortgage

Technology Companies
Lockheed Martin
Made2Manage
OSI Software
Peoplesoft, Inc.
Seagate Technology

Government
New York Police Department
State of Alabama
State of California
State of Indiana
State of Kentucky
U.S. Department of Commerce
U.S. Patent and Trademark Office
U.S. Postal Service

Healthcare
Abbott Laboratories
Blue Cross/Blue Shield of Rochester
Clarian Health
Community Health
Eli Lilly
Hospital for Sick Children
Ross Products
St. Vincent Hospital

Retail
1-800-Contacts
1-800-Pet-Meds
Abercrombie & Fitch Co.
Dollar Tree Stores
The Finish Line
IKEA
Kohl's Corporation
Trader Joe's
Walgreen's

Business Services
Century 21 Sheetz Realty
Ceridian Payroll Services
Cox Ohio Publishing
Park Place Entertainment
Robert Half International
Robert Orr Sysco Food Services
Sabre

Education
Brown University
Harvard University
Indiana University
Navy College Center
Ohio State
University of Michigan
University of North Carolina
University of Texas

        No customer or reseller accounted for 10% or more of our revenues in 2003, 2002 or 2001.

Competition

        The market for our software applications is highly competitive. Our competition varies depending on the different market segments where we license our software applications. Our main competitors in the contact center market are Aspect Communications Corporation, Avaya, Cisco, Concerto Software, Inc. and Nortel. Significant enterprise IP telephony competitors include 3Com Communications, Inc., Alcatel, Avaya, Cisco, Nortel and Siemens AG. In the unified communications market we compete mainly with Avaya, Cisco and Nortel. IVR competitors are primarily Avaya, Edify Corporation, Intervoice, Inc. and Nortel. We also compete with other new or recent entrants in each marketplace.

13

Intellectual Property and Other Proprietary Rights

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

•

copyright, patent, 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 customers.

Employees

        As of February 29, 2004, we had 335 employees worldwide, including 109 in research and development, 102 in client services, 88 in sales and marketing and 36 in administration. Our future performance depends in significant part upon the continued service of our key sales, 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 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. We have not experienced any work stoppages. We have had certain Company-initiated workforce reductions (See Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K). We consider our relations with our current employees to be good.

Item 2. Properties

        We moved our corporate headquarters to a new 120,000 square foot office building in Indianapolis, Indiana in April 2003. We lease the building and as of December 31, 2003, the lease required payments of $33.6 million over the remaining term of the lease, which expires on March 31, 2018. For the previous headquarters office we are obligated to pay lease payments through February 29, 2004 for certain parts of the building and February 12, 2005 for a smaller portion of the building. The remaining lease payments related to our previous headquarters as of December 31, 2003 totaled $360,000.

        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. All of these leases are short-term leases.

        We believe that all of our facilities, including our new corporate headquarters, are adequate and well suited to our business. Because we moved our corporate headquarters before our lease on the corporate offices previously occupied expired, we do have some additional capacity in Indianapolis, Indiana. We have subleased some of this unutilized space. In addition, we are actively pursuing a subleasing arrangement for a small portion in our new corporate headquarters.

        See Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources for further discussion.

Item 3. Legal Proceedings

        From time to time we have received claims from competitors and other technology providers claiming that our technology infringes their proprietary rights. One such claim has resulted in a legal proceeding being filed against us, which is described below. We cannot assure you that these matters can be resolved amicably without litigation, or that we will be able to enter into licensing arrangements

14

on terms and conditions that would not have a material adverse effect on our business, financial condition or results of operations.

        In July 2002, we received a letter from a consulting firm that has been retained by a telecommunication technology provider to develop and implement a licensing program based on the technology provider's patents. The consulting firm believes that we have infringed on the technology provider's propriety rights and therefore feels that a licensing agreement between us and the technology provider is appropriate. We believe that the technology subject to this claim is not significant to the software we license. We believe that this matter can be resolved without a material adverse effect on our business, financial condition or results of operations, however we cannot provide assurance as to the outcome.

        In December 2002, we received a letter from one of our resellers requesting indemnification related to a request that the reseller had received for indemnification from a customer. The customer had received a letter from a third party indicating that the customer may be infringing patents held by the third party. To date, our patent counsel has not determined the validity or the applicability of these patents as they relate to our products or whether the reseller is entitled to indemnification. We believe that this matter can be resolved without a material adverse effect on our business, financial condition or results of operations, however we cannot provide assurance as to the outcome.

        On September 30, 2003, Recursion Software, Inc. filed suit in Dallas County Court in Dallas, Texas against us alleging breach of contract and money due under claims of quantum meruit and unjust enrichment. Recursion claims that we incorporated Recursion Software into one of our products in breach of the underlying license. No dollar amount has been stated in the action. We believe that we have strong defenses to the claims and intend to vigorously defend against the action. We believe that this matter can be resolved without a material adverse effect on our business, financial condition or results of operations, however we cannot provide assurance as to the outcome.

        In November 2002, we received a notification from the French government as a result of a tax audit that had been conducted encompassing the years 1998, 1999, 2000 and 2001. These assessments claim various taxes are owed related to Value Added Tax ("VAT") and corporation taxes in addition to what has previously been paid and accrued. As of December 31, 2003, the assessment related to VAT was approximately $2.9 million and the assessment related to corporation taxes was approximately $378,000. Our tax counsel has assessed the possibility of us paying the assessment related to VAT as remote and the assessment related to corporation taxes as reasonably possible, therefore we have not accrued for these amounts. We are appealing the assessments, but cannot assure you that these matters will be resolved without litigation or that we will not have to pay some or all of the assessments.

        From time to time, we are also involved in certain legal proceedings in the ordinary course of conducting our business. While the ultimate liability pursuant to these actions cannot currently be determined, we believe these legal proceedings will not have a material adverse effect on our financial position or results of operations. Litigation in general, and intellectual property litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict.

Item 4. Submission of Matters to a Vote of Security Holders.

        None.

15

PART II.

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

        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 sales prices of our common stock as reported by The NASDAQ Stock Market.

	High		Low
2002
First quarter	$	9.00	$	4.54
Second quarter		5.10		2.50
Third quarter		3.52		2.50
Fourth quarter		3.60		1.49
2003
First quarter		3.80		2.53
Second quarter		4.03		2.88
Third quarter		3.70		2.74
Fourth quarter		6.70		2.67

        As of March 15, 2004, we had 149 shareholders of record of our common stock. In addition, we believe we had approximately 4,200 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.

        On December 16, 2003, we issued 2,000 shares of common stock to Randall L. Tobias, a former director, in recognition of his service as a member of our Board of Directors. These shares were not registered under the Securities Act of 1933, as amended, and were exempt from registration requirements pursuant to Section 4(2) thereof.

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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.

Consolidated Statement of Operations Data:

			Year Ended December 31,
			2003			2002			2001			2000			1999
			(In thousands, except per share data)
Revenues:
	Software		$	26,323		$	28,323		$	31,321		$	16,784		$	14,231
	Services			25,189			19,483			16,625			10,475			4,850
		Total revenues		51,512			47,806			47,946			27,259			19,081
Cost of revenues:
	Software			1,190			986			959			540			194
	Services			12,451			12,123			13,430			10,118			5,728
		Total cost of revenues		13,641			13,109			14,389			10,658			5,922
Gross profit				37,871			34,697			33,557			16,601			13,159
Operating expenses:
	Sales and marketing			20,782			21,022			21,987			16,596			10,175
	Research and development			13,443			15,142			15,616			10,835			6,967
	General and administrative			6,027			5,606			6,786			5,158			2,773
	Restructuring and other charges			3,440			774			1,056			—			—
		Total operating expenses		43,692			42,544			45,445			32,589			19,915
Operating loss				(5,821	)		(7,847	)		(11,888	)		(15,988	)		(6,756	)
Interest income, net				163			412			1,169			1,108			(361	)
Loss before income taxes				(5,658	)		(7,435	)		(10,719	)		(14,880	)		(7,117	)
Income taxes				211			230			271			180			—
Net loss			$	(5,869	)	$	(7,665	)	$	(10,990	)	$	(15,060	)	$	(7,117	)
Net loss per share—basic and diluted			$	(0.38	)	$	(0.50	)	$	(0.73	)	$	(1.06	)	$	(0.62	)
Shares used to compute net loss per share				15,627			15,423			15,058			14,171			11,469

Consolidated Balance Sheet Data:

	December 31,
	2003			2002		2001		2000		1999
	(In thousands)
Cash, cash equivalents and short-term investments	$	15,469		$	15,244	$	22,084	$	13,721	$	23,365
Working capital		(2,667	)		352		5,155		50		10,709
Total assets		33,259			35,166		43,508		34,453		32,370
Long-term debt		—			—		—		—		377
Total shareholders' equity		3,791			8,984		15,817		10,358		24,155

17

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 involves risks and uncertainties which may cause actual results to differ materially from those predicted in the forward-looking statements. Forward-looking statements can often 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 that may affect our future operating results" described herein.

Overview

        We are a leading provider of software applications for contact centers and hope to leverage that leadership position to provide mission critical VoIP applications to enterprises. Our customers are in a wide variety of fields including financial institutions, government, healthcare and retail, among others. We are a global software provider with presence in North America, EMEA and APAC.

Financial Highlights

        In the initial years after we began licensing our software applications, our revenue growth was substantial. In the past two years, we have seen a decrease in worldwide spending on technology given the global economic slowdown, and as a result, our revenue growth has diminished. The information below shows our total revenues and percentage growth from the previous year since sales commenced (revenues in millions).

Year	Revenues		% Growth
2003	$	51.5	8	%
2002		47.8	0
2001		47.9	76
2000		27.3	43
1999		19.1	112
1998		9.0	467
1997		1.6	n/a

        We have experienced a change in our source of revenues with a shift from licensing software to a greater proportion of our revenue from services, which include license renewals and maintenance. Our software revenues have shifted from orders from new customers in 2001 to orders from existing customers in 2003, as shown below in the percentage of revenues from contract licenses each year by new and existing customers.

	Year Ended December 31,
	2003		2002		2001
Software licensed by new customers	29	%	38	%	55	%
Software licensed by existing customers	71		62		45

        We believe that during the economic downturn and resulting decrease in technology spending, it became harder to market our products to new customers. Companies delayed changes to their systems

18

and continued to use technology that they had in place. However, we believe that once companies have implemented our software and the personnel at these companies experience the capabilities and efficiencies of our software, these companies are increasing their technology spending for our software. Future licensing to new customers is dependent on the economy and whether companies will allocate their resources to upgrade their systems.

        Over the past three years our gross profits have increased and operating expenses have decreased. These improvements have been a result of cost reduction and containment efforts that have included staff reductions.

        We incurred restructuring charges in 2003 of $3.4 million related to costs associated with staff reductions, restructuring our EMEA resources and moving our worldwide headquarters to a new building in Indianapolis, Indiana. We incurred restructuring charges of $774,000 in 2002 related principally to costs associated with staff reductions and $1.1 million in 2001 related to the write-down of an investment and costs associated with staff reductions.

        We had approximately $15.5 million of cash and short-term investments as of December 31, 2003. We had borrowings from a line of credit as of December 31, 2003 of $2.8 million, but have since repaid the line in full. We believe that as our revenues grow and our expenses remain controlled, we will increase our liquidity and position ourselves for growth in the future. If revenues remain stagnant or decrease, our liquidity position may weaken, which would result in the need to raise capital.

Critical Accounting Policies and Estimates

        We believe there are three accounting policies that are important to understanding our historical and future performance, as these policies affect the reported amounts of revenues and are the more significant areas involving management's judgments and estimates. These critical accounting policies and estimates relate to revenue recognition, the allowance for doubtful accounts receivable and research and development. These policies, and our procedures related to these policies, are described below. Refer to Note 1 of Notes to Consolidated Financial Statements for a further discussion of our accounting policies.

Sources of Revenues and Revenue Recognition Policy

        We generate software revenues from licensing the right to use our software applications and generate services revenues primarily from annual renewal fees, annual maintenance fees, educational services and professional services. We believe both of these sources of revenues are critical to our financial statements because of their materiality to our statements as a whole and because of the judgment required in determining if revenue recognition criteria have been met.

Software revenues

        Our software license agreements are either annually renewable or perpetual. For any revenues to be recognized from a software license agreement, the following criteria must be met:

•

persuasive evidence of an arrangement exists;



•

the fee is fixed or determinable;



•

collection is probable; and



•

delivery has occurred.

        For an annually renewable software license agreement, upon meeting the revenue recognition criteria above we recognize a majority of the initial license fees under these agreements as software

19

revenues ratably over the initial license period, which is generally 12 months and the remainder of the initial license fees are recognized as services revenues over the same time period.

        For a perpetual software license agreement, upon meeting the revenue recognition criteria above, we immediately recognize as software revenues the amount of initial license fees if sufficient vendor specific objective evidence exists to support allocating a portion of the total fee to the undelivered elements of the arrangement. If sufficient vendor specific objective evidence of the fair value of the undelivered elements does not exist, we recognize the initial license fee as software revenues ratably over the initial term of the maintenance agreement, which is generally 12 months.

Services revenues

        Services revenues are recognized for annually renewable software license agreements and perpetual software license agreements. For annually renewable software license agreements, the allocation of the initial order between software revenues and services revenues is based on actual renewal fee rates. After the initial license period, our customers may renew their license agreement for an additional period, typically 12 months, by paying a renewal fee. Under perpetual software license agreements, we recognize annual maintenance fees as services revenues ratably over the post-contract maintenance period, which is typically 12 months.

        We also generate services revenues from other services that we provide to our resellers and customers. These additional services revenues include fees for educational services and professional services. Revenues from educational services, which consist of training courses for resellers and customers, and professional services, which include implementing and customizing our products for a customer, are typically recognized as the related services are performed.

Allowance for Doubtful Accounts Receivable

        We adjust our allowance for doubtful accounts for each reporting period based on a detailed analysis of our accounts receivable at the end of that period. In estimating the allowance for doubtful accounts, we primarily consider the age of the reseller's or customer's receivable and also consider the creditworthiness of the reseller or customer, the economic conditions of the customer's industry, and general economic conditions, among other factors. If payment is not made timely, we contact the customer or reseller to try to obtain payment. If this is not successful, we institute other collection practices such as generating collection letters, involving our sales representatives and ultimately terminating the customer's or reseller's access to future upgrades, licenses and customer support. Once all collection efforts are exhausted, the receivable is written off against the allowance for doubtful accounts.

Research and Development

        Research and development expenditures are generally expensed as incurred. Based on our product development process and technological feasibility, the date at which capitalization of development costs may begin is established upon completion of a working model. Costs incurred between completion of the working model and the point at which the product is ready for general release have been insignificant. Through December 31, 2003, all research and development costs have been expensed.

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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,
			2003		2002		2001
Revenues:
	Software		51	%	59	%	65	%
	Services		49		41		35
		Total revenues	100		100		100
Cost of revenues:
	Software		2		2		2
	Services		24		25		28
		Total cost of revenues	26		27		30
Gross profit			74		73		70
Operating expenses:
	Sales and marketing		40		44		46
	Research and development		26		32		33
	General and administrative		12		12		14
	Restructuring and other charges		7		1		2
		Total operating expenses	85		89		95
Operating loss			(11	)	(16	)	(25	)
Interest income, net			—		—		2
Loss before income taxes			(11	)	(16	)	(23	)
Income taxes			—		—		1
Net loss			(11	)%	(16	)%	(24	)%

Comparison of Years Ended December 31, 2003, 2002 and 2001

Revenues

Software Revenues

	Year Ended December 31,
	2003			2002			2001
	($ in thousands)
Software revenues	$	26,323		$	28,323		$	31,321
Change from prior year		(7	)%		(10	)%		87	%
Percentage of total revenue		51	%		59	%		65	%

        We license our software applications either as annually renewable or perpetual. We believe that the decrease in software revenues is primarily due to a tightening of technology spending by companies due to the global economic downturn. Software revenues have decreased as a percent of total revenues in 2003 and 2002. This is primarily due to the reduced software licensing by companies in general coupled with the growing customer base that is renewing maintenance licenses, thereby increasing services revenues.

21

        Historically, we have primarily licensed our software using annually renewable licenses, which generally recognize software revenues over 12 months. Therefore deferred software revenues at the end of the year is a good indicator of what software revenues we will recognize in the following year related to contracts previously signed. Deferred software revenues decreased $3.4 million from 2002 to 2003. This decrease is due to a decrease in new and existing customers licensing our software applications, which may lead to a decrease in software revenues in 2004 related to initially contracted annually renewable licenses.

        We began offering more perpetual licenses to our customers and therefore the recognition of revenue on new contracts signed in 2004 may be accelerated compared to how revenue would have been recognized under annually renewable licenses. Some customers prefer a perpetual license, therefore the decision to offer customers perpetual licenses was a part of other actions by the Company designed with the intent of improving the customer licensing process and accelerating the timing of revenue recognition.

Services revenues

	Year Ended December 31,
	2003			2002			2001
	($ in thousands)
Services revenues	$	25,189		$	19,483		$	16,625
Change from prior year		29	%		17	%		59	%
Percentage of total revenue		49	%		41	%		35	%

        The increase in services revenues was primarily due to increases in our growing installed base of customers and related payments of annual license renewal fees and ongoing maintenance from perpetual licenses. As we sign and install new customers, our services revenues should grow, if existing customers continue to renew licenses and pay for maintenance on our software applications. The percent of services revenues to total revenues grew due to the declining software revenues coupled with the increasing services revenues.

Cost of Revenues

			Year Ended December 31,
			2003			2002			2001
			($ in thousands)
Cost of revenues:
	Software		$	1,190		$	986		$	959
	Services			12,451			12,123			13,430
		Total cost of revenues	$	13,641		$	13,109		$	14,389
Change from prior year				4	%		(9	)%		35	%
Software costs as a % of software revenue				5	%		3	%		3	%
Services costs as a % of services revenue				49	%		62	%		81	%

        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 include product media, duplication and documentation. Cost of software can fluctuate depending on which software applications are licensed to our customers, and the third party technology, if any, which is licensed. The increase in the software costs as a percent of related software revenue in 2003 was due to increased royalties for third party software. We expect that costs of software will increase slightly in

22

2004, in proportion to an expected increase in software revenues. This increase in software revenues will depend on the global economy as well as our ability to effectively market our products.

        Costs of services consist primarily of compensation expenses for technical support, education and professional services personnel and other costs associated with supporting the Company's resellers and customers. The decrease in costs of services as a percent of related services revenue was a result of our focus on cost control and increases in the related services revenue. We expect that costs of services will decrease slightly in 2004 due mostly to decreased depreciation and relatively lower amounts of outsourced services costs. We expect services revenues will increase faster than services costs, leading to a decrease in services costs as a percent of services revenues in 2004.

Gross Profit

	Year Ended December 31,
	2003			2002			2001
	($ in thousands)
Gross profit	$	37,871		$	34,697		$	33,557
Change from prior year		9	%		3	%		102	%
Percentage of total revenue		74	%		73	%		70	%

        Our gross profit has steadily increased over the last three years. This is a result of increased total revenues, mainly services revenues as our installed base of customers grew, as described previously, and a reduction in cost of revenues as a percentage of total revenues, mainly resulting from our focus on cost control, as described above.

Operating Expenses

Sales and Marketing

	Year Ended December 31,
	2003			2002			2001
	($ in thousands)
Sales and marketing expenses	$	20,782		$	21,022		$	21,987
Change from prior year		(1	)%		(4	)%		32	%
Percentage of total revenue		40	%		44	%		46	%
Percentage of software revenue		79	%		74	%		70	%

Research and Development

	Year Ended December 31,
	2003			2002			2001
	($ in thousands)
Research and development expenses	$	13,443		$	15,142		$	15,616
Change from prior year		(11	)%		(3	)%		44	%
Percentage of total revenue		26	%		32	%		33	%

        As technology spending among businesses decreased and our revenues remained constant in 2002, we initiated cost reductions. A significant portion of this initiative was accomplished through restructuring efforts in the United States and internationally (see Note 13 of Notes to Consolidated Financial Statements), which resulted in reduced compensation expenses in 2003 and 2002. Sales and marketing and research and development expenses are comprised primarily of compensation expenses. Therefore, because of the reduced compensation expense, sales and marketing and research and

23

development expenses have decreased both in 2003 and 2002. Both of these categories of expenses have also decreased as a percentage of total revenue. Sales and marketing expenses only decreased 1% in 2003 from 2002 due to one-time expenses incurred in 2003 mainly related to employee related international taxes. These expenses are not expected to be incurred in 2004. We expect that in 2004 sales and marketing expenses and research and development expenses will decrease slightly due to a decrease in depreciation as a portion of the Company's fixed assets becomes fully depreciated.

General and Administrative

	Year Ended December 31,
	2003			2002			2001
	($ in thousands)
General and administrative expenses	$	6,027		$	5,606		$	6,786
Change from prior year		8	%		(17	)%		32	%
Percentage of total revenue		12	%		12	%		14	%

        General and administrative expenses are comprised of compensation expense and non-allocable expenses including bad debt, legal and other professional service fees. General and administrative expenses decreased in 2002 from 2001 as compensation expense decreased. These expenses increased in 2003 from 2002 due to several items including the hiring of a general counsel, increased directors and officers' insurance premiums and increased property taxes.

Restructuring and Other Charges

	Year Ended December 31,
	2003			2002			2001
	($ in thousands)
Restructuring and other charges	$	3,440		$	774		$	1,056
Change from prior year		344	%		(27	)%		100	%
Percentage of total revenue		7	%		2	%		2	%

        Restructuring and other charges have fluctuated over the last three years. These expenses relate primarily to staff reductions, both in the United States and internationally and, in 2001, write-down of an investment. In addition, in 2003 the Company moved its corporate headquarters to a new location in Indianapolis, Indiana, which resulted in a charge of approximately $1.7 million. We expect to incur some additional expenses related to the restructuring of international operations in 2004 however, at this time, we do not expect the amount to be significant. See Note 13 of Notes to Consolidated Financial Statements. Although we do not currently believe that we will need to further reduce staff, the state of the economy and resulting technology spending by businesses, among other factors, could result in further reductions.

24

Interest Income, Net

        The majority of interest income, net is made up of interest earned from investments. Interest expense, which is not material for any years reported, is also included in interest income, net. We have experienced decreased interest earnings during the past three years as shown below.

	Year Ended December 31,
	2003			2002			2001
	($ in thousands)
Cash, cash equivalents and short-term investments (average)	$	15,377		$	18,664		$	17,397
Interest income		179			422			1,193
Return on investment		1.2	%		2.3	%		6.9	%

        The decrease in interest income in 2002 from 2001 was related mainly to a decrease in interest rates. The decrease in 2003 from 2002 was due partially to a decrease in interest rates and partially to the mix of investments. In 2002, short-term investments were a greater proportion of the total, while in 2003, more cash was held in cash and cash equivalents accounts. Cash and cash equivalents earn a lower rate of return than short-term investments. We opted to invest in this more liquid mix of investments in 2003 in order to ensure the availability of our cash. We believe that interest income, net will remain low in 2004 principally due to low interest rates.

Liquidity and Capital Resources

        In 1999 we raised cash through an initial public offering that provided net proceeds of $34.9 million. In 2001 we received an equity investment that yielded $15 million in cash. In addition, we generate cash from the collections we receive related to licensing our application software and to annual license renewals, maintenance and other services revenues. We also obtained a $3 million line of credit, of which we had utilized $2.8 million as of December 31, 2003. We use cash primarily for paying our employees (including salaries, commissions, benefits and severance), leasing office space, reimbursing travel expenses, paying insurance premiums, remitting applicable taxes and paying vendors for services rendered and supplies purchased. In addition, we purchase property and equipment, including furnishing our new worldwide headquarters and in-house technology purchases.

        We determine liquidity by combining cash and cash equivalents and short-term investments net of our line of credit borrowings as shown in the table below. Although our total liquidity position decreased in 2003, we believe that it, combined with our anticipated cash flows from operations in 2004, will be sufficient to satisfy our cash needs over the next 12 months. If cash flows from operations are less than anticipated or we have additional cash needs (such as an unfavorable outcome in legal proceedings), our liquidity may not be sufficient to cover our needs. In this case, we may be forced to raise additional capital, either through the capital markets or debt financings. We may not be able to receive favorable terms in raising this capital.

	December 31,
	2003		2002
	(in thousands)
Cash and cash equivalents	$	12,461	$	5,913
Short-term investments		3,008		9,331
Line of credit		(2,800)		—
Total liquidity	$	12,669	$	15,244

        Our operating activities resulted in a net cash inflow of $75,000 in 2003 and net cash outflows of $4.3 million and $2.1 million for 2002 and 2001, respectively. These outflows consisted mainly of net losses offset by non-cash items such as depreciation and changes in deferred revenues. Depreciation

25

was $4.4 million, $5.2 million and $4.3 million in 2003, 2002 and 2001, respectively. Total deferred revenue decreased by $1.2 million and $800,000 in 2003 and 2002, respectively, and increased $4.0 million in 2001. In addition, restructuring expenses were accrued through accounts payable and accrued liabilities, which resulted in fluctuations in cash flow as those expenses were paid (see Note 13 of Notes to Consolidated Financial Statements).

        The amount that we report as cash and cash equivalents or as temporary investments fluctuates depending on investing practices in each period. Purchases of short-term investments are reported as a use of cash and the related receipt of proceeds upon maturity of the investment is reported as a source of cash.

        We purchased property and equipment with a cost of $3.2 million, $3.2 million and $5.0 million in 2003, 2002 and 2001, respectively.

        As shown in the following table, we have operating lease obligations and purchase obligations not recorded in our financial statements. The operating lease obligations relate principally to the lease of our corporate headquarters, as well as a few other building operating leases (see Note 7 of Notes to Consolidated Financial Statements). In addition, we have several short-term rental obligations in the U.S. and internationally, totaling $393,000, that are included in the table. Finally, we have signed obligations to purchase some software for internal use that are included in the purchase obligations. The amounts shown in the following table are as of December 31, 2003.

	Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1 - 3 Years		4 - 5 Years		More than 5 Years
	(in thousands)
Line of credit	$	2,800	$	2,800	$	—	$	—	$	—
Operating lease obligations		34,823		3,047		4,236		4,239		23,301
Purchase obligations		194		194		—		—		—
Total	$	37,817	$	6,041	$	4,236	$	4,239	$	23,301

        Except as set forth above in the Contractual Obligations table, we have no material off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Factors that may affect our future operating results are set forth below:

THE OVERALL ECONOMIC CLIMATE MAY BE WEAK

        Our products typically represent substantial capital commitments by customers and involve a potentially long sales cycle. As a result, customer purchase decisions may be significantly affected by a variety of factors, including general economic trends in the allocation of capital spending budgets to communication software, services and systems, lengthened sales cycles, customer approval processes, and market conditions, which have resulted in many of our customers delaying and/or reducing their capital spending related to information systems. If the economy is weak, demand for our products could decrease, resulting in lower revenues.

WE HAVE HISTORICALLY INCURRED LOSSES AND WE MAY NOT SUSTAIN PROFITABILITY

        Since inception, the first quarter of 2003 was the only quarter we have been profitable. We incurred net losses of $5.9 million, $7.7 million and $11.0 million in 2003, 2002 and 2001, respectively. At December 31, 2003, we had accumulated net losses since inception of $61.3 million. We intend to continue to make significant investments in our research and development, marketing, services and

26

sales operations. Certain of these expenses will precede generation of revenues. As a result, we may continue to experience losses and/or negative cash flow from operations in future quarters.

OUR QUARTERLY OPERATING RESULTS HAVE VARIED SIGNIFICANTLY

        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 if or when our potential customers will place orders and finalize licenses, and because it is difficult to predict the mix of annually renewable licenses and perpetual licenses in a quarter, we cannot accurately forecast our licensing activity, our revenues and our operating results for future quarters. We recognize revenues from different licenses over different periods depending on the satisfaction of the requirements of relevant accounting literature, including AICPA Statement of Position 97-2, Statement of Position 98-9, SEC Staff Accounting Bulletin (SAB) 101, and all related AICPA Technical Practice Aids (5100.38 - 5100.76). As a result, our quarterly revenues and operating results depend on many factors, including the type of license, the size, quantity and timing of orders received for our products during each quarter, the delivery of the related software and our expectations regarding collection. 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 customers' decisions to license our products. Since a large portion of our operating expenses, including salaries and rent, is fixed and difficult to reduce or modify in a short time period, our business, financial condition or results of operations could be materially adversely affected if revenues do not meet our expectations.

        Our limited number of products, changes in pricing policies, the timing of development completion, and 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 VARIABILITY OF QUARTERLY OPERATING RESULTS

        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. The lengthy sale cycle also makes it difficult for us to forecast product license revenues. Because of the unique characteristics of our products, our prospective 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 that we license or of our products and capabilities. For this reason, we must provide a significant level of education to prospective customers about the use and benefits of our products, which can cause potential customers to take many months to make these decisions. As a result, sales cycles for 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.

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

•

a customer's budgetary constraints;



•

the timing of a customer's budget cycles;



•

concerns by customers about the introduction of new products by us or our competitors; and



•

downturns in general economic conditions, including reductions in demand for contact center services.

        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 continue to expand internationally.

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

        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 have become more complicated, and we expect this trend to continue in the future. As a result, our inability to successfully manage these relationships or negotiate sufficient contractual terms could have a material adverse effect on us.

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

        The market for our software applications is highly competitive and, because there are relatively low barriers to entry in the software market, we expect competition to increase in the future. In addition, because our industry is 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 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.

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WE MAY NOT BE ABLE TO GROW OUR BUSINESS IF WE DO NOT MAINTAIN SUCCESSFUL RELATIONSHIPS WITH OUR RESELLERS AND 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 continuing to rely heavily on such partners in the future. We are still developing 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 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 and prevent us from attracting new customers.

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

        Our products address a market for Web-based, interactive electronic business solutions. Therefore, our future success depends on the widespread adoption of the Web as a primary medium for commerce and business applications. The failure of this market to expand, 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 on 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 or taxation of Internet commerce.

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

        Our products currently run only on Microsoft Windows operating systems. In addition, our products use other Microsoft 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

29

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

SLOW GROWTH, OR A DECLINE IN DEMAND FOR INTERACTION MANAGEMENT SOFTWARE OF THE TYPE WE LICENSE, COULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL RESULTS AND GROWTH PROSPECTS

        If the demand for interaction management software of the type we license does not grow within each of our four targeted markets, our financial results and ability to grow our business 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, the market for our products and services is still emerging. Further, our growth plans require us to successfully attract enterprise and service provider customers in significantly larger numbers than we have historically achieved.

IF OUR 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 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 customers do not perceive our products 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.

30

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 patents, licensing and other agreements with consultants, suppliers, strategic and OEM partners, resellers and customers, and employee and third-party non-disclosure agreements. These laws and agreements provide only limited protection of our proprietary rights. We currently hold three patents and have filed numerous other patent applications relating to technology embodied in our software products. We hold 17 U.S. trademark registrations and 30 foreign trademark registrations and have numerous other trademark applications pending worldwide, as well as having common law rights in other trademarks and service marks. We hold one registered copyright. 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. 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

        Third parties have claimed or may in the future 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 additional infringement claims. See Note 12 of Notes to the Consolidated Financial Statements for a description of contingencies.

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

        Also, in connection with our effort to streamline operations, reduce costs and rationalize our staffing and structure, we initiated headcount reductions in both 2001 and 2002 of approximately 10% to12% each year. There were substantial costs associated with the workforce reductions related to severance and other employee-related costs, and our restructuring plans may still yield unanticipated

31

consequences, such as attrition beyond our implemented headcount reductions. As a result, our ability to respond to unexpected challenges may be impaired and we may be unable to take advantage of new opportunities. These reductions in workforce may reduce employee morale and may create concern among existing employees about job security, which may lead to increased turnover. These reductions in headcount may still subject us to the risk of litigation. In addition, recent trading levels of our common stock have decreased the value of the stock options granted to employees pursuant to our stock option plans. As a result of these factors, our remaining personnel may seek employment with larger, more established companies or companies they perceive as having a greater potential for stock price appreciation.

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 material 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 assure that any acquired businesses will achieve anticipated revenues, earnings or cash flow.



•

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



•

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



•

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



•

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

OUR INTERNATIONAL OPERATIONS INVOLVE FINANCIAL AND OPERATIONAL RISKS

        Our international operations require significant management attention and financial resources to establish and operate, including hiring appropriate personnel and recruiting effective international resellers. Non-North American revenues accounted for 13%, 19% and 22% of our total revenues for the years ended 2003, 2002, and 2001, respectively. To date, our products have been licensed outside North America primarily in Western Europe, South Africa, and Australia. We also have marketing efforts in Japan, Korea, China and Central and South America. We intend to continue to emphasize our international operations and we may enter additional international markets. Revenues from international operations may be inadequate to cover the expenses of those operations. In addition to foreign currency fluctuation risks, other risks inherent in our international business activities may include the following:

•

economic and political instability;

32

•

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;



•

restrictions on the repatriation of funds;



•

acts of terrorism; and



•

increased government regulations related to increasing or reducing business activity in various countries.

FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN LOSSES

        Our international revenues are generally denominated in U.S. dollars with the exception of some European resellers and customers located in countries who have adopted the Euro as their official currency. 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 in the future 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 development costs, diversion of technical and other resources from our other development efforts, or the loss of credibility with current or future 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 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 2000 server and voice processing boards operating in a complex network environment with database servers, email

33

servers and other third party systems, it may be more prone to performance interruptions for our customers than traditional hardware-based products. Performance interruptions at our 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 STRATEGY

        Successful implementation of our 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 customers;



•

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



•

technological innovations by others;



•

the operating and stock price performance of other comparable companies or of our competitors;



•

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

OUR COMMON STOCK IS SUBJECT TO VARIOUS LISTING REQUIREMENTS

        The various markets operated by The NASDAQ Stock Market have quantitative maintenance criteria for continued listing of common stock. We may be delisted from one or more NASDAQ markets if we fail to comply with the criteria. While we believe that we currently meet criteria for listing on a market operated by The NASDAQ Stock Market, we can offer no assurance that our common stock will continue to meet the various criteria for continued listing on any market operated

34

by The NASDAQ Stock Market. Any delisting may result in a reduction in the liquidity of our common stock, which may have a material adverse effect on the price of our common stock.

REGULATORY CHANGES MADE TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES OR CORPORATE GOVERNANCE MATTERS MAY IMPACT OUR BUSINESS

        Revisions to generally accepted accounting principles will require us to review our accounting and financial reporting procedures in order to ensure continued compliance with required policies. From time to time, such changes may have a short-term impact on our reporting, and these changes may impact market perception of our financial condition. In addition, legislative changes, and the perception these changes create, can have a material, adverse effect on our business. For example:

•

pending or new legislation may lead to an increase in our costs related to audits in particular and regulatory compliance generally; and



•

changes in the legal climate may lead to additional liability concerns which may result in increased insurance costs.

OUR EXECUTIVE OFFICERS AND DIRECTORS CONTROL US AND MAY MAKE DECISIONS THAT SHAREHOLDERS DO NOT CONSIDER TO BE IN THEIR BEST INTERESTS

        Our current directors and executive officers together beneficially own more than 50% of our outstanding common stock. Accordingly, these shareholders are able to control us through their ability to determine the outcome of the election of our directors, amend our Restated Articles of Incorporation and By-Laws and take other actions requiring the vote or consent of shareholders, including mergers, going private transactions and other extraordinary transactions, and the terms of any of these transactions. The ownership position of these shareholders may have the effect of delaying, deterring or preventing a change in control or a change in the composition of our board of directors.

ANTI-TAKEOVER PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS AND INDIANA LAW MAKE ANY CHANGE IN CONTROL OF US MORE DIFFICULT, MAY DISCOURAGE BIDS AT A PREMIUM OVER THE MARKET PRICE AND MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR STOCK

        Our Restated Articles of Incorporation and By-Laws contain provisions that may have the effect of delaying, deferring or preventing a change in control of us, may discourage bids at a premium over the market price of our common stock and may adversely affect the market price of our common stock, and the voting and other rights of the holders of our common stock. These provisions include:

•

the division of our board of directors into three classes serving staggered three-year terms;



•

removal of directors only for cause and only upon a 66 2/3% shareholder vote;



•

prohibiting shareholders from calling a special meeting of shareholders;



•

the ability to issue additional shares of our common stock or preferred stock without shareholders' approval; and



•

advance notice requirements for raising business or making nominations at shareholders' meetings.

        The Indiana corporation law contains business combination provisions that, in general, prohibit for five years any business combination with a beneficial owner of 10% or more of our common stock unless the holder's acquisition of the stock was approved in advance by our board of directors. The Indiana corporation law also contains control share acquisition provisions that limit the ability of certain shareholders to vote their shares unless their control share acquisition was approved in advance.

35

WE CANNOT PREDICT EVERY EVENT AND CIRCUMSTANCE THAT MAY IMPACT OUR BUSINESS AND, THEREFORE, THE RISKS AND UNCERTAINTIES DISCUSSED ABOVE MAY NOT BE THE ONLY ONES YOU SHOULD CONSIDER

        The risks and uncertainties discussed above are in addition to those that apply to most businesses generally. In addition, as we continue to grow our business, we may encounter other risks of which we are not aware at this time. These additional risks may cause serious damage to our business in the future, the impact of which we cannot estimate at this time.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

        We develop products in the United States and license our products 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 most sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. Additionally, as our business matures in foreign markets, we may offer our products and services in certain other local currencies. As a result, we will be subject to foreign currency fluctuations, which may have an adverse affect on our company.

        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. We have a line of credit with a variable interest rate based upon the bank's prime rate on which we will incur interest expense if the line is utilized.

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Item 8. Financial Statements and Supplementary Data.

Report of KPMG LLP, Independent Auditors

The Board of Directors
Interactive Intelligence, Inc.

        We have audited the accompanying consolidated balance sheet of Interactive Intelligence, Inc. and subsidiaries as of December 31, 2003 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited the 2003 consolidated financial statement schedule listed in the Index at Item 15. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit.

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

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Interactive Intelligence, Inc. and subsidiaries at December 31, 2003 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

	/s/  KPMG LLP
Indianapolis, Indiana January 23, 2004

37

Report of Ernst & Young LLP, Independent Auditors

The Board of Directors
Interactive Intelligence, Inc.

        We have audited the accompanying consolidated balance sheet of Interactive Intelligence, Inc. as of December 31, 2002 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15 for the years ended December 31, 2002 and 2001. 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 consolidated financial position of Interactive Intelligence, Inc. at December 31, 2002 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2002, 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, presents fairly in all material respects the information set forth therein.

	/s/  ERNST & YOUNG LLP
Indianapolis, Indiana February 7, 2003

38

Interactive Intelligence, Inc.

Consolidated Balance Sheets

As of December 31, 2003 and 2002

(in thousands, except share amounts)

			December 31,
			2003			2002
Assets
Current assets:
	Cash and cash equivalents		$	12,461		$	5,913
	Short-term investments			3,008			9,331
	Account receivable, net of allowance for doubtful accounts of $354 in 2003 and $671 in 2002			8,956			9,047
	Prepaid expenses			1,958			2,170
	Other current assets			418			73
		Total current assets		26,801			26,534
Property and equipment, net				5,857			7,586
Other assets, net				601			1,046
Total assets			$	33,259		$	35,166
Liabilities and Shareholders' Equity
Current liabilities:
	Line of credit		$	2,800		$	—
	Accounts payable and accrued liabilities			4,544			3,203
	Accrued compensation and related expenses			1,349			995
	Deferred software revenues			8,745			12,102
	Deferred services revenues			12,030			9,882
		Total current liabilities		29,468			26,182
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; 15,755,477 issued and outstanding at December 31, 2003, 15,524,369 issued and outstanding at December 31, 2002			157			155
	Additional paid-in capital			64,696			64,140
	Accumulated other comprehensive income			280			162
	Accumulated deficit			(61,342	)		(55,473	)
		Total shareholders' equity		3,791			8,984
Total liabilities and shareholders' equity			$	33,259		$	35,166

See Notes to Consolidated Financial Statements

39

Interactive Intelligence, Inc.

Consolidated Statements of Operations

For the Years Ended December 31, 2003, 2002, and 2001

(in thousands, except per share amounts)

			Year Ended December 31,
			2003			2002			2001
Revenues:
	Software		$	26,323		$	28,323		$	31,321
	Services			25,189			19,483			16,625
		Total revenues		51,512			47,806			47,946
Cost of revenues:
	Software			1,190			986			959
	Services			12,451			12,123			13,430
		Total cost of revenues		13,641			13,109			14,389
Gross profit				37,871			34,697			33,557
Operating expenses:
	Sales and marketing			20,782			21,022			21,987
	Research and development			13,443			15,142			15,616
	General and administrative			6,027			5,606			6,786
	Restructuring and other charges			3,440			774			1,056
		Total operating expenses		43,692			42,544			45,445
Operating loss				(5,821	)		(7,847	)		(11,888	)
Interest income, net				163			412			1,169
Loss before income taxes				(5,658	)		(7,435	)		(10,719	)
Income taxes				211			230			271
Net loss			$	(5,869	)	$	(7,665	)	$	(10,990	)
Basic and diluted:
Net loss per share			$	(0.38	)	$	(0.50	)	$	(0.73	)
Shares used to compute net loss per share				15,627			15,423			15,058

See Notes to Consolidated Financial Statements

40

Interactive Intelligence, Inc.

Consolidated Statements of Shareholders' Equity

For the Years Ended December 31, 2003, 2002 and 2001

(in thousands)

		Common Stock
					Additional Paid-in Capital		Accum. Other Comprehensive Income (loss)			Accumulated Deficit
		Shares	Amount										Total
Balances, January 1, 2001		14,344	$	143	$	46,995	$	38		$	(36,818	)	$	10,358
Issuances of common stock		691		7		15,965		—			—			15,972
Exercise of stock options		248		3		328		—			—			331
Amortization of deferred stock-based compensation		—		—		197		—			—			197
Comprehensive loss:
	Unrealized loss on investments	—		—		—		(51	)		—			(51	)
	Net loss	—		—		—		—			(10,990	)		(10,990	)
Total comprehensive loss		—		—		—		(51	)		(10,990	)		(11,041	)
Balances, December 31, 2001		15,283		153		63,485		(13	)		(47,808	)		15,817
Issuances of common stock		131		1		432		—			—			433
Exercise of stock options		110		1		114		—			—			115
Amortization of deferred stock-based compensation		—		—		109		—			—			109
Comprehensive income (loss):
	Unrealized gain on investments	—		—		—		22			—			22
	Unrealized gain on foreign currency translation	—		—		—		153			—			153
	Net loss	—		—		—		—			(7,665	)		(7,665	)
Total comprehensive income (loss)		—		—		—		175			(7,665	)		(7,490	)
Balances, December 31, 2002		15,524		155		64,140		162			(55,473	)		8,984
Issuances of common stock		136		1		322		—			—			323
Exercise of stock options		95		1		134		—			—			135
Amortization of deferred stock-based compensation		—		—		100		—			—			100
Comprehensive income (loss):
	Unrealized loss on investments	—		—		—		(9	)		—			(9	)
	Unrealized gain on foreign currency translation	—		—		—		127			—			127
	Net loss	—		—		—		—			(5,869	)		(5,869	)
Total comprehensive income (loss)		—		—		—		118			(5,869	)		(5,751	)
Balances, December 31, 2003		15,755	$	157	$	64,696	$	280		$	(61,342	)	$	3,791

See Notes to Consolidated Financial Statements

41

Interactive Intelligence, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands)

			Year Ended December 31,
			2003			2002			2001
Operating activities:
Net loss			$	(5,869	)	$	(7,665	)	$	(10,990	)
Adjustments to reconcile net loss to net cash used by operating activities:
	Depreciation			4,396			5,236			4,308
	Amortization of deferred stock-based compensation			100			109			197
	Loss on disposal of property and equipment			559			—			—
	Changes in operating assets and liabilities:
		Accounts receivable		91			(623	)		1,054
		Prepaid expenses		212			(55	)		(327	)
		Other current assets		(345	)		150			(33	)
		Other assets		445			18			(264	)
		Accounts payable and accrued liabilities		1,341			(658	)		(49	)
		Accrued compensation and related expenses		354			(58	)		(32	)
		Deferred software revenues		(3,357	)		(1,461	)		1,956
		Deferred services revenues		2,148			668			2,063
Net cash provided (used) by operating activities				75			(4,339	)		(2,117	)
Investing activities:
	Purchases of property and equipment			(3,226	)		(3,224	)		(5,030	)
	Purchases of available-for-sale investments			—			(14,848	)		(10,196	)
	Sales of available-for-sale investments			6,441			13,273			14,286
Net cash provided (used) by investing activities				3,215			(4,799	)		(940	)
Financing activities:
	Proceeds from line of credit			2,800			—			—
	Principal payment on capital lease obligations			—			—			(377	)
	Proceeds from issuance of common stock			323			433			15,607
	Proceeds from stock options exercised			135			115			331
Net cash provided by financing activities				3,258			548			15,561
Net increase (decrease) in cash and cash equivalents				6,548			(8,590	)		12,504
Cash and cash equivalents, beginning of period				5,913			14,503			1,999
Cash and cash equivalents, end of period			$	12,461		$	5,913		$	14,503
Cash paid for taxes			$	6		$	189		$	129

See Notes to Consolidated Financial Statements

42

Interactive Intelligence, Inc.

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001

1.     THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

The Company

        Interactive Intelligence, Inc. (the "Company") is a leading provider of software applications for contact centers and is leveraging that leadership position to provide mission critical voice over Internet protocol (VoIP) applications to enterprises. The Company sells into four distinct markets, all of whose needs are increasing for VoIP-based systems:

•

Contact Centers



•

Enterprise IP Telephony



•

Unified Communications, and



•

Self-service Automation.

        The Company's principal competitors are hardware vendors who offer proprietary approaches using a combination of phone systems, call distributors, voicemail systems, and interactive voice response (IVR) systems equipment. The Company offers a software solution based on Microsoft Windows that resides on a customer's network and uses an open Session Initiation Protocol (SIP) for VoIP networking. This open approach typically results in lower overall costs for phone devices, system maintenance, and customer networking. The Company's software applications are also pre-integrated to many popular business applications such as financial, customer relationship management (CRM) and enterprise resource planning (ERP) software, thereby automating and tracking business transactions to customer interactions. The Company is best known for its bundled suite of contact center applications that includes multi-media customer contact for phone calls, Web chat, Web callback, e-mail queuing, customer defined queues, and integrated speech recognition applications.

        Principal operations of the Company commenced during 1997. Since then, the Company has established wholly-owned subsidiaries in Australia, France, the Netherlands and the United Kingdom. The Company also currently has branch offices in Canada, Germany, Hong Kong, Japan, Korea, Malaysia, Singapore, Spain and Sweden. The Company markets its software applications in North America, Central America, South America, Europe, Asia/Pacific, 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 applications and generates services revenues primarily from annual software license renewal fees, annual maintenance fees, educational services and professional services. The Company's software license agreements are either annually renewable or perpetual.

        The Company's software license fees primarily originate from its marketing programs and the efforts of its direct sales group and resellers. These resellers are authorized to place orders for software licenses with the Company on behalf of its customers and the Company receives a portion of the

43

customer's software license fees according to the terms of their reseller agreements. The Company recognizes as revenue only that portion of the software license fee paid to it by the reseller.

        For any revenues to be recognized from a software license agreement, the following criteria must be met:

•

persuasive evidence of an arrangement exists;



•

the fee is fixed or determinable;



•

collection is probable; and



•

delivery has occurred.

        Delivery is further defined in certain software license agreements as delivery of the product master or first copy for non-cancelable product licensing arrangements under which the recipient, typically a reseller, has certain software distribution rights. For these licensing arrangements, the delivery criteria have been met when a binding order for a specified customer is placed, as the reseller already possesses a product master copy and the Company has no further delivery obligations.

        For an annually renewable software license agreement, upon meeting the revenue recognition criteria the Company recognizes a portion of the initial license fees under these agreements as software revenues ratably over the initial license period, which is generally 12 months. The allocation of the initial order between software revenues (initial license fees) and services revenues (annual renewal fees) is based on actual license renewal fee rates. After the initial license period, the Company's customers may renew their license agreement for an additional annual period by paying an additional annual license renewal fee. If the annual renewal fee is not paid, the customer is no longer entitled to use the software and the Company terminates the license agreement. Payment of the annual renewal fee also entitles the customer to post-contract technical support and unspecified product upgrades for the initial license term or renewal period. The Company recognizes these additional annual renewal fees as services revenues ratably over the term of the renewal period, which is also generally 12 months.

        For a perpetual software license agreement, upon meeting the revenue recognition criteria, the Company immediately recognizes as software revenues the amount of initial license fees if sufficient vendor specific objective evidence exists to support allocating a portion of the total fee to the undelivered elements of the arrangement. If sufficient vendor specific objective evidence of the undelivered elements does not exist, the Company typically recognizes the initial license fee ratably over the initial post contract maintenance term, which is generally 12 months. Under these perpetual license agreements, the Company recognizes annual maintenance fees as services revenues ratably over the post-contract maintenance period, which is typically 12 months. The Company's customers may renew their maintenance term by paying an additional maintenance fee. Payment of this fee entitles the customer to post-contract technical support and unspecified product upgrades. The Company recognizes these additional maintenance fees as services revenues ratably over the term of the renewal period, which is also generally 12 months.

        The Company shares annual renewal fees and annual maintenance fees with those resellers who provide level one technical support to customers. When these revenues are shared with resellers, the Company typically receives between 50% and 70% of the amount charged by the reseller to the customer. The Company recognizes these annual renewal fees and annual maintenance fees as services revenues ratably over the term of the renewal period.

44

        The Company also generates revenues from other services that it provides to its resellers and customers. These additional services revenues include fees for educational services and professional services. Revenues from educational services, which consist of training courses for resellers and customers, and professional services, which include implementing and customizing our products for a customer, are typically recognized as the related services are performed.

Allowance for Doubtful Accounts Receivable

        The Company adjusts the allowance for doubtful accounts for each reporting period based on a detailed analysis of its accounts receivable at the end of that period. In estimating the allowance for doubtful accounts, the Company primarily considers the age of the reseller's or customer's receivable and also considers the creditworthiness of the reseller or customer, the economic conditions of the customer's industry, and general economic conditions, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of its future allowance for doubtful accounts.

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 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 corporate and government debt securities, are classified as available-for-sale. Such investments are recorded at fair value and unrealized gains and losses are excluded from earnings and recorded as a separate component of equity until realized. Premiums or discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. A decline in the market value of securities below cost judged to be other than temporary results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Interest and dividends on all securities are included in interest income when earned.

Financial Instruments

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

45

Property and Equipment

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

Impairment of Long-Lived Assets

        The Company adopted Financial Accounting Standards Board (FASB) Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, on January 1, 2002. The adoption of FASB Statement No. 144 did not affect the Company's financial statements.

        In accordance with FASB Statement No. 144, long-lived assets, such as property, plant and equipment, and intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. The Company does not have any long lived assets it considers to be impaired.

Advertising

        The Company expenses all advertising costs as incurred. Advertising expense for 2003, 2002 and 2001 was $66,000, $121,000 and $400,000, respectively.

Research and Development

        Research and development expenditures are generally expensed as incurred. FASB Statement 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, 2003, all research and development costs have been expensed.

Stock Options

        The Company applies the intrinsic-value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. FASB Statement No. 123, Accounting

46

for Stock-Based Compensation and FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, and amendment of FASB Statement No. 123, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of FASB Statement No. 123, as amended.

        For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense on a straight-line basis over the options' vesting period. The table included below illustrates the effect on the net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement 123 to stock-based employee compensation (in thousands except per share amounts).

	Years Ended December 31,
	2003			2002			2001
Net loss, as reported	$	(5,869	)	$	(7,665	)	$	(10,990	)
Add: Stock-based employee compensation expense and stock-based non-employee expense included in reported net income, net of related tax effects		100			109			197
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(3,784	)		(5,592	)		(4,969	)
Pro forma net loss	$	(9,553	)	$	(13,148	)	$	(15,762	)
Loss per share:
Basic and diluted—as reported	$	(0.38	)	$	(0.50	)	$	(0.73	)
Basic and diluted—pro forma		(0.61	)		(0.85	)		(1.05	)

        Pro forma information regarding net income is required by FASB Statement No. 148, which also requires that the information be determined as if the Company had 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 2003, 2002 and 2001, respectively:

•

a risk-free interest rate of 4.26%, 3.82% and 5.03%,



•

a volatility factor of 91.8%, 98.1% and 96.8%,



•

a dividend yield of 0% for all years, and



•

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

Income Taxes

        Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences

47

are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Loss Per Share

        Basic loss per share is calculated based on the weighted-average number of outstanding common shares in accordance with FASB Statement 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. When the Company reports a net loss, the 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. In 2003, 2002 and 2001, 472,000, 515,000 and 1.0 million shares of common stock, respectively, would not have been included in the diluted weighted average shares outstanding, as their effect would be antidilutive.

Comprehensive Loss

        Comprehensive loss is comprised of net loss and other comprehensive income (loss). The only items of other comprehensive income (loss), which the Company currently reports, are unrealized gains (losses) on marketable securities and foreign currency translation. Total comprehensive loss was $5.8 million, $7.5 million and $11.0 million for 2003, 2002 and 2001, respectively.

Reclassifications

        Certain reclassifications have been made to prior year amounts to conform with the current year presentation.

Recently Issued Accounting Standards

        In May 2003, the FASB issued FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Company, the Statement was effective for financial instruments entered into or modified after May 31, 2003, and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the Statement will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Company currently does not have any financial instruments that are within the scope of this Statement.

        In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FASB Interpretation No. 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to apply FASB Interpretation No. 46R to interests in variable interest entities (VIEs) created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FASB Interpretation No. 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any

48

difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FASB Interpretation No. 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The Company does not hold any interests in VIEs.

2.     INVESTMENTS

        Investments are summarized as follows at December 31 (in thousands):

	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Fair Value
December 31, 2003:
Government notes	$	3,008	$	—	$	—	$	3,008
December 31, 2002:
Corporate notes	$	1,002	$	—	$	—	$	1,002
Government notes		7,608		7		—		7,615
Other asset-backed securities		712		2		—		714
Total short-term investments	$	9,322	$	9	$	—	$	9,331

        The Company's short-term investments all mature in less than one year. Proceeds from the sale of investment securities were $6.4 million and $13.3 million in 2003 and 2002, respectively. Gross realized gains and gross realized losses included in interest income, net totaled less than $10,000 in 2003 and 2002.

        Interest income was $179,000, $422,000 and $1.2 million in 2003, 2002 and 2001, respectively.

3.     PROPERTY AND EQUIPMENT

        Property and equipment are summarized as follows at December 31 (in thousands):

	December 31,
	2003		2002
Computer equipment	$	15,261	$	14,770
Furniture and fixtures		2,033		1,859
Office equipment		401		429
Leasehold improvements		2,359		1,855
Software		3,143		2,940
Trade show equipment		277		337
Total cost		23,474		22,190
Less accumulated depreciation		17,617		14,604
Property and equipment, net	$	5,857	$	7,586

49

        Property and equipment is depreciated over useful lives of 3 to 5 years, except for leasehold improvements, which are depreciated over the lesser of the term of the related lease or the estimated useful life, varying from 5 to 15 years.

4.     BANK LINE OF CREDIT

        The Company has a line of credit secured by cash and cash equivalents with a bank in the amount of $3.0 million with interest to be charged at the bank's prime rate (4.00% at December 31, 2003). Principal on the note is due on demand and interest is remitted monthly. As of December 31, 2003 the Company had borrowed $2.8 million under this line and repaid the amount on January 5, 2004.

        The Company paid $16,000, $12,000 and $24,000 of interest in 2003, 2002, and 2001, respectively.

5.     RELATED PARTY TRANSACTIONS

        The Company's primary shareholder and CEO was a director and 25% shareholder in a telemarketing company that provided both telemarketing and fulfillment services to the Company through March 31, 2002 and in previous years. The Company paid approximately $35,000 in 2002 and $198,000 in 2001 for these services.

        During most of 2001, the Company held a 19% interest in Interactive Portal, Inc. (Interactive Portal), an application service provider, which offered a variety of subscription based, enhanced communications and application services. In October 2001, the Company acquired the remaining 81% ownership of Interactive Portal not owned by the Company from the Company's primary shareholder and CEO and a director of the Company. The purchase price was based on the net book value of Interactive Portal. The Company issued an aggregate of 99,136 shares of its common stock at $5.00 per share as payment of the purchase price. The acquisition was accounted for as a purchase. The operating results of Interactive Portal are included with those of the Company from the date of acquisition forward. The sellers are entitled to royalties (aggregating 5%) for a period of three years from October 2001 on sales of certain of the Company's products, which utilize software developed by Interactive Portal. Royalty amounts in each of the three years ended December 31, 2003 have totaled less than $36,000 for each year. In addition, in 2001, the Company paid Interactive Portal approximately $55,000 for various services provided.

        In 2001, the Company entered into a software development agreement and a service contract with a wireless communications software company, the majority shareholder of which is a director of the Company and a minority shareholder of which is the Company's primary shareholder and CEO. In 2001, the Company paid approximately $100,000 for development work and wireless communication expenses and the Company received a software order for approximately $17,000. In 2002, the Company paid approximately $21,000 in wireless communication expenses. As of December 31, 2002, the wireless communications services were discontinued.

6.     SHAREHOLDERS' EQUITY

        On January 25, 2001, the Company received an equity investment from Cisco Systems, Inc. The Company sold 515,517 shares of common stock at a price of $29.00 per share, yielding approximately $15.0 million in cash.

50

Stock Option Plans

        The Company's Stock Option Plans, adopted in 1995 and 1999, authorize the Board of Directors or the Compensation Committee, as applicable, to grant incentive and nonqualified stock options. The Board of Directors has approved up to an aggregate of 3.9 million 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 under the 1999 Stock Option Plan 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 incentive 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 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 67,500 nonqualified stock options in 1998 outside of the 1995 and 1999 Stock Option Plans.

        During the fourth quarter of 2003, the Company offered a voluntary stock option exchange program for its employees. Under the program, employees were given the opportunity, if they chose, to cancel certain outstanding options for common stock previously granted to them in exchange for new options for common stock. Each employee electing to participate in the exchange program was required to exchange all options granted during the six-month and one day period prior to the cancellation date. If the options which the employee elected to cancel were granted prior to June 30, 2003, new option grants will be issued for one-third the number of shares of common stock of the previous option grant with two year vesting and for options granted on or after June 30, 2003, new option grants will be issued for the equal number of shares of common stock with three year vesting (except for those relating to options granted on or after June 30, 2003 which had an original vesting period of one year or less, which new options will be fully exercisable on the date of grant). Under the exchange program, options for 453,933 shares of common stock with exercise prices ranging from $2.39 to $49.00 were tendered and cancelled and the Company expects to grant replacement options for 158,361 shares of common stock on July 2, 2004 with an exercise price equal to the fair market value of the common stock on that date, subject to certain conditions such as the employee's continued employment.

        During the second quarter of 2001, the Company offered a limited voluntary stock option exchange program for its employees. Under the program, employees were given the opportunity, if they chose, to cancel certain outstanding options for common stock previously granted to them in exchange for new options for common stock to be issued six months and one day after exchange. Each employee electing to participate in the exchange program was required to exchange all options granted during the six-month period prior to the cancellation date. The exchange resulted in the voluntary cancellation of options to purchase approximately 218,000 shares of common stock with exercise prices ranging from $12.00 to $49.00 per share. Approximately 216,000 options to purchase common stock were granted with an exercise price equal to the fair market value of the common stock of $4.70.

        The Company recognized expense of $100,000, $109,000 and $197,000 in 2003, 2002 and 2001, respectively, for the amortization of stock options granted to non-employees and the amortization of stock options granted to employees with an intrinsic value on the date of issuance.

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        Stock option activity is summarized as follows:

	Year Ended December 31,
	2003				2002				2001
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Balances, beginning of year	3,247,374		$	8.59	3,187,930		$	9.81	2,232,816		$	11.03
Options granted	672,560			3.24	555,360			4.41	1,899,070			11.14
Options exercised	(94,912	)		1.47	(111,185	)		1.03	(247,450	)		1.33
Options canceled	(835,222	)		15.29	(384,731	)		13.18	(696,506	)		20.38
Options outstanding, end of year	2,989,800			5.74	3,247,374			8.59	3,187,930			9.81
Option price range at end of year	$0.13 - $50.50				$0.13 - $50.50				$0.13 - $50.50
Options available for grant at end of year	1,639,906				1,755,244				1,728,023
Weighted average fair value of options granted during the year	$2.71				$3.73				$9.43

        The following table summarizes information about the options outstanding at December 31, 2003:

		Options Outstanding			Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$  0.13 - $  2.99	772,067	5.87 years	$	1.75	483,158	$	1.10
$  3.00 - $  4.49	779,971	7.87 years		3.24	355,431		3.13
$  4.50 - $  5.99	791,788	8.03 years		5.62	399,840		5.59
$  6.00 - $  8.99	234,325	7.05 years		7.74	108,904		7.98
$  9.00 - $13.49	210,545	6.14 years		10.88	170,321		10.67
$13.50 - $50.50	201,104	6.84 years		23.39	131,857		24.35
Total/average	2,989,800			5.74	1,649,511		5.93

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 have been reserved for issuance under the 2000 Purchase Plan. The 2000 Purchase Plan permits eligible employees to acquire shares of the Company's 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 134,196, 130,511 and 76,665 shares were

52

issued in 2003, 2002 and 2001, respectively, under the 2000 Purchase Plan at an average price of $2.87 in 2003, $3.47 in 2002 and $8.80 in 2001.

7.     LEASE AGREEMENTS

        The Company leases its corporate headquarters facility under a non-cancelable operating lease agreement, which expires in 2018. The 120,000 square foot building is located in Indianapolis, Indiana. The Company has lease agreements for 45,390 square feet related to its previous corporate headquarters. These leases expire on February 29, 2004 and February 12, 2005.

        Minimum future lease payments under non-cancelable operating leases as of December 31, 2003 are summarized as follows (in thousands):

2004	$	2,654
2005		2,282
2006		2,044
2007		2,016
2008		2,223
Thereafter		23,301
Total minimum lease payments	$	34,520

        The Company also rents office space for sales, development and international offices under month-to-month leases and leases with terms generally less than one year. Rent expense was $4.6 million, $2.6 million and $2.9 million in 2003, 2002 and 2001, respectively.

8.     CONCENTRATION OF CREDIT RISK

        No entity accounted for 10% or more of revenues or accounts receivable in 2003, 2002 or 2001. However, five entities collectively represented 30% and 29% of the accounts receivable balance at December 31, 2003 and December 31, 2002, respectively. The Company evaluates the credit worthiness of its customers on a periodic basis. The Company generally does not require collateral.

9.     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, 2003.

53

10.   INCOME TAXES

        Income tax expense attributable to income from continuing operations consists of (in thousands):

	Current		Deferred		Total
December 31, 2003:
U.S. Federal	$	—	$	—	$	—
State and local		6		—		6
Foreign jurisdiction		205		—		205
Total	$	211	$	—	$	211
December 31, 2002:
U.S. Federal	$	—	$	—	$	—
State and local		5		—		5
Foreign jurisdiction		225		—		225
Total	$	230	$	—	$	230
December 31, 2001:
U.S. Federal	$	—	$	—	$	—
State and local		1		—		1
Foreign jurisdiction		270		—		270
Total	$	271	$	—	$	271

        Income tax expense attributable to income from continuing operations differed from the benefit of $1.9 million, $2.5 million and $3.6 million for 2003, 2002 and 2001, respectively, computed by applying the U.S. Federal income tax rate of 34% to pretax loss primarily due to the fact that the Company has provided a valuation allowance against its tax credit carryforwards and net operating losses due to the uncertainty of their realizability.

        The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2003 and 2002 are presented below (in thousands):

	2003			2002
Deferred tax assets attributable to:
Net operating loss carryforward	$	19,494		$	13,344
Deferred revenue		—			4,114
Research and development carryforward		2,474			1,956
Other		1,372			1,222
Total gross deferred tax assets		23,340			20,636
Less valuation allowance		(23,340	)		(20,636	)
Net deferred tax assets	$	—		$	—

        In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the

54

periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately $68 million prior to the expiration of the net operating loss carryforwards in 2018. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences and has therefore recorded a full valuation allowance.

11.   SEGMENT DISCLOSURES

        In accordance with FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company views its operations and manages its business as principally one segment which is interaction management software applications licensing and associated services. As a result, the financial information disclosed herein represents all of the material financial information related to the Company's principal operating segment.

        Revenues derived from non-North American customers accounted for approximately 13% in 2003, 19% in 2002 and 22% in 2001 of the Company's total revenues. The Company attributes its revenues to countries based on the country in which the customer is located. The sales and licensing revenues in each individual non-North American country accounted for less than 10% of total revenues in 2003, 2002 or 2001. Approximately 10% of the Company's assets are located in foreign countries, of which approximately 4% are located in the United Kingdom.

12.   CONTINGENCIES

        From time to time the Company has received claims from competitors and other technology providers claiming that the Company's technology infringes their proprietary rights. One such claim has resulted in a legal proceeding being filed against the Company, which is described below. The Company cannot assure you that these matters can be resolved amicably without litigation, or that the Company will be able to enter into licensing arrangements on terms and conditions that would not have a material adverse effect on its business, financial condition or results of operations.

        In July 2002, the Company received a letter from a consulting firm that has been retained by a telecommunication technology provider to develop and implement a licensing program based on the technology provider's patents. The consulting firm believes that the Company has infringed on the technology provider's propriety rights and therefore feels that a licensing agreement between the Company and the technology provider is appropriate. The Company believes that the technology subject to this claim is not significant to the software it licenses. The Company believes that this matter can be resolved without a material adverse effect on its business, financial condition or results of operations, however the Company cannot provide assurance as to the outcome.

        In December 2002, the Company received a letter from one of its resellers requesting indemnification related to a request that the reseller had received for indemnification from a customer. The customer had received a letter from a third party indicating that the customer may be infringing patents held by the third party. To date, the Company's patent counsel has not determined the validity or the applicability of these patents as they relate to its products or whether the reseller is entitled to indemnification. The Company believes that this matter can be resolved without a material adverse

55

effect on its business, financial condition or results of operations, however the Company cannot provide assurance as to the outcome.

        On September 30, 2003, Recursion Software, Inc. filed suit in Dallas County Court in Dallas, Texas against the Company alleging breach of contract and money due under claims of quantum meruit and unjust enrichment. Recursion claims that the Company incorporated Recursion Software into one of its products in breach of the underlying license. No dollar amount has been stated in the action. The Company believes that it has strong defenses to the claims and intends to vigorously defend against the action. The Company believes that this matter can be resolved without a material adverse effect on its business, financial condition or results of operations, however the Company cannot provide assurance as to the outcome.

        In November 2002, the Company received a notification from the French government as a result of a tax audit that had been conducted encompassing the years 1998, 1999, 2000 and 2001. These assessments claim various taxes are owed related to Value Added Tax ("VAT") and corporation taxes in addition to what has previously been paid and accrued. As of December 31, 2003, the assessment related to VAT was approximately $2.9 million and the assessment related to corporation taxes was approximately $378,000. The Company's tax counsel has assessed the possibility of the Company paying the assessment related to VAT as remote and the assessment related to corporation taxes as reasonably possible, therefore the Company has not accrued for these amounts. The Company is appealing the assessments, but cannot assure you that these matters will be resolved without litigation or that it will not have to pay some or all of the assessments.

        From time to time, the Company is also involved in certain legal proceedings in the ordinary course of conducting its business. While the ultimate liability pursuant to these actions cannot currently be determined, the Company believes these legal proceedings will not have a material adverse effect on its financial position or results of operations. Litigation in general, and intellectual property litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict.

13.   RESTRUCTURING AND OTHER CHARGES

Year Ended December 31, 2003

        In February 2003, the Company announced its plan to downsize and reorganize resources in Europe, the Middle East and Africa ("EMEA"). The French office was significantly affected, with most positions moved or eliminated. The Company determined that the severance payments and related legal fees qualified as restructuring costs in accordance with FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities.

        Effective April 1, 2003, the Company moved its worldwide headquarters to a new building in Indianapolis, Indiana and all Indianapolis-based employees, equipment and furniture were relocated to the new facility. The Company continues to owe lease payments on the previous headquarters through February 29, 2004, for most of the space, and through February 12, 2005 for the remaining space. The Company determined that the remaining lease payments on the previous headquarters, net of sublease income, qualified as an exit cost and was recognized in accordance with FASB Statement No. 146 as restructuring charges. The Company does not anticipate additional restructuring charges related to the relocation of its worldwide headquarters.

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        The Company recognized restructuring charges in accordance with FASB Statement No. 146 of $3.4 million for the year ended December 31, 2003, which includes approximately $1.3 million related to severance.

        The Company has ten former employees from its French office that it has not reached agreement regarding severance. The Company has recorded a liability for the estimated severance for those employees in accordance with FASB Statement No. 146. The Company could incur additional expenses related to these employees for legal fees and for additional severance costs when a settlement is reached.

Year Ended December 31, 2002

        On April 4, 2002, the Company commenced a restructuring program to reduce expenses and improve efficiency due to macro-economic and capital spending issues affecting its industry. The restructuring program consisted of reducing approximately 10% of the Company's worldwide workforce and was substantially completed by the end of the second quarter of 2002. The reduction in staff affected most business functions and geographic regions. Nearly all of the $649,000 recorded as restructuring charges related to severance payments and fringe benefits, which was classified as operating expenses.

        Beginning in November 2002, the Company commenced a small restructuring program to continue to reduce expenses and improve efficiency due to macro-economic and capital spending issues affecting the industry. The restructuring program consisted of reducing approximately 2% of the Company's worldwide workforce. The reduction in staff affected several departments and geographic regions. Nearly all of the $49,000 recorded as restructuring charges related to severance payments and fringe benefits, which was classified as operating expenses.

        In addition, the Company incurred approximately $76,000 in legal fees in 2002 related to the potential restructuring of the resources in EMEA.

Year Ended December 31, 2001

        On July 6, 2001 the Company commenced a restructuring program to reduce expenses and improve efficiency due to macro-economic and capital spending issues affecting its industry. In addition to the charge related to restructuring, the Company also incurred a charge related to the write-down of an impaired asset in 2001.

        The restructuring program consisted of reducing approximately 10% percent of the Company's worldwide workforce and closing certain sales offices and was substantially completed by the end of the third quarter of fiscal 2001. The reduction in staff affected most business functions and geographic regions. The Company recorded a restructuring charge of approximately $456,000, most of which related to severance payments and fringe benefits.

        In the third quarter of 2001, due to the decline in business conditions, the Company wrote down its 19% equity investment in Interactive Portal. The Company recognized a charge for this write-down in the amount of approximately $600,000. In October 2001, the remaining 81% ownership of Interactive Portal was purchased as described in Note 5.

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        As a result of the restructuring program and the impaired asset, the Company recorded charges in the third quarter of 2001 totaling approximately $1.1 million, which were classified as operating expenses.

        A summary of the beginning accrued restructuring charges, expensed amount, cash payments and the ending accrued restructuring charges for December 31 is presented below (in thousands).

	Beginning Balance		Expense		Cash Payments			Ending Balance
December 31, 2003:
EMEA restructuring	$	53	$	1,770	$	(1,274	)	$	549
Headquarters relocation		—		1,670		(1,403	)		267
Total	$	53	$	3,440	$	(2,677	)	$	816
December 31, 2002:
Worldwide restructuring	$	5	$	774	$	(726	)	$	53
December 31, 2001:
Worldwide restructuring	$	—	$	456	$	(451	)	$	5
Impaired asset		—		600		(600	)		—
Total	$	—	$	1,056	$	(1,051	)	$	5

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SELECTED QUARTERLY FINANCIAL DATA (unaudited)

(in thousands, except per share amounts)

			Quarters in Year Ended December 31, 2003
			First		Second			Third			Fourth
Revenues:
	Software		$	8,621	$	5,772		$	5,684		$	6,246
	Services			5,763		6,335			6,455			6,636
		Total revenues		14,384		12,107			12,139			12,882
Cost of revenue:
	Software			292		325			254			319
	Services			3,186		3,254			2,962			3,049
		Total cost of revenue		3,478		3,579			3,216			3,368
Gross profit				10,906		8,528			8,923			9,514
Operating expenses:
	Sales and marketing			5,207		4,910			5,028			5,637
	Research and development			3,495		3,472			3,322			3,154
	General and administrative			1,456		1,356			1,546			1,669
	Restructuring and other charges			448		2,690			34			268
		Total operating expenses		10,606		12,428			9,930			10,728
Operating income (loss)				300		(3,900	)		(1,007	)		(1,214	)
Interest income, net				53		43			36			31
Income (loss) before income taxes				353		(3,857	)		(971	)		(1,183	)
Income taxes				53		43			54			61
Net income (loss)			$	300	$	(3,900	)	$	(1,025	)	$	(1,244	)
Net income (loss) per share—basic and diluted			$	0.02	$	(0.25	)	$	(0.07	)	$	(0.08	)
Shares used to compute net loss per share:
Basic				15,565		15,600			15,638			15,705
Diluted				15,947		15,600			15,638			15,705

			Quarters in Year Ended December 31, 2002
			First			Second			Third			Fourth
Revenues:
	Software		$	7,592		$	7,704		$	6,753		$	6,274
	Services			4,361			4,416			5,147			5,559
		Total revenues		11,953			12,120			11,900			11,833
Cost of revenue:
	Software			272			192			273			249
	Services			3,023			2,865			2,920			3,315
		Total cost of revenue		3,295			3,057			3,193			3,564
Gross profit				8,658			9,063			8,707			8,269
Operating expenses:
	Sales and marketing			5,549			5,191			5,189			5,093
	Research and development			3,906			3,712			3,739			3,785
	General and administrative			1,497			1,381			1,369			1,359
	Restructuring and other charges			—			682			—			92
		Total operating expenses		10,952			10,966			10,297			10,329
Operating loss				(2,294	)		(1,903	)		(1,590	)		(2,060	)
Interest income, net				129			104			86			93
Loss before income taxes				(2,165	)		(1,799	)		(1,504	)		(1,967	)
Income taxes				69			60			50			51
Net loss			$	(2,234	)	$	(1,859	)	$	(1,554	)	$	(2,018	)
Net loss per share—basic and diluted			$	(0.15	)	$	(0.12	)	$	(0.10	)	$	(0.13	)
Shares used to compute net loss per share				15,337			15,398			15,453			15,500

59

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

Description		Balance at Beginning of Period		Charged (Credited) to Costs and Expenses, net			Charged to Other Accounts— Describe		Deductions— Describe (1)		Balance at End of Period
Accounts receivable allowances deducted from asset accounts:
	Year ended December 31, 2003	$	671,000	$	(97,000	)(2)	$	—	$	220,000	$	354,000
	Year ended December 31, 2002		677,000		325,000			—		331,000		671,000
	Year ended December 31, 2001		631,000		744,000			—		698,000		677,000

(1)

Uncollectible accounts written off, net of recoveries.

(2)

Credits reflect recovery of amounts previously written off or revisions to previous estimates.

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

        None.

Item 9A. Controls and Procedures

        We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities Exchange Act of 1934, as amended ("Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2003 pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our President and Chief Executive Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.

        There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant.

        Information with respect to Directors set forth under the caption "Election of Directors," information with respect to Executive Officers set forth under the caption "Executive Officers," information with respect to any delinquent filers set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" and information with respect to the code of ethics set forth under the caption "Code of Ethics" appearing in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 19, 2004, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003, are incorporated herein by reference.

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 Meeting of Shareholders to be held on May 19, 2004, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

        Information set forth under the captions "Principal Shareholders", "Security Ownership of Management" and "Securities Authorized for Issuance under Equity Compensation Plans" appearing in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 19, 2004, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003, is 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 19, 2004, which

61

will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003, is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

        Information set forth under the caption "Independent Auditors" appearing in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 19, 2004, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003, is incorporated herein by reference.

PART IV

Item 15. 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:

•

Reports of Independent Auditors

•

Consolidated Balance Sheets as of December 31, 2003 and 2002

•

Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001

•

Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2003, 2002 and 2001

•

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001

•

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

On November 17, 2003, the Company filed a Form 8-K, which attached a press release announcing its plans to begin a stock repurchase program of its common stock.

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
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
10.6	(1)	Strategic Relationship Agreement between the Company and Dialogic Corporation

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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	(12)	Employment Agreement between the Company and Donna LeGrand dated August 11, 2003
10.10	(1)	*Employment Agreement between the Company and Keith A. Midkiff, dated February 10, 1997
10.11		Employment Agreement between the Company and Stephen R. Head, dated November 3, 2003
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
	(9)	*(iii) Letter of Assignment between the Company and Jeremiah J. Fleming, dated as of April 1, 2001
10.14	(1)	*Stock Option Agreement between the Company and Donald E. Brown, M.D., dated September 22, 1998
10.15	(10)	*Employment Agreement between the Company and David N. Hudson, dated January 20, 2002.
10.16	(10)	(i) Office Lease, dated April 1, 2001, between the Company and Duke-Weeks Realty Limited Partnership (Exhibits thereto will be furnished supplementally to the Securities and Exchange Commission upon request.)
	(10)	(ii) Lease Modification Agreement, dated September 19, 2001, between the Company and Duke-Weeks Realty Limited Partnership (Exhibits thereto will be furnished supplementally to the Securities and Exchange Commission upon request.)
10.17	(8)	(i) Revolving Credit Loan Agreement, dated December 21, 2000, between the Company and KeyBank National Association ("KeyBank"), Revolving Credit Promissory Note made by the Company in favor of Keybank National Association, dated December 21, 2000.
	(9)	(ii) Modification and/or Extension Agreement, dated April 30, 2001, between the Company and KeyBank
	(11)	(iii) Modification and/or Extension Agreement, dated April 29, 2002, between the Company and KeyBank
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.

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10.20		Commercial Pledge and Security Agreement, dated December 19, 2003, between the Company and KeyBank National Association and Promissory Note made by the Company in favor of Keybank National Association, dated December 19, 2003
10.23	(1)	Form of Indemnity Agreement between the Company and each of its directors and executive officers
10.27	(5)	*Form of Amendment to Employment Agreement, dated March 15, 2000, between the Company and each of Messrs. John R. Gibbs, Keith A. Midkiff and Jeremiah J. Fleming.
10.28	(6)	*Interactive Intelligence, Inc. Employee Stock Purchase Plan
10.29	(7)	*Interactive Intelligence, Inc. 401(k) Savings Plan
10.31	(10)	Stock Purchase Agreement dated as of October 1, 2001 by and among the Company and Donald E. Brown, M.D. and Robert A. Compton (Exhibits thereto will be furnished supplementally to the Securities and Exchange commission upon request.)
10.32	(10)	Royalty Agreement dated as of October 1, 2001 by and among the Company and Donald E. Brown, M.D.
10.33	(10)	Royalty Agreement dated as of October 1, 2001 by and among the Company and Robert A. Compton
21		Subsidiaries of the Company
23.1		Consent of Ernst & Young LLP
23.2		Consent of KPMG LLP
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Donald E. Brown, M.D., Chief Executive Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Stephen R. Head, Chief Financial Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*

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.

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(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.

(8)

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, 2000 is incorporated herein by reference.

(9)

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, 2001 is incorporated herein by reference.

(10)

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, 2001 is incorporated herein by reference.

(11)

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, 2002 is incorporated herein by reference.

(12)

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, 2003 is incorporated herein by reference.

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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 25, 2004	By	/s/  STEPHEN R. HEAD Stephen R. Head Chief Financial Officer, Vice President of Finance and Administration, Secretary and Treasurer

        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 25, 2004
/s/  STEPHEN R. HEAD Stephen R. Head	Chief Financial Officer, Vice President of Finance and Administration, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)	March 25, 2004
/s/  ROBERT A. COMPTON Robert A. Compton	Director	March 25, 2004
/s/  SAMUEL F. HULBERT, PH.D Samuel F. Hulbert, Ph.D	Director	March 25, 2004
/s/  WILLIAM E. MCWHIRTER William E. McWhirter	Director	March 25, 2004

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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 8. Financial Statements and Supplementary Data.

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

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures

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 and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions.
Item 14. Principal Accountant Fees and Services

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

SIGNATURES

EX-10.11

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Exhibit 10.11

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT ("Agreement"), made and entered into, effective as of the 3rd day of November, 2003, by and between Stephen Head ("Employee") and Interactive Intelligence, Inc. ("Company"), an Indiana corporation.

WITNESSETH:

WHEREAS, the Employee possesses certain skills which the Company wishes to utilize in its business, and the Employee wishes to provide certain services to the Company upon the terms and conditions set forth in this Agreement;

NOW, THEREFORE, in consideration of the premises and of the mutual promises and agreements contained herein and other good and valuable consideration, the receipt, legal adequacy and sufficiency of which are hereby acknowledged, the parties agree as follows:

Section 1.    Employment.    The Company engages the Employee to serve the Company, and the Employee agrees to serve the Company as an employee in such capacities as the Board of Directors of the Company may, from time to time, determine, upon the terms and conditions hereinafter set forth.

Section 2.    Term; Renewal.    The term of the Employee's employment under this Agreement shall be for an initial term commencing and ending on the dates set forth on the Addendum attached hereto and incorporated herein by reference ("Addendum"), which term shall automatically renew for successive one (1) year terms, on the same terms and conditions set forth herein unless either the Company or the Employee gives written notice to the other, at least thirty (30) days prior to the expiration of the initial term or any renewal term, that the term will not renew.

Section 3.    Title, Services and Duties.

        (a)   During the term of employment hereunder, the Employee shall serve in the capacities described on the Addendum and shall perform the duties and responsibilities described on the Addendum or as are normally associated with such a position in the Company's industry and as may be delegated to the Employee by the President or the Company's Board of Directors.

        (b)   During such employment, the Employee shall devote substantially all of the Employee's business time, attention, energy and skill to the business of the Company, and shall perform such services in a faithful, competent and diligent manner at the direction of the President and of the Company's Board of Directors.

        (c)   During the Employee's employment, the Company shall provide the Employee with such office facilities and support services as the Company determines in its business judgment to be appropriate for the Employee to perform the Employee's duties and responsibilities hereunder.

        (d)   The Employee shall comply with all policies and procedures adopted by the Company from time to time, including without limitation, policies regarding reimbursement for business expenses incurred on behalf of the Company, and compliance with applicable laws.

Section 4.    Compensation as Employee.    At all times during the initial term or any renewal term of this Agreement, the Company shall pay the Employee an annual salary in the amount set forth in the Addendum, payable at the usual payroll payment dates of the Company, and any other options or benefits set forth in the Addendum. All amounts paid hereunder by Company to the Employee shall be subject to all applicable local, state and federal withholding taxes. The Company may increase or decrease the salary set forth herein from time to time, in its sole discretion, but any decrease may only be made upon fifteen (15) days prior notice.

Section 5.    Termination and Severance Payments

        (a)   In the event that the employment of the Employee is terminated for cause or in the event that the Employee resigns his/her employment with the Company, the Employee shall be paid any salary and any other benefits which have then accrued and to which the Employee is entitled to at such time. However, in such event, the Employee shall not be entitled to any severance compensation as set forth in subparagraph (b) below.

        (b)   In the event that the employment of the Employee is terminated by the Company for any reason other than for cause, in addition to receiving all accrued salary and benefits to which the Employee is entitled to at such time, the Company further agrees to pay the Employee as severance pay an amount equal to the Employee's salary as in effect at such time for an additional one (1) month from the date of termination, with payments to be made on the Company's usual payroll payment dates.

        (c)   All amounts paid under Subsections (a) or (b) hereof to the Employee shall be subject to all applicable local, state or federal withholding taxes, if any.

Section 6.    Employee Benefits.

        (a)   The Employee shall be limited each calendar year to a vacation benefit for the amount of time shown in the Addendum (prorated from the date of commencement to the end of that applicable calendar year). All vacation benefits must be fully utilized in the calendar year in which accrued, provided that (i) no vacation may be taken during the first six (6) months of the initial term hereof without the prior written consent of the Company, (ii) the Employee must comply with procedures adopted from time to time by the Company with respect to the scheduling of vacations, and (iii) if because of the Company's requirements, the Company does not approve the Employee's requested vacation schedule and thus prevents the Employee from fully utilizing all of the Employee's vacation in the year earned, the Company and the Employee shall in good faith make arrangements for either the carryover of such unused vacation to the next calendar year or such other arrangements as are mutually satisfactory.

        (b)   During the term of the Employee's employment hereunder, the Employee shall be entitled to participate, upon the same terms and conditions applicable to employees generally in any life, health, hospitalization or any other insurance program, or any other pension or benefit plan which the Company may from time to time provide or make available to the Company's employees and for which the Employee is eligible and qualified; provided that if the inclusion of the Employee under any such program or plan causes or would cause either such program or plan to be terminated or the Company to incur a materially disproportionate additional cost, the Company may elect to provide benefits of a substantially similar nature which avoids such adverse effects.

Section 7.    Covenant Not to Compete.

        (a)   During the Employee's service hereunder and for a period of eighteen (18) months thereafter, regardless of the reason or method of termination, the Employee will not, directly or indirectly, for the Employee's own benefit or the benefit of any other person or entity:

        (i)    solicit in any manner, seek to obtain, or service the business of any customer of the Company, other than for the Company;

        (ii)   become an owner of any business, if such business competes with the Company;

        (iii)  become employed by or serve as an agent, independent contractor or representative of any business which competes with the Company;

2

        (iv)  solicit the employment of or hire any employee of the Company, or encourage any employee to terminate his or her employment with the Company; or

        (v)   prepare in any manner to compete with the Company.

        (b)   For purposes of this Agreement, a "customer" shall be deemed to be any person, business, partnership, proprietorship, firm, organization or corporation which has done business with the Company or which has been solicited or serviced in any manner, directly or indirectly, by the Company within eighteen (18) months prior to the date of the termination of the Employee, and the phrase "service the business of any customer" means the development, modification, enhancement or improvement of any product or service offered by the Company or which is reasonably related to the products or services offered by the Company. The Employee hereby acknowledges that, by virtue of the Employee's position and access to information, the Employee will have advantageous familiarity and personal contacts with the Company's customers, wherever located, and that the restrictions contemplated hereby are reasonable for the protection of the Company's goodwill and customer base, and the Company's efforts in the development of such customers.

        (c)   If the Employee does not comply with the provisions of this Section 7, the eighteen (18) month period of non-competition provided herein shall be tolled and deemed not to run during any period(s) of noncompliance, the intention of the parties being to provide eighteen (18) full months of non-competition by the Employee after the termination or expiration of this Agreement.

Section 8.    Covenant Not to Disclose Confidential Information.

        (a)   The term "Confidential Information" as used herein shall mean any and all software programs, customer lists, trade secrets and information, know-how, skills, knowledge, ideas, knowledge of customer's commercial requirements, pricing methods, sales and marketing techniques, dealer relationships and agreements, financial information, intellectual property, codes, algorithms, research, development, research and development programs, processes, documentation, inventions, or devices used in or pertaining to the Company's business (i) which relate in any way to the Company's business, products or processes; or (ii) which are discovered, conceived, developed or reduced to practice by the Employee, either alone or with others either (x) during the term of this Agreement; or (y) at the Company's expense; or (z) on the Company's premises or with the Company's equipment.

        (b)   During the course of his/her services hereunder, the Employee may become knowledgeable about, or become in possession of, Confidential Information. If such Confidential Information were to be divulged or become known to any competitor of the Company or to any other person outside the employ of the Company, or if the Employee were to consent to be employed by any competitor of the Company or to engage in competition with the Company, the Company would be harmed. In addition, the Employee has or may develop relationships with the Company's customers which could be used to solicit the business of such customers away from the Company. The parties have entered into this Agreement to guard against such potential harm.

        (c)   The Employee shall not, directly or indirectly, use any Confidential Information for any purpose other than the benefit of the Company or communicate, deliver, exhibit or provide any Confidential Information to any person, firm, partnership, corporation, organization or entity, except other employees or agents of the Company as required in the normal course of the Employee's service as an employee or except as the President or any authorized officer of the Company may direct in writing. The covenant contained in this Section 8 shall be binding upon the Employee during the term of this Agreement and following the termination hereof, for the shorter of the period until either (i) until such Confidential Information becomes obsolete; or (ii) until

3

such Confidential Information becomes generally known in the Company's trade or industry by means other than a breach of this covenant.

        (d)   The Employee agrees that all Confidential Information and all records, documents and materials relating to all of such Confidential Information, shall be and remain the sole and exclusive property of the Company.

Section 9.    Remedies.

        (a)   The Employee agrees that the Company will suffer irreparable damage and injury and will not have an adequate remedy at law in the event of any breach by the Employee of any provision of Sections 7 or 8 hereof. Accordingly, in the event of a breach or of a threatened or attempted breach by the Employee of Sections 7 or 8 hereof, in addition to all other remedies to which the Company is entitled under law, in equity, or otherwise, the Company shall be entitled to a temporary restraining order and permanent injunction (without the necessity of showing any actual damage) or a decree of specific performance of the provisions of Sections 7 or 8 hereof and no bond or other security shall be required in that connection. The Company shall be entitled to recover from the Employee, reasonable attorneys' fees and expenses incurred in any action wherein the Company successfully enforces the provisions of Sections 7 or 8 hereof against the breach or threatened breach of those provisions by the Employee.

        (b)   The Employee acknowledges and agrees that in the event of termination of this Agreement for any reason whatsoever, the Employee can obtain other engagements or employment of a kind and nature similar to that contemplated herein and that the issuance of an injunction to enforce the provisions of Sections 7 or 8 hereof will not prevent the Employee from earning a livelihood.

        (c)   The covenants on the part of the Employee contained in Sections 7 or 8 hereof are essential terms and conditions to the Company entering into this Agreement, and shall be construed as independent of any other provision in this Agreement. The existence of any claim or cause of action the Employee has against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of these covenants.

Section 10.    Inventions.

        (a)   The Employee shall disclose fully to the Company all inventions (as defined below) conceived or discovered by the Employee, whether solely or jointly with others during the term of this Agreement. Such inventions shall belong solely to the Company and shall not belong to the Employee. During the term of this Agreement, the Employee shall assign to the Company, exclusively and free from any royalty obligation or any other legal or equitable title or right of the Employee, all such inventions referred to above and all patents, trademarks, copyrights, and maskworks, and any and all applications and rights pertaining thereto on a worldwide basis. The Employee shall assist the Company, during and subsequent to the term hereof, in every proper way, but without any further compensation or additional consideration, to transfer and assign such inventions to and for the Company's benefit and enjoyment and to cooperate as may be reasonably requested to perfect the Company's ownership therein and, if requested by the Company, to prosecute or direct in prosecuting any application for or registration with respect to any patent or other applicable intellectual property right, including, but not in limitation thereof, the execution and delivery of applications for the registration of one or more intellectual property rights and assignments of the same as may be deemed necessary or desirable by the Company in any office selected by the Company. The judgment of the Company with respect to the registrability of any particular item of intellectual property shall be final and conclusive as between the Employee and the Company.

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        (b)   Any improvements made upon such inventions by the Employee subsequent to the term hereof shall be presumed to have been developed during the term hereof and by and for the benefit of the Company and accordingly shall be the property of the Company.

        (c)   The Employee agrees to execute such other standard forms relating to the invention or development of inventions and other intellectual properties as the Company may require of its consultants and employees generally.

        (d)   Prior inventions of the Employee, if any, as listed on the Addendum, are excluded from the scope of this Agreement.

        (e)   For purposes of this Agreement, "inventions" includes all inventions, creations, developments, software programs, algorithms, routines, patterns, components, compilations, devices, or improvements of any kind or nature, whether or not trade secret, patented, patentable, copyrighted or copyrightable, which the Employee had made or conceived or developed or may make, conceive or develop, either solely or jointly with others, while in the employ of the Company or with the use of the Company's time, materials, equipment or facilities or relating in any way to the Company's actual, anticipated, or subsequently arising business, products, services or activities, or arising out of or suggested by any task assigned to be performed by the Employee, solely or jointly with others, for or on behalf of the Company.

Section 11.    Surrender of Records.    Upon termination of the Employee's employment for any reason, the Employee shall immediately surrender to the Company any and all records, notes, documents, forms, manuals, photographs, instructions, lists, drawings, blueprints, programs, diagrams or other written, printed or electronic material (including any and all copies made at any time whatsoever) in his or her possession or control which pertain to the business of the Company.

Section 12.    Termination.    During the initial term or any renewal term, the employment of the Employee may be terminated at will for any reason by either the Company or the Employee, with at least ten (10) days prior written notice by the terminating party delivered to the other setting forth whether such termination was for cause or without cause to determine whether the Employee is entitled to any severance payment pursuant to Section 5 above. Notwithstanding the foregoing, this Agreement shall be terminated immediately, without any notice or waiting period, upon the Employee's death. This Agreement may be terminated at any time by mutual agreement of the parties.

Section 13.    Parties Bound.    All provisions of this Agreement shall inure to the benefit of and be binding upon the parties hereto, their heirs, personal representatives, successors and assigns.

Section 14.    Effect and Modification.    This Agreement comprises the entire agreement between the parties with respect to the subject matter hereof and supersedes all other earlier agreements relating to the subject matter hereof. No statement or promise, except as herein set forth, has been made with respect to the subject matter of this Agreement. No modification or amendment hereof shall be effective unless in writing and signed by the Employee and an officer of the Company (other than the Employee).

Section 15.    Non-Waiver.    The Company's or the Employee's failure or refusal to enforce all or any part of, or the Company's or the Employee's waiver of any breach of this Agreement, shall not be a waiver of the Company's or the Employee's continuing or subsequent rights under this Agreement, nor shall such failure or refusal or waiver have any affect on the subsequent enforceability of this Agreement.

Section 16.    Non-Assignability.    This Agreement contemplates that the Employee will personally provide the services described herein, and accordingly, the Employee may not assign the Employee's rights or obligations hereunder, whether by operation of law or otherwise, in whole or in part, without the prior written consent of the Company.

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Section 17.    Notice.    Any notice, request, instruction or other document to be given hereunder to any party shall be in writing and delivered by hand, telegram, registered or certified United States mail return receipt requested, or other form of receipted delivery, with all expenses of delivery prepaid, as follows:

If to the Employee:	To the most recent address the Company has on its records. Employees most recent address (please fill in): 904 Salt Court Redwood City, CA 94065
If to the Company:	Interactive Intelligence, Inc. 7601 Interactive Way Indianapolis, IN 46278 Attn: Donald E. Brown, M.D., President

Any notice to the employee shall also be sufficient, if sent to the most recent address of the employee on the Company's books and records.

Section 18.    Governing Law.    This Agreement is being delivered in and shall be governed by the laws of the State of Indiana. All actions or proceedings shall be tried in the state or federal courts whose venue includes Marion County or Hamilton County, Indiana.

Section 19.    Prior Agreements.

        (a)   The Employee represents and warrants to the Company that the Employee is not a party to or otherwise bound by any agreement that would restrict in any way the performance by the Employee of the Employee's duties, services and obligations under this Agreement, that the Employee has disclosed to the Company all employment type agreements to which the Employee has been bound, including without limitation employment agreements, consulting agreements, non-compete agreements or covenants, confidentiality or non-disclosure agreements or covenants, and intellectual property assignment agreements, and that the Company will not have any liability to any third party arising out of the Employee entering into this Agreement or performing hereunder.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

By:	/s/  STEPHEN R. HEAD Printed: Stephen Head
INTERACTIVE INTELLIGENCE, INC.
By:	/s/  DONALD E. BROWN Printed: Donald E. Brown, CEO

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ADDENDUM TO EMPLOYMENT AGREEMENT
BETWEEN INTERACTIVE INTELLIGENCE, INC.
AND
STEPHEN HEAD, DATED, NOVEMBER 3, 2003

        This Addendum relates to the Employment Agreement between Interactive Intelligence, Inc. and, Stephen Head dated November 3, 2003. This Addendum is incorporated therein by reference and shall be an integral part of the Employment Agreement.

1.	Name of Employee:	Stephen Head
2.	Initial Term:	Two (2) Years
3.	Date of Commencement:	November 3, 2003
4.	Date Initial Term Ends:	November 3, 2005
5.	Title:	CFO
6.	Job Description:	Administration
7.	Initial Compensation:	$140,000
8.	Stock Options:
	- Plan	Incentive Stock Option Plan ("Qualified")
	- Number	#75,000 (seventy five thousand) shares
	- Exercise Price	Price in effect as of the grant date
9.	Amount of Vacation :	Two(2) weeks per calendar year
10.	Other Benefits:	Medical, Vision and Dental Insurance, 401k Plan, Long Term Disability, Cafeteria 125 Plan
11.	Prior Inventions:
Date: November 3, 2003		/s/ SRH Initials	/s/ DEB Initials
(#31613 and 40525)

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Exhibit 10.11

EMPLOYMENT AGREEMENT
ADDENDUM TO EMPLOYMENT AGREEMENT BETWEEN INTERACTIVE INTELLIGENCE, INC. AND STEPHEN HEAD, DATED, NOVEMBER 3, 2003

EX-10.20

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Exhibit 10.20

PROMISSORY NOTE

Borrower: Interactive Intelligence, Inc.
7601 Interactive Way
Indianapolis, IN 46278 Lender: KeyBank National Association
IN-MM-Indianapolis (9^th floor)
10 W. Market Street
Indianapolis, IN 46204

Principal Amount: $3,000,000.00 Initial Rate: 4.000% Date of Note: December 19, 2003

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, on demand, the principal amount of Three Million & 00/100 Dollars ($3,000,000) 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 immediately upon Lender's demand. Payment in full is due immediately upon Lender's demand. Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning February 1, 2004, with all subsequent interest payments to be due on the same day of each month after that. Unless otherwise agreed or required by applicable law, payments will be applied first to any accrued unpaid interest; then to principal; then to any unpaid collection costs; and then to any late charges. Then annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by 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.

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 Prime Rate announced by Lender ("the Index"). 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, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each day that the Index changes. The interest rate will change automatically and correspondingly on the date of each announced change of the Index by Lender. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 4.000% 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 4.000% 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 agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Except for the foregoing, 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, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount much be mailed or delivered to: KeyBank National Association, IN-MM-Indianapolis (9^th floor), 10 W. Market St., Indianapolis, IN 46204.

LATE CHARGE.    If a regularly scheduled interest 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. If Lender demands payment of this loan, and Borrower does not pay the loan in full within 10 days after Lender's demand, Borrower also will be charged either 5.000% of the unpaid portion of the sum of the unpaid principal plus accrued unpaid interest or $50.00, whichever is greater.

INTEREST AFTER DEFAULT.    Upon default, including failure to pay upon final maturity, Lender, at its option, may, 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'S RIGHTS.    Upon Lender's demand, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. Under all circumstances, the Indebtedness will be repaid without relief from any Indiana or other valuation and appraisement laws.

ATTORNEY'S FEES; EXPENSES.    Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower 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 without limitation all attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law.

JURY WAIVER.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.

GOVERNING LAW.This Note will be governed by, construed and enforced in accordance with federal law and the laws of the State of Indiana. This Note has been accepted by Lender in the State of Indiana.

RIGHT OF SETOFF.    To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts.

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 as provided in this paragraph. 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 person currently is authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender's address shown above, written notice of revocation of his or her authority: Steve Head, Chief Financial Officer of Interactive Intelligence, Inc. 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.

DEMAND LINE OF CREDIT.    Borrower understands that Lender is authorized to make an annual (or more frequent) credit review based upon Borrower's current financial condition in determining whether to continue the line of credit. Nevertheless, Lender may, at any time, with or without cause, refuse to advance funds or extend credit under the line of credit.

SUCCESSOR INTERESTS.    The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, person representatives, successors and assign, and shall inure to the benefit of Lender and it successors and assigns.

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, and notice f 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 my modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several.

PRIOR TO SIGNING THIS NOTE, BOROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING TH EVARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE.

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.

BORROWER:

INTERACTIVE INTELLIGENCE, INC.

By: /s/  STEPHEN R. HEAD Steve Head, Chief Financial Officer of Interactive Intelligence, Inc.

COMMERCIAL PLEDGE AND SECURITY AGREEMENT

Grantor: Interactive Intelligence, Inc.
7601 Interactive Way
Indianapolis, IN 46278 Lender: KeyBank National Association
IN-MM-Indianapolis (9^th floor)
10 W. Market Street
Indianapolis, IN 46204

THIS COMMERCIAL PLEDGE AND SECURITY AGREEMENT dated December 19, 2003, is made and executed between Interactive Intelligence, Inc. ("Grantor") and KeyBank National Association ("Lender").

GRANT OF SECURITY INTEREST.For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law.

COLLATERAL DESRIPTION.    The word "Collateral" as used in this Agreement means all of Grantor's property (however owned if more than one), in the possession of, or subject to the control of, Lender (or in the possession of, or subject to the control of, a third party subject to the control of Lender), whether existing now or later and whether tangible or intangible in character, including without limitation each and all of the following:

All Assets held in McDonald Investment account #88543924

In addition, the word "Collateral" includes all of Grantor's property (however owned), in the possession of, or subject to the control of, Lender (or in the possession of, or subject to the control of, a third party subject to the control of Lender), whether now or hereafter existing and whether tangible or intangible in character, including without limitation each of the following:

(A)

All property to which Lender acquires title or documents of title.



(B)

All property assigned to Lender.



(C)

All promissory notes, bills of exchange, stock certifications, bonds, investment property, savings passbooks, time certificates of deposit, insurance policies, and all other instruments and evidence of an obligation.



(D)

All records relating to any of the property described in this Collateral section, whether in the form of a writing, microfilm, microfiche, or electronic media.



(E)

All Income and Proceeds from the collateral as defined herein.

CROSS-COLLATERALIZATION.    In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated whether Grantor may be liable individually or jointly with others, whether obligated or guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts my be or hereafter may become otherwise unenforceable.

RIGHT OF SETOFF.    To the extent permitted by applicable law, Lender reserves a right of setoff in all Grantor's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Grantor holds jointly with someone else and all accounts Grantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Grantor authorizes Lender, tot the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts.

REPRESENTATIONS AND WARRANTIES WITH RESPECT OT THE COLLATERAL.    Grantor represents and warrants to the Lender that:

Ownership.    Grantor is the lawful owner of the collateral free and clear of all security interests, liens, encumbrances, registered pledges, adverse claims, and any other claims of others except as disclosed to and accepted by Lender in writing prior to execution of this Agreement.

Right to Pledge.    Grantor has the full right, power and authority to enter into this Agreement and to pledge the Collateral.

Authority; Binding Effect.    Grantor has the full right, power and authority to enter into this agreement and to grant a security interest in the Collateral to Lender. This Agreement is binding upon Grantor as well as Grantor's successors and assigns, and is legally enforceable in accordance with its terms. The foregoing representations and warranties, and all other representations and warranties contained in this Agreement are and shall be continuing in nature and shall remain in full force and effect until such time as this Agreement is terminated or cancelled as provided herein.

No Further Assignment.    Grantor has not, and shall not, sell, assign, transfer, encumber or otherwise dispose of any of Grantor's rights in the Collateral except as provided in this Agreement.

No Defaults.    There are no defaults existing under the Collateral, and there are no offsets or counterclaims to the same. Grantor will strictly and promptly perform each of the terms, conditions, covenants and agreements, if any, contained in the Collateral which are to be performed by Grantor.

No Violations.    The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement.

Financing Statement.    Grantor authorizes Lender to file a UCC-1 financing statement, or alternatively, a copy of this Agreement to perfect Lender's security interest. At Lender's request, Grantor additionally agrees to sign all other documents that are necessary to perfect, protect, and continue Lender's security interest in the Property. Grantor will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to pay such fees and costs. Lender may sign and file financing statements without Grantor's signature, and Grantor irrevocably appoints Lender to execute financing statements and documents of title in Grantor's name and to execute all documents necessary to transfer title if there is a default. Lender may file a copy of this Agreement as a financing statement. If Grantor changes Grantor's name or address, or the name or address of any person granting a security interest under this Agreement changes, Grantor will promptly notify the Lender of such change.

LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL.    Lender may hold the Collateral until all Indebtedness has been paid and satisfied. Thereafter Lender may deliver the Collateral to Grantor or to any other owner of the Collateral. Lender shall have the following rights in addition to all other rights Lender may have by law:

Maintenance and Protection of Collateral.    Lender may, but shall not be obligated to, take steps as it deems necessary or desirable to protect, maintain, insure, store, or care for the Collateral, including paying of any liens or claims against the Collateral. This may include such things as hiring other people, such as attorneys, appraisers or other experts. Lender may charge Grantor for nay cost incurred in so doing. When applicable law provides more than one method of perfection of Lender's security interest, Lender may choose the method(s) to be used. If the Collateral consists of stock, bonds or other securities for which no certificate has been issued, Grantor agrees, at Lender's request, either to request issuance of an appropriate certificate or to give instructions on Lender's forms to the issuer, transfer agent, mutual fund company, or broker, as the case may be, to record on its books or records Lender's security interest in the Collateral.

Income and Proceeds from the Collateral.    Lender may receive all Income and Proceeds and add it to the Collateral. Grantor agrees to deliver to Lender immediately upon receipt, in the exact form received and without commingling with other property, all Income and Proceeds from the Collateral which may be received by, paid, or delivered to Grantor or for Grantor's account, whether as an addition to, in discharge of, in substitution of, or in exchange for any of the Collateral.

Application of Cash.    At Lender's option, Lender may apply any cash, whether included in the Collateral or received as Income and Proceeds or through liquidation, sale, or retirement, of the Collateral, to the satisfaction of the Indebtedness or such portion thereof as Lender shall choose, whether or not matured.

Transactions with Others.    Lender may (1) extend time for payment or other performance, (2) grant a renewal or change in terms or conditions, or (3) compromise, compound or release any obligation, with any one or more Obligators, endorsers, or Guarantors of the Indebtedness as Lender deems advisable, without obtaining the prior written consent of Grantor, and no such act or failure to act shall affect Lender's rights against Grantor or the Collateral.

All Collateral Secures Indebtedness.    All Collateral shall be security for the Indebtedness, whether the Collateral is located at one or more offices or branches of Lender. This will be the case whether or not the office or branch where Grantor obtained Grantor's loan knows about the Collateral or relies upon the Collateral as security.

Collection of Collateral.    Lender at Lender's option may, but need not, collect the Income and Proceeds directly from the Obligors. Grantor authorizes and directs the Obligors, if Lender decides to collect the Income and Proceeds, to pay and deliver to Lender all Income and Proceeds from the Collateral and to accept Lender's receipt for the payments.

Power of Attorney.    Grantor irrevocably appoints Lender as Grantor's attorney-in-fact, with full power of substitution, (a) to demand, collect, receive, receipt for, sue and recover all Income and Proceeds and other sums of money and other property which may now or hereafter become due, owing or payable from the Obligors in accordance with the terms of the Collateral; (b) to execute, sign and endorse any and all instruments, receipts, checks, drafts and warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and in the place and stead of Grantor, execute and deliver Grantor's release and acquittance for Grantor; (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in Lender's own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable; and (e) to execute in Grantor's name and deliver to the Obligors on Grantor's behalf, at the time and in the manner specified by the Collateral, any necessary instruments or documents.

Perfection of Security Interest.    Upon Lender's request, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral. When applicable law provides more than one method of perfection of Lender's security interest, Lender may choose the method(s) to be used. Upon Lender's request, Grantor will sign and deliver any writings necessary to perfect Lender's security interest. Grantor hereby appoints Lender as Grantor's irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend, or to continue the security interest granted in this Agreement or to demand termination of filings of other secured parties. This is a continuing Security Agreement and will continue in effect even though all or any part of the indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender.

LENDER'S EXPENDITURES.    If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's behalf may (but shall not be obligated to) take any action that Lender deems

appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. The Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default.

LIMIATIONS ON OBLIGATIONS OFLENDER.    Lender shall use ordinary reasonable care in the physical preservation and custody of the Collateral in Lender's possession, but shall have no other obligation to protect the Collateral or its value. In particular, but without limitation, Lender shall have no responsibility for (A) any depreciation in value of the Collateral or for the collection or protection of any Income and Proceeds from the Collateral, (B) preservation of rights against parties to the Collateral or against third persons, (C) ascertaining any maturities, calls, conversions, exchanges, offers, tenders, or similar matters relating to any of the collateral, or (D) informing Grantor about any of the above, whether or not Lender has or is deemed to have knowledge of such matters. Except as provided above, Lender shall have no liability for depreciation or deterioration of the Collateral.

DEFAULT.    Default will occur if payment in full is not made immediately when due.

RIGHT AND REMEDIES ON DEFAULT.    If Default occurs under this Agreement, at any time thereafter, Lender may exercise any one or more of the following rights and remedies:

Accelerate Indebtedness.    Declare all Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice of any kind to Grantor.

Collect the Collateral.    Collect any of the Collateral and, at Lender's option and to the extent permitted by applicable law, retain possession of the Collateral while suing on the Indebtedness.

Sell the Collateral.    Sell the Collateral, at Lender's discretion, as a unit or in parcels, at one or more public or private sales. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender shall give or mail to Grantor, and other persons as required by law, notice at least ten (10) days in advance of the time and place of any public sale, or of the time after which any private sale may be made. However, no notice need be provided to any person who, after Default occurs, enters into and authenticates an agreement waiving that person's right to notification of sale. Grantor agrees that any requirement of reasonable notice as to Grantor is satisfied if Lender mails notice by ordinary mail addressed to Grantor at the last address Grantor has given Lender in writing. If a public sale is held, there shall be sufficient compliance with all requirements of notice to the public by a single publication in any newspaper of general circulation in the county where the Lender is located, setting forth the time and place of sale and a brief description of the property to be sold. Lender may be a purchaser at any public sale. Under all circumstances, the Indebtedness will be repaid without relief from any Indiana or other valuation and appraisement laws.

Sell Securities.    Sell any securities included in the Collateral in a manner consistent with applicable federal and state securities laws. If, because of restrictions under such laws, Lender is unable, or believes Lender is unable, to sell the securities in an open market transaction, Grantor agrees that Lender will have no obligation to delay sale until the securities can be registered. Then Lender may make a private sale to one or more persons or to a restricted group of persons, even though such sale may result in a price that is less favorable than might be obtained in an open market transaction. Such a sale will be considered commercially reasonable. If any securities held as Collateral are "restricted securities" as defined in the Rules of the Securities and Exchange

Commission (such as Regulation D or Rule 144) or the rules of state securities departments under state "Blue Sky" laws, or if Grantor or any other owner of the Collateral is an affiliate of the issuer of the securities, Grantor agrees that neither Grantor, nor any member of Grantor's family, nor any other person signing this Agreement will sell or dispose of any securities of such issuer without obtaining Lender's prior consent.

Rights and Remedies with Respect to Investment Property, Financial Assets and Related Collateral.    In addition to other rights and remedies granted under this Agreement and under applicable law, Lender may exercise any or all of the following rights and remedies: (1) register with any issuer or broker or other securities intermediary any of the Collateral consisting of investment property or financial assets (collectively herein, "investment property") in Lender's sole name or in the name of Lender's broker, agent or nominee; (2) cause any issuer, broker or other securities intermediary to deliver to Lender any of the Collateral consisting of securities, or investment property capable of being delivered; (3) enter into a control agreement or power of attorney with any issuer or securities intermediary with respect to any Collateral consisting of investment property, on such terms as Lender may deem appropriate, in its sole discretion, including without limitation, an agreement granting to Lender any of the rights provided hereunder without further notice to or consent by Grantor; (4) execute any such control agreement on Grantor's behalf and in Grantor's name, and hereby irrevocably appoints Lender as agent and attorney-in-fact, coupled with an interest, for the purpose of executing such control agreement on Grantor's behalf; (5) exercise any and all rights of Lender under any such control agreement or power of attorney; (6) exercise any noting, conversion, registration, purchase, option, or other rights with respect to any Collateral; (7) collect, with or without legal action, and issue receipts concerning any notes, checks, drafts, remittances or distributions that are paid or payable with respect to any Collateral consisting of investment property. Any control agreement entered with respect to any investment property shall contain the following provisions, at Lender's discretion. Lender shall be authorized to instruct the issuer, broker or other securities intermediary to take or to refrain from taking such actions with respect to the investment property as Lender may instruct, without further notice to or consent by Grantor. Such action may include without limitation the issuance of entitlement orders, account instructions, general trading or buy or sell orders, transfer and redemption orders, and stop loss orders. Lender shall be further entitled to instruct the issuer, broker or securities intermediary to sell or to liquidate any investment property, or to pay the cash surrender or account termination value with respect to any and all investment property, and to deliver all such payments and liquidations proceeds to Lender. Any such control agreement shall contain such authorizations as are necessary to place Lender in "control" of such investment collateral, as contemplated under the provisions of the Uniform Commercial Code, and shall fully authorize Lender to issue "entitlement orders" concerning the transfer, redemption, liquidation or disposition of investment collateral, in conformance with the provisions of the Uniform Commercial Code.

Foreclosure.    Maintain a judicial suit for foreclosure and sale of the Collateral.

Transfer Title.    Effect transfer of title upon sale of all or part of the Collateral. For this purpose, Grantor irrevocable appoints Lender as Grantor's attorney-in-fact to execute endorsements, assignments and instruments in the name of Grantor and each of them (if more than one) as shall be necessary or reasonable.

Other Rights and Remedies.    Have and exercise any or all of the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, at law, in equity, or otherwise.

Application of Proceeds.    Apply any cash which is part of the Collateral, or which is received from the collection or sale of the Collateral, to reimbursement of any expenses, including any costs for registration of securities, commissions incurred in connection with a sale, attorney's fees and court costs, whether or not there is a lawsuit and including any fees on appeal, incurred by Lender in connection with the collection and sale of such Collateral and to the payment of the Indebtedness of Grantor to Lender, with any excess funds to be paid to Grantor as the interest of Grantor may

appear. Grantor agrees, to the extent permitted by law, to pay any deficiency after application of the proceeds of the Collateral to the Indebtedness.

Election of Remedies.    Except as may be prohibited by applicable law, all of Lender's right and remedies, whether evidence by this Agreement, the Related Documents, or by any other writing, 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 Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies.

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.

Attorneys' Fees; Expenses.    Grantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender' attorneys' fees and 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. Grantor also shall pay all court costs and such additional fees as may be directed by the court.

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.

Governing Law.This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of Indiana. This Agreement has been accepted by Lender in the State of Indiana.

No Waiver by Lender.    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 Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations 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 to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices.    Any notice required to be given under this Agreement shall be give in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. 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. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address. Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors.

Severability.    If a court of competent jurisdiction finds any provisions of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted form this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Successors and Assigns.    Subject to any limitations stated in this Agreement on transfer of Grantor's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor's successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness.

Time is of the Essence.    Time is of the essence in the performance of this Agreement.

Waive Jury.All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party.

DEFINITIONS.    The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code"

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

Borrower.    The word "Borrower" means Interactive Intelligence, Inc. and includes all co-signors and co-makers signing the Note.

Collateral.    The word "Collateral" means all of Grantor's right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement.

Default.    The word "Default" means the Default set forth in this Agreement in the section titled "Default".

Grantor.    The word "Grantor" means Interactive Intelligence, Inc.

Income and Proceeds.    The words "Income and Proceeds" mean all present and future income, proceeds, earnings, increases, and substitutions from or for the Collateral of every kind and nature, including without limitation all payments, interest, profits, distributions, benefits, rights, options, warrants, dividends, stock dividends, stock splits, stock rights, regulatory dividends, subscriptions, monies, claims for money due and to become due, proceeds of any insurance on the Collateral, shares of stock of different par value or no par value issued in substation or exchange for shares included in the Collateral, whether voluntary or involuntary, by agreement or by operation of law, and all other property Grantor is entitled to receive on account of such Collateral, including accounts, documents, instruments, chattel paper, investment property, and general intangibles.

Indebtedness.    The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents.

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

Note.    The word "Note" means the Note executed by Interactive Intelligence, Inc. in the principal amount of $3,000,000 dated December 19, 2003, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

Obligor.    The word "Obligor" means without limitation any and all persons obligated to pay money or to perform some other act under the Collateral.

Property.    The word "Property" means all of Grantor's right, title and interest in and to all the Property as described in the "Collateral Description" section of this Agreement.

Related Documents.    The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness.

GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL PREDGE AND SECURITY AGREEMENT AND AGREES TO ITS TERM. THIS AGREEMENT IS DATED DECEMBER 19, 2003.

GRANTOR:

INTERACTIVE INTELLIGENCE, INC.

By: /s/  STEPHEN R. HEAD Steve Head, Chief Financial Officer of Interactive Intelligence, Inc.

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Exhibit 10.20

EX-21

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Exhibit 21

Subsidiaries as of December 31, 2003

Name	Jurisdiction of Organization
Interactive Intelligence, Inc. International	United States
Interactive Portal, Inc.	United States
Interactive Intelligence France S.A.R.L.	France
ININ (Australia) Pty Ltd.	Australia
ININ UK Limited	England
ININ Netherlands B.V.	The Netherlands

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Exhibit 21

Subsidiaries as of December 31, 2003

EX-23.1

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Exhibit 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

•

Form S-8 No. 333-33772 pertaining to the Interactive Intelligence, Inc. 401(K) Savings Plan,



•

Form S-8 No. 333-33734 pertaining to the Interactive Intelligence, Inc. Employee Stock Purchase Plan,



•

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



•

Form S-8 No. 333-110866 pertaining to the Interactive Intelligence, Inc. Salary Reduction for Options Program

of our report dated February 7, 2003, with respect to the consolidated financial statements and schedule included in the Annual Report on Form 10-K of Interactive Intelligence, Inc. for the year ended December 31, 2003.

/s/ Ernst & Young LLP        
Indianapolis, Indiana
March 24, 2004

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Exhibit 23.1

EX-23.2

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Exhibit 23.2

The Board of Directors
Interactive Intelligence, Inc.:

        We consent to incorporation by reference in the registration statements (Nos. 333-33772, 333-33734, 333-87919 and 333-110866) on Form S-8 of Interactive Intelligence, Inc. of our report dated January 23, 2004, relating to the consolidated balance sheet of Interactive Intelligence, Inc. and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, shareholders' equity, and cash flows and the consolidated financial statement schedule for the year ended December 31, 2003, which report appears in the December 31, 2003, annual report on Form 10-K of Interactive Intelligence, Inc.

/s/ KPMG LLP            
Indianapolis, Indiana
March 24, 2004

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Exhibit 23.2

EX-31.1

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EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Donald E. Brown, M.D., certify that:

1.

I have reviewed this annual report on Form 10-K of Interactive Intelligence, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

	/s/  DONALD E. BROWN Donald E. Brown, M.D. President and Chief Executive Officer
Date: March 25, 2004

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EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

EX-31.2

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EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen R. Head, certify that:

1.

I have reviewed this annual report on Form 10-K of Interactive Intelligence, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

	/s/  STEPHEN R. HEAD Stephen R. Head Chief Financial Officer, Vice President of Finance and Administration, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)
Date: March 25, 2004

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EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

EX-32.1

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EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Annual Report of Interactive Intelligence, Inc. (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dr. Donald E. Brown, Chairman of the Board, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  DONALD E. BROWN, M.D. Donald E. Brown, M.D.
President and Chief Executive Officer

March 25, 2004

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CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

EX-32.2

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EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Annual Report of Interactive Intelligence, Inc. (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen R. Head, Chief Financial Officer, Vice President of Finance and Administration, Secretary and Treasurer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  STEPHEN R. HEAD Stephen R. Head
Chief Financial Officer, Vice President of Finance and Administration, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)

March 25, 2004

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CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002