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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2000

or

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from  to

Commission File Number 000-27385

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INTERACTIVE INTELLIGENCE, INC.(Exact name of registrant as specified in its charter)

Indiana(State or other jurisdiction of
incorporation or organization)

35-1933097(IRS Employer Identification No.)


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

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

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

Yes /x/  No / /

The
number of shares of common stock outstanding on October 31, 2000 was 14,316,972.

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TABLE OF CONTENTS

|                              |  |                                                                                                                 |  | Page No.
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | --------
|PART I. FINANCIAL INFORMATION |  |                                                                                                                
|Item 1.                       |  | Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999                            |  | 1       
|                              |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2000 and 1999 |  | 2       
|                              |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999           |  | 3       
|                              |  | Notes to Condensed Consolidated Financial Statements                                                            |  | 4       
|Item 2.                       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                           |  | 6       
|Item 3.                       |  | Qualitative and Quantitative Disclosure About Market Risk                                                       |  | 20      
|PART II. OTHER INFORMATION    |  |                                                                                                                
|Item 1.                       |  | Legal Proceedings                                                                                               |  | 20      
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                       |  | 20      
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                |  | 20      
|                              |  | Signature                                                                                                       |  | 21      
|                              |  |                                                                                                                 |  |         

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PART I. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements and Footnotes.

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

|                                                  |                                                                                                                                                                        | September 30,
2000 |        | December 31,
1999 |  
|------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------ | ----------------- | -
|
|Assets                                            |                                                                                                                                                                        |                    |        |                   |  
|Current assets:                                   |                                                                                                                                                                        |                    |        |                   |  
|                                                  | Cash and cash equivalents                                                                                                                                              |                    | $      | 1,727             |  
|                                                  | Short-term investments                                                                                                                                                 |                    |        | 7,967             |  
|                                                  | Accounts receivable, net of allowance for doubtful accounts accounts of $520 in 2000 and $437 in 1999                                                                  |                    |        | 6,948             |  
|                                                  | Prepaid expenses                                                                                                                                                       |                    |        | 496               |  
|                                                  | Other current assets                                                                                                                                                   |                    |        | 61                |  
|                                                  |                                                                                                                                                                        |                    |        |                   |  
|Total current assets                              |                                                                                                                                                                        |                    | 17,199 |                   |  
|Property and equipment, net                       |                                                                                                                                                                        |                    | 7,650  |                   |  
|Long-term investments                             |                                                                                                                                                                        |                    | 6,056  |                   |  
|Other assets, net                                 |                                                                                                                                                                        |                    | 887    |                   |  
|                                                  |                                                                                                                                                                        |                    |        |                   |  
|Total assets                                      |                                                                                                                                                                        | $                  | 31,792 |                   | $
|                                                  |                                                                                                                                                                        |                    |        |                   |  
|Liabilities and shareholders' equity              |                                                                                                                                                                        |                    |        |                   |  
|Current liabilities:                              |                                                                                                                                                                        |                    |        |                   |  
|                                                  | Accounts payable and accrued liabilities                                                                                                                               |                    | $      | 3,413             |  
|                                                  | Accrued compensation and related expenses                                                                                                                              |                    |        | 651               |  
|                                                  | Deferred revenue                                                                                                                                                       |                    |        | 6,510             |  
|                                                  | Current portion of capital lease obligations                                                                                                                           |                    |        | 412               |  
|                                                  |                                                                                                                                                                        |                    |        |                   |  
|Total current liabilities                         |                                                                                                                                                                        |                    | 10,986 |                   |  
|Capital lease obligations, net of current portion |                                                                                                                                                                        |                    | 80     |                   |  
|Shareholders' equity:                             |                                                                                                                                                                        |                    |        |                   |  
|                                                  | Preferred stock, no par value; 10,000,000 authorized; no shares issued and outstanding                                                                                 |                    |        |                  |  
|                                                  | Common stock, $0.01 par value; 100,000,000 authorized; 14,302,990 issued and outstanding at September 30, 2000, 13,831,486 issued and outstanding at December 31, 1999 |                    |        | 143               |  
|                                                  | Additional paid-in capital                                                                                                                                             |                    |        | 46,725            |  
|                                                  | Accumulated deficit                                                                                                                                                    |                    |        | (26,142           | )
|                                                  |                                                                                                                                                                        |                    |        |                   |  
|Total shareholders' equity                        |                                                                                                                                                                        |                    | 20,726 |                   |  
|                                                  |                                                                                                                                                                        |                    |        |                   |  
|Total liabilities and shareholders' equity        |                                                                                                                                                                        | $                  | 31,792 |                   | $
|                                                  |                                                                                                                                                                        |                    |        |                   |  

See
accompanying notes.

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

|                                           |                            | Three months ended
September 30, |        | Nine months
ended
September 30, |  
|------------------------------------------ | -------------------------- | -------------------------------- | ------ | ------------------------------- | -
|
|                                           |                            |                                  |        |                                 |  
|Revenues:                                  |                            |                                  |        |                                 |  
|                                           | Software                   |                                  | $      | 7,689                           |  
|                                           | Services                   |                                  |        | 2,789                           |  
|                                           |                            |                                  |        |                                 |  
|                                           | Total revenues             |                                  |        | 10,478                          |  
|Costs and expenses:                        |                            |                                  |        |                                 |  
|                                           | Costs of software          |                                  |        | 159                             |  
|                                           | Costs of services          |                                  |        | 2,781                           |  
|                                           | Sales and marketing        |                                  |        | 4,672                           |  
|                                           | Research and development   |                                  |        | 2,808                           |  
|                                           | General and administrative |                                  |        | 1,294                           |  
|                                           |                            |                                  |        |                                 |  
|Total costs and expenses                   |                            |                                  | 11,714 |                                 |  
|                                           |                            |                                  |        |                                 |  
|Operating loss                             |                            |                                  | (1,236 | )                               |  
|Interest income (expense), net             |                            |                                  | 294    |                                 |  
|                                           |                            |                                  |        |                                 |  
|Loss before income taxes                   |                            |                                  | (942   | )                               |  
|Income taxes                               |                            |                                  | 54     |                                 |  
|                                           |                            |                                  |        |                                 |  
|Net loss                                   |                            | $                                | (996   | )                               | $
|                                           |                            |                                  |        |                                 |  
|Net loss per share:                        |                            |                                  |        |                                 |  
|Basic and diluted                          |                            | $                                | (0.07  | )                               | $
|                                           |                            |                                  |        |                                 |  
|Shares used to compute net loss per share: |                            |                                  |        |                                 |  
|Basic and diluted                          |                            |                                  | 14,270 |                                 |  

See
accompanying notes.

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

|                                                                            |                                                   | Nine months ended
September 30,                        |       
|--------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------------ | ------
|
|Operating activities                                                        |                                                   |                                                        |       
|Net loss                                                                    |                                                   | $                                                      | (4,384
|Adjustments to reconcile net loss to net cash used by operating activities: |                                                   |                                                        |       
|                                                                            | Depreciation                                      |                                                        |       
|                                                                            | Amortization of deferred stock-based compensation |                                                        |       
|                                                                            | Changes in operating assets and liabilities:      |                                                        |       
|                                                                            |                                                   | Accounts receivable                                    |       
|                                                                            |                                                   | Prepaid expenses                                       |       
|                                                                            |                                                   | Other current assets                                   |       
|                                                                            |                                                   | Accounts payable and accrued liabilities               |       
|                                                                            |                                                   | Accrued compensation and related expenses              |       
|                                                                            |                                                   | Deferred revenue                                       |       
|                                                                            |                                                   | Accounts payable and deferred compensationshareholder |       
|                                                                            |                                                   |                                                        |       
|Net cash used by operating activities                                       |                                                   |                                                        | (2,375
|Investing activities                                                        |                                                   |                                                        |       
|Purchases of property and equipment, net                                    |                                                   |                                                        | (5,162
|Purchases of available-for-sale investments                                 |                                                   |                                                        | (2,267
|Sales of available-for-sale investments                                     |                                                   |                                                        | 9,374 
|Change in other assets                                                      |                                                   |                                                        | (525  
|                                                                            |                                                   |                                                        |       
|Net cash provided (used) by investing activities                            |                                                   |                                                        | 1,420 
|Financing activities                                                        |                                                   |                                                        |       
|Borrowings under lines of credit                                            |                                                   |                                                        |      
|Repayments under lines of credit                                            |                                                   |                                                        |      
|Principal payments on capital lease obligations                             |                                                   |                                                        | (445  
|Borrowings under notes payable and accrued interestshareholder             |                                                   |                                                        |      
|Repayments under notes payable and accrued interestshareholder             |                                                   |                                                        |      
|Proceeds from stock options exercised                                       |                                                   |                                                        | 733   
|Repurchases of common stock                                                 |                                                   |                                                        |      
|Proceeds from issuances of common stock                                     |                                                   |                                                        | 159   
|                                                                            |                                                   |                                                        |       
|Net cash provided by financing activities                                   |                                                   |                                                        | 447   
|                                                                            |                                                   |                                                        |       
|Net increase (decrease) in cash and cash equivalents                        |                                                   |                                                        | (508  
|Cash and cash equivalents, beginning of period                              |                                                   |                                                        | 2,235 
|                                                                            |                                                   |                                                        |       
|Cash and cash equivalents, end of period                                    |                                                   | $                                                      | 1,727 
|                                                                            |                                                   |                                                        |       

See
accompanying notes.

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## 

Interactive Intelligence, Inc.  Notes to Condensed Consolidated Financial Statements  (Unaudited)

1.  Description of Business and Basis of Presentation



2.  Net Loss Per Common Share



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

|                                                            |  | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |  
|----------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | -
|
|Net Loss:                                                   |  | $                                | (996   | )                               | $
|                                                            |  |                                  |        |                                 |  
|Basic and diluted:                                          |  |                                  |        |                                 |  
|Weighted-average shares used to compute net loss per share: |  |                                  | 14,270 |                                 |  
|                                                            |  |                                  |        |                                 |  
|Basic and diluted net loss per common share:                |  | $                                | (0.07  | )                               | $
|                                                            |  |                                  |        |                                 |  

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3.  Bank Lines of Credit



4.  Contingencies



5

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

Forward-Looking Information

Certain statements in this Form 10-Q contain "forward-looking" information (as defined in Section 27A of the Securities Act of 1933,
as amended) that involve risks and uncertainties which may cause actual results to differ materially from those predicted in the forward-looking statements. Forward-looking statements can be
identified by their use of such verbs as "expects," "anticipates," and "believes" or similar verbs or conjugations of such verbs. If any of our assumptions on which the statements are based prove
incorrect or should unanticipated circumstances arise, our actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number
of factors or combination of factors, including, but not limited to, the "Factors Affecting Operating Results" described herein and the Risk Factors described in our Securities and Exchange Commission
filings, including the Form 10-K filing for the year ended December 31, 1999.

Overview

We commenced operations in October 1994. Through the end of 1996, we focused primarily on research and development activities. Our first product was
released in March 1997. In 1997 and 1998, we expanded our operations to capitalize on the increased market demand for communications and interaction management software. We decided, at the
expense of profitability, to continue investing significantly in research and development, and to accelerate our investments in marketing, services and sales operations. We had no revenue in 1996, and
our total revenues were $1.6 million in 1997, $9.0 million in 1998 and $19.1 million in 1999. Through the nine months ended September 30, 2000, our total revenues were
$26.1 million.

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

Historical Results of Operations

The following table presents certain financial data, derived from our unaudited statements of operations, as a percentage of total revenues for the periods
indicated. The operating results for the

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three and nine months ended September 30, 2000 and 1999 are not necessarily indicative of the results that may be expected for the full year or for any future period.

|                               |                            | Three months ended
September 30, |    | Nine months ended
September 30, |   
|------------------------------ | -------------------------- | -------------------------------- | -- | ------------------------------- | --
|
|Revenues:                      |                            |                                  |    |                                 |   
|                               | Software                   |                                  | 73 | %                               | 75
|                               | Services                   |                                  | 27 |                                 | 25
|                               |                            |                                  |    |                                 |   
|Total revenues                 |                            | 100                              |    | 100                             |   
|                               |                            |                                  |    |                                 |   
|Costs and expenses:            |                            |                                  |    |                                 |   
|                               | Costs of software          |                                  | 2  |                                 | 1 
|                               | Costs of services          |                                  | 27 |                                 | 31
|                               | Sales and marketing        |                                  | 44 |                                 | 50
|                               | Research and development   |                                  | 27 |                                 | 37
|                               | General and administrative |                                  | 12 |                                 | 15
|                               |                            |                                  |    |                                 |   
|Total costs and expenses       |                            | 112                              |    | 134                             |   
|                               |                            |                                  |    |                                 |   
|Operating loss                 |                            | (12                              | )  | (34                             | ) 
|Interest income (expense), net |                            | 3                                |    | (4                              | ) 
|                               |                            |                                  |    |                                 |   
|Loss before income taxes       |                            | (9                               | )  | (38                             | ) 
|Income taxes                   |                            | 1                                |    | 0                               |   
|                               |                            |                                  |    |                                 |   
|Net loss                       |                            | (10                              | )% | (38                             | )%
|                               |                            |                                  |    |                                 |   

Revenues

Our total revenues increased 100% from $5.2 million for the three months ended September 30, 1999 to $10.5 million for the three months
ended September 30, 2000. Total revenues increased 108% from $12.5 million for the nine months ended September 30, 1999, to $26.1 million for the nine months ended
September 30, 2000. Non-North American revenues grew from $1.1 million and $2.5 million for the three and nine months ended September 30, 1999, respectively, to
$3.3 million and $6.9 million for the three and nine months ended September 30, 2000, respectively. Our revenues are derived primarily from license fees and charges for services,
including product maintenance, education services, and
professional services. The increase in total revenues resulted primarily from increases in the number of both new and existing software licenses and, to a lesser extent, product maintenance revenues.
We do not believe that the percentage increases in revenues achieved in prior periods should be anticipated in future periods. We anticipate that software revenues will continue to represent the
majority of our revenues for the foreseeable future.

Software.Our software revenues increased 96% from $3.9 million for the three months ended September 30,
1999, to $7.7 million for the three months ended September 30, 2000. Software revenues increased 101% from $9.4 million for the nine months ended September 30, 1999, to
$18.9 million for the nine months ended September 30, 2000. The increase in software revenues can be attributed to an increase in software licenses as a result of increased market
acceptance for our products and a growing geographic presence in North America, Europe, and the Asia/Pacific region.

Services.Services revenues increased 112% from $1.3 million for the three months ended September 30,
1999, to $2.8 million for the three months ended September 30, 2000. Services revenues increased 130% from $3.1 million for the nine month period ended September 30, 1999,
to $7.2 million

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for the nine month period ended September 30, 2000. The increase in services revenues was primarily due to an increase in product maintenance revenues, which is related to our growing installed
base of end-user customers. We also realized increased education revenues and additional implementation and customization revenues from our professional services organization.

Cost and Expenses

Our total costs and expenses increased 67% from $7.0 million for the three months ended September 30, 1999, to $11.7 million for the three
months ended September 30, 2000. Similarly, total costs and expenses increased 73% from $18.1 million for the nine months ended September 30, 1999, to $31.3 million for the
nine months ended September 30, 2000. The increase in amount was primarily due to increases in investments in our research and development, marketing, and sales and services efforts.

Costs of Software.Costs of software consist primarily of product royalties paid to third-parties for the use of their
technologies in our products and, to a lesser extent, software packaging costs, which include product media, duplication and documentation. Costs of software increased from $74,000 for the three
months ended September 30, 1999, to $159,000 for the three months ended September 30,
2000. This represents approximately 1% of software revenues for the three months ended September 30, 1999 and approximately 2% for the three months ended September 30, 2000. Costs of
software increased from $134,000 for the nine months ended September 30, 1999 to $356,000 for the nine months ended September 30, 2000. This represents approximately 1% of software
revenues in both periods. The increase was due to royalties owed as a result of higher software revenues and an increase in estimated royalty expenses related to third-party technology. We expect
product royalties to continue to increase in the future, in terms of both costs and as a percentage of software revenues, as we release additional products and utilize additional third-party functions
and features in our product offerings.

Costs of Services.Costs of services consist primarily of compensation expenses for technical support, education, and
professional services personnel and other costs associated with supporting our resellers and end-user customers. Costs of services increased from $1.6 million for the three months
ended September 30, 1999, to $2.8 million for the three months ended September 30, 2000. Costs of services increased from $4.0 million for the nine months ended
September 30, 1999, to $7.0 million for the nine months ended September 30, 2000. As a percentage of services revenues, cost of services represented 122% and 100% for the three
months ended September 30, 1999 and 2000, respectively, and 126% and 97% for the nine months ended September 30, 1999 and 2000, respectively. The increase in amount was due to an ongoing
effort to maximize our reseller effectiveness and end-user customer satisfaction through the expansion of our technical support, education and professional services organizations. We
expect that costs of services will increase as we make continued investments to support our end-user customer base and resellers.

Sales and Marketing.Sales and marketing expenses consist of trade shows, advertising, telemarketing campaigns and
other promotional expenses, compensation expenses, including sales commissions, and travel expenses. Sales and marketing expenses increased from $2.6 million for the three months ended
September 30, 1999, to $4.7 million for the three months ended September 30, 2000. Sales and marketing expenses increased from $7.2 million for the nine months ended
September 30, 1999 to $12.5 million for the nine months ended September 30, 2000. The increase reflects the expansion of our worldwide sales and marketing organizations, and
higher sales compensation associated with higher software revenues, and marketing activities such as trade shows and advertising. We currently plan to continue investing significantly in sales and
marketing efforts.

Research and Development.Research and development expenses consist primarily of compensation expenses for our
developers and third party efforts to develop and enhance our products, including adapting our products for specific countries. Research and development expenses increased from

8

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$1.9 million for the three months ended September 30, 1999, to $2.8 million for the three months ended September 30, 2000. Research and development expenses increased from
$4.9 million for the nine
months ended September 30, 1999, to $7.6 million for the nine months ended September 30, 2000. Currently, all costs related to research and development of our products are charged
to research and development expense as incurred. The dollar increases in research and development expenses were due to the hiring of software developers and third party efforts required to enhance our
existing product suite, develop new products, and localize our products for the Japanese, Korean, Chinese and Spanish markets. We believe that a significant investment in research and development has
been, and will continue to be, critical to market acceptance of our products.

General and Administrative.General and administrative expenses consist primarily of compensation for our
administrative, financial, and information technology personnel, and a number of non-allocable costs, including legal and other professional service fees. General and administrative
expenses increased from $771,000 for the three months ended September 30, 1999, to $1.3 million for the three months ended September 30, 2000. General and administrative expenses
increased from $1.9 million for the nine months ended September 30, 1999 to $3.7 million for the nine months ended September 30, 2000. The increase resulted primarily from
the addition of personnel to support the growth of our business and an increased amount of legal and other professional service fees. We believe our general and administrative expenses will continue
to increase as we expand our administrative infrastructure and incur legal and other professional service fees.

Interest income (expense), net

Interest income is generated primarily from invested funds from our initial public offering completed in September 1999. Interest expense is currently
generated only by our capital lease lines of credit. During the three and nine months ended September 30, 1999, interest expense was also generated by debt owed to our principal stockholder and
various commercial lines of credit. Net interest expense was $227,000 for the three months ended September 30, 1999, while net interest income was $294,000 for the three months ended
September 30, 2000. Additionally, net interest expense was $625,000 for the nine months ended September 30, 1999 while net interest income was $868,000 for the nine months ended
September 30, 2000. The change to net interest income from net interest expense was due to investing the proceeds from our initial public offering in interest-bearing securities after repaying
all outstanding debt except for our capital lease lines.

Income taxes

For U.S. corporate income tax purposes, we did not recognize a tax benefit related to U.S. federal or state income taxes during the three months or nine months
ended September 30, 1999 or September 30, 2000 because of the uncertainty of eventually realizing these benefits. However, we did recognize a tax
expense related to our international operations of $54,000 for the three months ended September 30, 2000, and $134,000 for the nine months ended September 30, 2000. No income tax expense
related to our international operations was recognized for the three or nine months ended September 30, 1999.

Liquidity and Capital Resources

In September 1999, we sold 3.0 million shares of common stock in our initial public offering, generating $39.0 million in cash, before
offering expenses. As of September 30, 2000, we had cash and cash equivalents of $1.7 million, short term investments of $8.0 million, long-term investments of
$6.1 million and a working capital balance of $6.2 million. Prior to our initial public offering, we funded our operations primarily through equity and debt infusions from our principal
stockholder, Dr. Brown, and a $5.0 million equity investment by Dialogic Investment Corporation and borrowings under commercial lines of credit.

9

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Our operating activities resulted in net cash outflows of $2.8 million and $2.4 million for the nine months ended September 30, 1999 and September 30,
2000, respectively. The operating cash outflows for the first nine months of 1999 were primarily the result of our operating loss and an increase in accounts receivable partially offset by an increase
in deferred revenue. The operating cash outflows for the first nine months of 2000 were also primarily the result of our operating loss and an increase in accounts receivable partially offset by
depreciation and increases in deferred revenue and accounts payable.

Our
investing activities have consisted primarily of capital expenditures for property and equipment and proceeds from the sale of investments. Our activities resulted in a
$2.7 million outflow for the nine month period ended September 30, 1999 and a $1.4 million inflow for the nine month period ended September 30, 2000. The 1999 outflow
consisted primarily of computer hardware, software, office equipment, and furniture expenditures for our growing employee headcount and our research and development needs. The 2000 inflow was
primarily attributed to net sales of available-for-sale investments offset by capital expenditures for property and equipment. At September 30, 2000, we did not have any
material commitments for future capital expenditures.

Prior
to the initial public offering, financing activities consisted primarily of the issuance of debt and equity to Dr. Brown, borrowings under commercial lines of credit, and
the equity investment by Dialogic Investment Corporation. For the nine months ended September 30, 1999 we generated $27.9 million in net proceeds from financing activities which
consisted primarily of proceeds from our initial public
offering, partially offset by scheduled repayments to our major shareholder. For the nine months ended September 30, 2000 we generated $447,000 in net proceeds from financing activities which
included stock option exercises partially offset by scheduled repayments of our capital lease lines. Our lines of credit expired on June 30, 2000 and were not renewed.

We
believe that our existing cash and cash equivalents, short-term investments and long term investments will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months. We may require additional funds to support our working capital requirements or for other corporate purposes. To support our growth, we
may consider, from time to time, raising additional funds through public or private equity or debt financings or from other sources. We cannot assure you that additional financing will be available at
all or that, if available, will be on terms favorable to us or that any additional financing will not dilute your ownership interest in Interactive Intelligence.

Factors affecting Operating Results

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

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

10

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WE HAVE HISTORICALLY INCURRED LOSSES AND WE MAY NOT ACHIEVE PROFITABILITY

We have not operated profitably to date. We incurred net losses of $7.4 million in 1998, $7.1 million in 1999 and $4.4 million for the
nine-month period ended September 30, 2000. At September 30, 2000, we had accumulated losses since inception of $26.1 million. We intend to continue to make
significant investments in our research and development, marketing, services and sales operations. We anticipate that these expenses could significantly precede any revenues generated by the increased
spending. As a result, we are likely to continue to experience losses and negative cash flow from operations in future quarters. If we do become profitable, we may not sustain or increase our
profitability.

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

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

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

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

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

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

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



We
recently introduced a product used by service providers which is anticipated to have a longer sales cycle than the sales cycle experienced in our other target markets. In addition,
the sales cycle for our products in international markets has been, and is expected to continue to be, longer than the sales cycle in North America. The average sales cycle for our products may
lengthen as we expand internationally.

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

If we are not able to manage our growth successfully, we will not grow as planned and our business could be adversely affected. We have grown revenues from
$1.6 million in 1997 to $9.0 million in 1998, $19.1 million in 1999 and $26.1 million in the first nine months of 2000, and we intend to continue to grow our business
operations significantly in the future. Our existing management, operational, financial and human resources and management information systems and controls may be inadequate to support our future
operations. In addition, as the complexity of our product technology and our reseller and other third-party relationships have increased, the management of those relationships and the negotiation of
contractual terms sufficient to protect our rights and limit our potential liabilities has
become more complicated, and we expect this trend to continue in the future. As a result, our inability to successfully manage these relationships or negotiate sufficient contractual terms could have
a material adverse effect on us.

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

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

Many
of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing, customer service and other resources, greater
name recognition and a larger installed base of customers than we do. As a result, these competitors may be able to respond to new or emerging technologies and changes in customer requirements faster
and more effectively than we can, or to devote greater resources to the development, promotion and sale of products than we can. Current and potential competitors have established, and may in the
future establish, cooperative

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relationships among themselves or with third parties, including mergers or acquisitions, to increase the ability of their products to address the needs of our current or prospective
end-user customers. If these competitors were to acquire significant market share, it could have a material adverse effect on our business, financial condition or results of operations.

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

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

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

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

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

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

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

Our products address a new and emerging market for Web-based, interactive electronic business solutions. Therefore, our future success depends upon
the widespread adoption of the Web as a primary medium for commerce and business applications. The failure of this market to develop, or a delay in the development of this market, could have a
material adverse effect on our business, financial condition or results of operations. The Web has experienced, and is expected to continue to experience,

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significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. The Web infrastructure may not be able to support the demands placed on it by the
continued growth upon which our success depends. Moreover, critical issues concerning the commercial use of the Web, such as security, reliability, cost, accessibility and quality of service, remain
unresolved and may negatively affect the growth of Web use or the attractiveness of commerce and business communication over the Web. In addition, the Web could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased activity or due to increased government regulation and taxation of Internet commerce.

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

Our Interaction Center platform products currently run only on Microsoft Windows NT® and Microsoft Windows® 2000 servers. In addition,
our products use other Microsoft Corporation technologies, including Microsoft® Exchange Server and Microsoft® SQL Server. A decline in market acceptance for Microsoft
technologies or the increased acceptance of other server technologies could cause us to incur significant development costs and could have a material adverse effect on our ability to market our
current products. Although we believe that Microsoft technologies will continue to be widely used by businesses, we cannot assure you that businesses will adopt these technologies as anticipated or
will not in the future migrate to other computing technologies that we do not currently support. In addition, our products and technologies must continue to be compatible with new developments in
Microsoft technologies.

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

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

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

If the demand for interaction management software of the type we license does not continue to grow as anticipated within each of our three targeted markets,
our ability to grow our business as planned could be materially adversely affected. Substantially all of our revenues have been generated from licenses of our Interaction Center platform 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 Interaction Center platform products is high, and growth in demand has accelerated in recent years, particularly

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among call centers, the market for our products and services is still emerging. Further, our growth plans require us to successfully attract enterprise and service provider end-user
customers.

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

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

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

Our products cannot currently meet the communications needs of organizations with more than 500 users at a single call center location and cannot currently
meet the communication needs of organizations with more than 1,000 users at a single enterprise location. As these organizations expand to include multiple locations, our products can be customized to
increase the number of telephone lines, extensions and users. We will need to adapt our software to serve larger single-site organizations. Although we are currently developing and testing
solutions that would enable our software to significantly increase the number of users that our products can serve at a single location, we cannot assure you that we will be able to successfully
introduce this technology into a currently available version of our products. Further, we may not be able to adapt our software in a timely or cost effective manner in a way that will permit us to
serve these customers. This inability could have a material adverse effect on our business, financial condition or results of operations.

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

Dialogic Corporation, a subsidiary of Intel Corporation, and AcuLab plc are our primary suppliers of the voice processing boards that are necessary for the
operation of the currently available versions of our products. If these suppliers become unable or unwilling to continue to manufacture and supply
these voice processing boards in the volume, price and technical specifications we require, then we would have to adapt our products to a substitute supplier. We may not be able to successfully
introduce voice processing boards made by a substitute supplier into the available versions of our products. In addition, introducing a substitute supplier of voice processing boards could result in
unforeseen additional product development or customization costs and could also introduce hardware and software operating or compatibility problems. The Company can not assure you that these issues
will not affect product shipments, will not be costly to correct, will not damage our reputation in the markets in which we operate, or will not have a material adverse affect on our business,
financial condition or results of operations.

In
addition, Dialogic Corporation's CT Media offers some of the functionality that our Interaction Center platform products provide and consequently could make it easier
for competitors or potential competitors to provide products competitive with ours. If CT Media were to become an

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industry standard, our failure to adopt it could disadvantage us in competitive situations. In addition, although neither our primary suppliers of voice processing boards nor their affiliates
currently offer a product that competes with our Interaction Center platform products, they could potentially develop a competitive or superior product.

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

We regard our software products as proprietary. In an effort to protect our proprietary rights, we rely primarily on a combination of copyright, trademark and
trade secret laws, as well as licensing and other agreements with consultants, suppliers, strategic and OEM partners, resellers and end-user customers, and employee and third-party
non-disclosure agreements. These laws and agreements provide only limited protection of our proprietary rights. In addition, we have not signed agreements containing these types of
protective provisions in every case, and the contractual provisions that are in place and the protection they provide vary and may not provide us with adequate protection in all circumstances.
Although we have filed patent applications directed to several inventions embodied in our software products, we currently hold no patents. We hold one registered copyright. Because our means of
protecting our proprietary rights may not be adequate, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization. A third party could also develop
similar technology independently. In addition, the laws of some countries in which we sell our products do not protect our software and intellectual property rights to the same extent as the laws of
the United States. Unauthorized copying, use or reverse engineering of our products could materially adversely affect our business, results of operations or financial condition.

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

INFRINGEMENT CLAIMS COULD ADVERSELY AFFECT US

In June 1999 and September 1999, the Company received letters from a competitor in the call center market claiming that the Company's products
utilize technologies pioneered and patented by that competitor. The Company's patent counsel has reviewed all of the patents listed in the letters. Based on the advice of the Company's patent counsel,
the Company believes that its products do not infringe any of the patents listed in either letter. The Company has discussed its conclusion with the competitor and has also discussed possible
licensing of certain technologies from the competitor. The Company cannot assure you that this matter can be resolved amicably without litigation, or that it will be able to enter into a licensing
arrangement on terms and conditions that would not have a material adverse effect on the Company's business, financial condition or results of operations.

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

Other
third parties could claim that our technology infringes their proprietary rights. As the number of software products in our target markets increases and the functionality of
these products overlap, we believe that software developers may face infringement claims. For example, various patent

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rights have been asserted against interfaces between PBX hardware and computer network systems. Although we believe that our products do not infringe any of these patents because, among other reasons,
our products are designed to replace PBXs and not to create such interfaces, if these patents were interpreted broadly, claims of infringement of these patents could have a material adverse affect on
us.

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

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

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

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

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



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OUR INTERNATIONAL OPERATIONS AND EXPANSION INVOLVE FINANCIAL AND OPERATIONAL RISKS

The expansion of our international operations will require significant management attention and financial resources to establish additional foreign operations,
hire additional personnel and recruit additional international resellers. Non-North American revenues accounted for 17% of our total revenues in 1997, 16% of our total revenues in 1998,
19% of our total revenues in 1999 and 25% of our total revenues in the first nine months of 2000. To date, our products have been licensed outside North America primarily in Western Europe, South
Africa and Australia. We are also expanding our marketing efforts in Japan, Korea, China and Central and South America. We intend to continue to expand our international operations and enter
additional international markets. Revenues from international expansion may be inadequate to cover the expenses of international expansion. In addition to the foreign currency fluctuation risks
described below, other risks inherent in our international business activities, in the countries in which we have licensed our products to date and in those countries in which we intend to expand,
generally could include the following:



FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN LOSSES

Our international revenues are generally denominated in U.S. Dollars, but our international expenses are generally denominated in local foreign currencies.
Although foreign currency translation gains and losses have been immaterial to date, fluctuations in exchange rates between the U.S. Dollar and other currencies could have a material adverse effect on
our business, financial condition or results of operations, and particularly on our operating margins. To date, we have not sought to hedge the risks associated with fluctuations in exchange rates,
but we may 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
end-user customers. This could

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result in a loss of revenue or delay in market acceptance of our products, which could have a material adverse effect upon our business, financial condition or results of operations.

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

Because
our solution consists of our software running on a Windows NT® or Windows® 2000 server and voice processing boards, it is inherently more prone to
performance interruptions for our end-user customers than traditional non-software based products. Performance interruptions at our end-user customer sites, most of
which currently do not have back-up systems, could affect demand for our products or give rise to claims against us.

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

Successful implementation of our growth strategy will likely 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:



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.

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## 

Item 3. Qualitative and Quantitative Disclosures About Market Risk

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

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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

See Note 4 of Notes to Condensed Consolidated Financial Statements for a description of correspondence received by us from competitors claiming that our
products utilize technologies pioneered and patented by them.

Item 2. Changes in Securities and Use of Proceeds.

Sales of Unregistered Securities During the Quarter

None.

Use of Proceeds

The shares of our common stock issued in the initial public offering were registered on a Registration Statement on Form S-1 (Registration
No. 333-79509) which was declared effective on September 22, 1999. From the effective date of such Registration Statement to September 30, 2000, the proceeds generated
by our initial public offering have been used as described in our report on Form 10-Q for the quarter ended September 30, 1999 and, in addition approximately
$10.4 million has been used for working capital.

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



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SIGNATURES

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

Interactive
Intelligence, Inc.
               (Registrant)

|Date: November 9, 2000 |  | By: | /s/MICHAEL J. TAVLINMichael J. Tavlin Senior Vice President and
Chief Financial Officer and Secretary
(Principal Financial Officer and
Duly Authorized Officer)
|---------------------- |  | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

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