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Innovation. Experience. Value. Interactive Intelligence Inc® | 2005 Annual Report Innovation. Experience. Value. TO OUR SHAREOWNERS, CUSTOMERS, PARTNERS AND EMPLOYEES: When we started Interactive Intelligence in 1994, we knew our server- capability via the Interaction based telephony platform would give organizations a welcome alternative Mobile Office, and new to expensive and inflexible proprietary communications systems. But we interaction screen recording in also knew our innovation would face the skepticism of an industry buried Interaction Recorder® to improve in traditional thinking and blinded by generations of legacy hardware. both compliance and Despite the doubts, however, we’ve stayed our course. performance management in the contact center environment. And the skeptics still can’t believe what we’ve accomplished. THE EXCEPTIONAL GROWTH Our experience, like our vision, has served us well. One milestone after OF VONEXUS. Introduced in another has allowed us to mature our company, our product suite, our July 2004, our Vonexus business processes and the network of sales and technology partners subsidiary is succeeding in the who share our foresight. Now in increasing numbers, contact centers enterprise IP PBX market by targeting small and mid- and enterprises around the world are using our platform to pave a path sized businesses with its 100% Microsoft®-based toward standards-based IP communications and away from obsolete IP communications system. Primary drivers of that proprietary hardware and outdated computer-telephony integration. growth in 2005 were the addition of more than 50 top-tier Elite Partner resellers and 120 new Clearly customers are recognizing the value our innovative applications and customer organizations. Also as a Microsoft Gold Certified industry experience bring to their business. In 2005, that value resulted in Partner, Vonexus continued to strengthen its technology partnership the most successful year Interactive Intelligence has ever realized. with Microsoft, as well as with Intel, HP®, and Polycom®. HIGHEST REVENUES AND PROFITS TO DATE. Interactive Intelligence GGRESSIVE MARKETING PLAN Interactive Intelligence saw reported positive operating results in each quarter of 2005, the second A . a significant increase in marketing activities in each of its global year in a row we’ve done so. The fourth quarter represented our best operations in 2005. Among our primary objectives were to make performance ever in terms of contracts, recognized revenue, and net the Interactive Intelligence name more recognized throughout the income. Revenues for fiscal year 2005 totaled $62.9 million, a 14 percent communications industry and more visible to prospective customers. increase over 2004, while net income was $2.1 million, up from $1.0 We made considerable progress in meeting these objectives by increasing million the year before. Diluted earnings per share for 2005 were $0.13 our online and print media presence along with media relations activities, compared to $.06 for 2004. by hosting enhanced conferences and user forums, and by strengthening STRONG SHOWING IN EMEA. Outside of North America, we our associations with leading industry media groups and analyst firms. were able to build on our global momentum of 2004 and accomplish The results of these efforts were extremely positive. even greater gains in 2005. Leading the contributions was a significant 62 According to our annual brand audit, 55 percent of respondents said percent growth in Europe, the Middle East, and Africa. Overall, international they felt Interactive Intelligence’s marketing presence had improved the contracts were more than 30 percent of our total for 2005. With this previous year, 67 percent rated our marketing messages as “consistent,” growth in 2005, Interactive Intelligence is in an even stronger position and 39 percent rated the company’s 12-month marketing impact as to capitalize on the worldwide appetite for IP communications solutions. “strong” or “very strong.” We expect the Interactive Intelligence name— VERSION 2.4, TAKING SIP ANOTHER STEP. When version 2.3 of our and reputation—to grow in stature even more in the coming years. flagship Interaction Center Platform® was released in 2004, it enhanced OOKING ORWARD For 2006 we have outlined a clear and our product suite’s native capability for voice over IP (VoIP) and the open L F . aggressive strategy for growth and continued profitability. Our key Session Initiation Protocol (SIP). With the release of version 2.4 at the end initiatives focus on moving up-market to win larger contact center of 2005, our platform took that capability a step further. opportunities, growing Vonexus through expanded channel efforts Providing the centerpiece of 2.4 is our exciting new SIP Interaction Media and additional product functionality, focusing our marketing to include Server, which works in tandem with SIP-oriented software innovative vertical campaigns, and expanding our revenue sources from Intel® to scale our “all software” systems by introducing new offerings to our product and services suite. We by a factor of three—a testament to the will continue to innovate all aspects of our business. rapidly-increasing scalability of our NNOVATION XPERIENCE AND ALUE Although these words solutions. SIP Regionalization I , E V . serve as our marketing slogan, they truly define who we are as the guiding in version 2.4 also allows principles for Interactive Intelligence: Since we introduced our server-based dispersed organizations to telephony system, we’ve provided our customers with purposeful innovation. minimize communications As we’ve helped organizations around the world deploy SIP-based costs by reducing bandwidth communications systems, industry experts have cited our experience. usage for calls that travel over And as we’ve brought innovation and experience together, our shareowners, a wide area network, and to customers, partners and employees have recognized the value. more easily configure site- specific dial plans in multi-site These are principles we believe in, and always will. configurations. Beyond SIP, other notable enhancements in version 2.4 included enhanced agent supervisory functionality, Donald E. Brown, M.D. expanded speech-driven President and Chief Executive Officer Selected Consolidated Financial Data Year ended December 31 2005 2004 2003 2002 2001 Consolidated Statement of Operations Data (in thousands except per share data) Revenues: Product $ 33,296 $ 28,187 $ 26,347 $ 28,492 $ 31,467 Services 29,641 26,932 25,165 19,314 16,479 Total revenues 62,937 55,119 51,512 47,806 47,946 Cost of revenues: Product 4,661 2,399 1,208 1,147 1,104 Services 11,025 10,756 12,433 11,962 13,285 Total cost of revenues 15,686 13,155 13,641 13,109 14,389 Gross profit 47,251 41,964 37,871 34,697 33,557 Operating expenses: Sales and marketing 24,149 20,492 20,663 21,001 21,987 Research and development 12,383 12,858 13,473 15,142 15,616 General and administrative 8,327 7,530 6,113 5,637 6,786 Restructuring and other charges – 101 3,436 774 1,056 Total operating expenses 44,859 40,981 43,685 42,554 45,445 Operating income (loss) 2,392 983 (5,814) (7,857) (11,888) Other income (expense): Interest income, net 269 125 163 412 1,169 Other income (expense), net (288) 70 (7) 10 – Total other income (expense) (19) 195 156 422 1,169 Income (loss) before income taxes 2,373 1,178 (5,658) (7,435) (10,719) Income taxes 265 138 211 230 271 Net income (loss) $ 2,108 $ 1,040 $ (5,869)$(7,665)$ (10,990) Net income (loss) per share: Basic $ 0.13 $ 0.07 $ (0.38) $ (0.50) $ (0.73) Diluted 0.13 0.06 (0.38) (0.50) (0.73) Shares used to compute net income (loss) per share: Basic 16,020 15,857 15,627 15,423 15,058 Diluted 16,754 16,605 15,627 15,423 15,058 Consolidated Balance Sheet Data (in thousands) Cash and cash equivalents $ 11,551 $ 14,603 $ 12,461 $ 5,913 $ 14,503 Cash, cash equivalents and investments 15,127 14,603 15,469 15,244 22,084 Working capital 3,177 347 (2,667) 352 5,155 Total assets 38,398 32,498 33,259 35,166 43,508 Total shareholders’ equity 7,793 5,036 3,791 8,984 15,817 Board of Directors Officers Donald E. Brown, M.D. Donald E. Brown, M.D. * Chairman of the Board, President President and Chief Executive Officer and Chief Executive Officer Gary R. Blough * Mark E. Hill ‡ Executive Vice President of Worldwide Sales President, Baker Hill Corporation Jeremiah J. Fleming * Edward L. Hamburg † President, Vonexus, Inc. Certain reclassifications have been made to prior year amounts to conform with the current year presentation. Former Executive Vice President of Corporate Operations, Chief Financial Michael D. Gagle, Ph.D. This annual report to shareholders includes a complete copy of the Company’s annual report on Form 10-K, excluding Officer and Corporate Secretary of SPSS Inc. Chief Scientist exhibits. Copies of exhibits may be obtained, upon written request of any shareholder of the Company to the Chief Samuel F. Hulbert, Ph.D. ‡ ƒ Stephen R. Head * Financial Officer. Former President, Rose-Hulman Institute Chief Financial Officer, Corporate This report contains certain forward-looking statements that involve of Technology Secretary and Treasurer a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: rapid Richard A. Reck † Pamela J. Hynes * technological changes in the industry, the company’s ability to maintain profitability, to manage successfully its growth and President, Business Strategy Advisors Vice President of Customer Services increasingly complex third party relationships, to maintain successful relationships with its current and any new resellers, to William E. McWhirter † ‡ ƒ Joseph A. Staples * maintain and improve its current products and to develop new Chairman Emeritus of Fifth ThirdBank, Senior Vice President of Worldwide Marketing products and to protect its proprietary rights adequately, and other factors described in the company’s SEC filings, including the Indiana and former ChiefExecutive Officer company’s latest annual report on Form 10-K and its quarterly of Peoples Bank & Trust Company * Denotes executive officer reports on Form 10-Q.